J.P.Morgan Issue Short NZD/USD Recommendation

Late Friday saw J.P.Morgan note that they have issued a new “NZD/USD recommendation, motivated by some NZD idiosyncracies as well as global beta. On the latter, the change in U.S. real yields is a material development that creates potentially-more headwinds compared to a move higher in just nominals. It is not surprising to see the antipodeans underperform and to the extent that Fed-driven real-yield repricing continues, there may be more scope for select high-beta weakness (perhaps indicatively, NZD on net was the slight underperformer in G10 across the several weeks following the initial February 2021 spike in real yields).”

• “NZD/USD is also appealing because of the gap in terminal rates vs the U.S.; NZD’s money market curve is remarkably steep, at odds with the RBNZ's neutral rate estimate at 2% as well as our expectation that the RBNZ hikes only once more this year, in February. Along with meaningful local developments in December (the government significantly curtailed bond issuance and has shifted to tighter fiscal policy), NZ rates should be relatively capped, thereby providing the most scope for terminal rate convergence with the U.S. in G10.”
• As such, they recommended a short NZD/USD recommendation, entering at $0.6766), with a stop-loss at $0.6901.