Download Major Currency Report

Strategy and tactics
Major Currency report – April 19 2017
NZDEUR
NZD/GBP
NZD/JPY
NZD/EUR forecast
NZD/GBP forecast
NZD/GBP forecast
0.7000
0.7000
0.6800
0.6800
0.6600
0.6400
0.6400
0.6200
0.6200
0.6000
0.6000
0.5800
0.5800
0.5600
0.5600
Jul16
Oct16
NZD/EUR
Jan17
Apr17
Jul17
Forecast (avg for the quarter)
Oct17
Jan18
0.5400
Apr18
0.6000
0.5800
0.5800
0.5600
0.5600
0.5400
0.5400
0.5200
0.5200
0.5000
0.5000
0.4800
0.4800
0.4600
0.4600
0.4400
0.4400
0.4200
0.4200
0.4000
0.4000
0.3800
Apr16
0 - 12 months= Ensure maintaining maximums of
hedging policy at spot rates below 0.6500.

12 – 24 months (no filter activation) = Ensure
maintaining maximums of hedging policy at spot
rates below 0.6500.
test)
=

Not
6 months + = Clients should maintain minimums
of policy.
21/4
24/4
Page 1
Eurozone
Manufacturing PMI
First round French
election
Previous
Apr17
Jul17
Oct17
Jan18
0.3800
Apr18
NZDGBP Forward curve
0 - 12 months = Ensure maintaining maximums
of hedging policy at current levels.

12 months + (no filter activation) = Ensure
maintaining maximums of hedging policy at current
levels.

12 months + (filter activated), Filter tests not
currently activated.
Consensus
forecasts
(Bloomberg)
Importer

0 – 6 months = Contact us for specific
recommendations.

6 months + = Contact us for specific
recommendations policy.
Upcoming key GBP data releases
Upcoming key EUR data releases
Release
Jan17
Forecast (avg for the quarter)

filter-
0 - 6 months= Clients should be at midpoints of
policy with staggered market orders at 0.6600 and
above using FEC's and wide collar options.
Date
(NZT)
Oct16
Exporter
Importer

Jul16
NZD/GBP Hedging
Recommendations (generic)

(filter
0.6200
0.6000
NZD/GBP
Exporter
12+ months
test activated.
0.6400
0.6200
NZDEUR Forward curve
NZD/EUR Hedging
Recommendations (generic)

0.6400
NZD/GBP
0.6600
NZD/GBP
0.7200
NZD/EUR
NZD/EUR
NZD/EUR forecast
0.7200
0.5400
Apr16
NZD/CAD
Impact
on EUR

56.2
Consensus
forecasts
(Bloomberg)
Impact
on GBP

Date
(NZT)
Release
21/4
Retail sales
28/4
Consumer
Confidence
-6
→--/
28/4
UK Q1 GDP
0.70%qoq

→--/
Previous
1.30%mom
Strategy and Tactics | Majors Report | 19 April 2017
EUR CARR
CARR Index (Central Assumptions – Rate Reaction)
Key variables, indicators and trends that drive NZD/EUR exchange rate movements
Strong
Depreciation
Date: 19 April 2017
Relative
Variables
1
Monetary
policy/inflation
2
Political
Stability
3
GDP growth
performance
4
Trade Outlook
5
Safe Haven Flow
6
Financial
Stability
Average EUR
Impact
Moderate Depreciation
Neutral
Moderate Appreciation
Current Position and Outlook
RBNZ finished with OCR cuts, likely first
increase in February 2018. NZ Q1 CPI
expected to be strong. ECB delaying tapering
QE/Negative interest rates. Eurozone
inflation improving (very gradually).
First round of French elections this Sunday.
Even through this there are still German and
Italian elections threatening to destabilise the
Euro zone.
NZ Q4 GDP soft though expected to bounce
back while ECB face weak economic activity
and high unemployment.
Both nations negotiating trade agreements
with the UK and US. NZ with more risk due
to smaller size of economy/reliance on trade.
EUR appeal as safe haven flow diminishing.
Is NZ now a place where investors feel safer
parking their money?
Italian Banking crisis hasn’t gone away.
Ongoing structural issues in financial sector.
Strong
Appreciation
NZD/EUR Spot Rate: 0.6570
NZD/EUR Impact (relative
to today’s spot rate) -3 to +3
1 mth
3 mth 12 mths
+1
+1
+2
+2
+2
+3
0
+1
+1
-1
-1
-1
0
+1
+1
0
+1
+2
+0.3
+0.8
+1.3
EUR Chart of the week
A sustained breakout in the NZD/EUR cross rate from its 0.6480 – 0.6580 range is yet to occur with the cross
rate currently trading at 0.6570. Investors have supported the Euro over the last fortnight as the Bloomberg chart
below illustrates Macron (pro EU) ahead of Le Pen (anti EU) in recent French election polls. The first round of
the election is this Monday (NZT). Following this the top two candidates face off in another election 14 days later.
With NZ CPI expected to print strongly tomorrow (2.0%yoy expected) and ongoing EU political instability, we
still favour a break out higher in the cross rate.
Page 2
Strategy and Tactics | Majors Report | 19 April 2017
GBP CARR
CARR Index (Central Assumptions – Rate Reaction)
Key variables, indicators and trends that drive NZD/GBP exchange rate movements
Strong
Depreciation
Date: 19 April 2017
Relative Variables
1
Monetary
policy/inflation
2
Brexit
3
GDP growth
performance
4
Share market
direction
5
Global Risk
Sentiment
Average GBP
Impact
Moderate Depreciation
Neutral
Moderate Appreciation
Strong
Appreciation
NZD/GBP Spot Rate: 0.5490
GBP Impact (relative to
today’s spot rate) -3 to +3
1 mth 3 mths 12 mths
RBNZ to remain neutral over coming quarters,
-1
0
+1
with tightening unlikely to occur until early
next year (Feb/March). BoE also neutral,
though they highlight that there may be the
requirement to tighten policy should inflation
rise too quickly above target.
GBP surge on early election announcement
+1
+2
+3
seems overdone. Expect this strength to
unwind slowly over the next month
Soft NZ Q4 real GDP growth, though expected
0
+1
+2
to be temporary blip. Outlook for firm growth
to continue throughout 2017. UK GDP
forecasts lifted by IMF due to GBP
depreciation.
UK financial sector under pressure at low
+1
+1
+2
interest rates, though expect continuation of
foreign disinvestment from NZ share market.
GBP transitioning to a ‘risk’ currency while
0
+1
+1
Brexit negotiations play out.
+0.2
+1.0
+1.8
Current Position and Outlook
GBP Chart of the week
Overnight UK Prime Minster Theresa May surprised financial markets by announcing an early UK election in
June. Markets reaction was extremely positive and the GBP surged higher. The GBP/USD exchange rate reached
as high as 1.2900 before unwinding somewhat to currently trade at 1.2830. As such the NZD/GBP has fallen
sharply to 0.5490. With May holding strong support, investors have taken the view that should she hold power
the UK will be in a better position to carry out Brexit negotiations. We do not foresee a soft Brexit as reasonable
and any NZD/GBP exporters who are not currently at maximums in the 0 – 12 month timeframe should adjust
hedging percentages higher.
Page 3
Strategy and Tactics | Majors Report | 19 April 2017
NZD/JPY forecast
NZD/CAD forecast
NZD/JPY forecast
90.00
1.0000
0.9750
0.9750
0.9500
0.9500
75.00
75.00
70.00
Apr16
Jul16
Oct16
NZD/JPY
Jan17
Apr17
Jul17
Forecast (avg for the quarter)
Oct17
Jan18
70.00
Apr18
0.9250
0.9250
0.9000
0.9000
0.8750
0.8750
0 - 12 months= Exporters should already be at
maximums. Target spot rate below 80.00 with
orders staggered lower to 78.00 for top-up hedging.
Consider FEC’s and zero-cost collar.

12 – 24 months (no filter activation) = No
longer filter test activated. Clients not requiring filter
test activation, target spot rate below 80.00 with
orders staggered lower to 78.00 for top-up hedging.
=
Not
filter-

0 - 6 months= Clients should be at minimums of
policy.

6 months + = Clients should ensure minimums of
policy.
20/04
Trade Balance
Previous
813.5b
Apr17
Jul17
Forecast (avg for the quarter)
Oct17
Jan18
0.8500
Apr18
NZDCAD Forward curve

0 – 12 months = Ensure mid points of policy by
0.9400. Staggered orders between 0.9300 to 0.9150
to be at maximums of policy.

12 months + (no filter activation) = Contact us
for specific recommendations.

12 months + (filter activated) = Contact us for
specific recommendations.
Importer

0 – 6 months = Importers should be well hedged
and should look to maintain maximums at a rate of
0.9650 and above.

6 months + = Contact us for specific
recommendations policy.
Upcoming key CAD data releases
Upcoming key JPY data releases
Release
Jan17
Exporter
Importer
Date
(NZT)
Oct16
NZD/CAD Hedging
Recommendations (generic)

test)
Jul16
NZD/CAD
Exporter
(filter
0.8500
Apr16
NZDJPY Forward curve
NZD/JPY Hedging
Recommendations (generic)
12+ months
test activated.
NZD/CAD
80.00
NZD/CAD
80.00
Consensus
forecasts
(Bloomberg)
608.0b
Consensus
forecasts
(Bloomberg)
Impact
on CAD

Impact
on JPY

Date
(NZT)
Release

22/04
CPI NSA MoM
0.2%
0.4%

22/04
CPI YoY
2.0%
1.8%

27/4
BoJ Outlook Report
-
-
→
27/4
BoJ Policy Balance
Rate
-0.10%
-
→
Page 4
1.0000
85.00
NZD/JPY
NZD/JPY
85.00

NZD/CAD forecast
90.00
Previous
Strategy and Tactics | Majors Report | 19 April 2017
JPY CARR
CARR Index (Central Assumptions – Rate Reaction)
Key variables, indicators and trends that drive NZD/JPY exchange rate movements
Strong
Depreciation
Moderate Depreciation
Date: 19 April 2017
Relative Variables
1
Monetary
policy/inflation
2
Safe Haven flows
3
GDP growth
performance
4
Share market
direction
5
Demographics
Average JPY Impact
Neutral
Moderate Appreciation
Strong
Appreciation
NZD/JPY Spot Rate: 76.40
JPY Impact (relative to
today’s spot rate) -3 to +3
1 mth
3 mth 12 mth
RBNZ finished with OCR cuts, likely first
0
+1
+2
increase is February 2018. Bank of Japan
more positive on growth recently, though
weak inflation remains a concern.
A number of geopolitical risks are present
-1
-2
-1
surrounding the US. Elections in Europe
and Chinese debt are also concerning.
Support for Yen is likely should any of these
risks materialise.
Robust GDP growth to continue in NZ in
0
+1
+2
2017 despite soft Q4 reading. Japanese
GDP growth low (already priced in) but
signs are that it is starting to pick up.
Nikkei remains well supported. Expect
-1
-1
-2
continuation of foreign disinvestment from
the NZ share market.
Japans ageing population remains a barrier
0
+1
+2
to wage growth and labour productivity.
-0.40
0
+0.60
Current Position and Outlook
JPY Chart of the week
Geopolitical issues and delayed fiscal stimulus in the US have been the culprits in supporting the downward trend
of the USD/JPY exchange rate, which has settled at 108.50 this morning. The Trump administration has tackled
a number of political fronts in the past fortnight, firstly with the heavy handed confrontation with the Islamic
State forces in Afghanistan, followed by strong rhetoric around “tackling issues” regarding North Korea. This saw
a lower risk appetite within the financial markets, leading to the USD/JPY settling at its lowest rates since
November 2016. Weak CPI data from the US and less than convincing fiscal stimulus plans from the Trump
Administration further led to the softening USD. This environment has seen the 10 year US Treasury yield fall to
fresh lows to trade at 2.18%. The NZD/JPY cross rate has also replicated this downward trend over the last
quarter, however there was a slight increase in the last week with the cross-rate settling at 76.40
Page 5
Strategy and Tactics | Majors Report | 19 April 2017
CAD CARR
CARR Index (Central Assumptions – Rate Reaction)
Key variables, indicators and trends that drive NZD/CAD exchange rate movements
Strong
Depreciation
Moderate Depreciation
Date: 19 April 2017
Relative Variables
1
Monetary
policy/inflation
2
Housing Market
3
GDP growth
performance
Commodity prices
4
Average CAD Impact
Neutral
Moderate Appreciation
Strong
Appreciation
NZD/CAD Spot Rate: 0.9430
CAD Impact (relative to
today’s spot rate) -3 to +3
1 mth
3 mth 12 mth
RBNZ finished with OCR cuts, likely first
0
0
+1
increase is February 2018. BoC content with
keeping interest rates unchanged (for the
time being), as interest rates are low
enough to stimulate growth and close the
output gap by mid-2018.
Housing market pressures have increased
+1
+1
+1
in Canada, with the BoC commenting that
the market has seen increased growth in the
short term.
Robust GDP growth to continue in NZ. Still
+1
+1
+1
positive GDP growth in Canada.
Wholemilk powder prices increased 3.5% at
0
-1
-1
GDT auction this week. Crude Oil prices
have increased.
+0.50
+0.25 +0.50
Current Position and Outlook
CAD Chart of the week
The Bank of Canada announced that it will continue to maintain its target rate at 0.5% (neutral), with expectations
that the housing activity in the country looks unlikely to be sustainable, with a downside risk over the long term.
The decision was also driven by the weak performance of exports and investments, following the uncertainty
regarding the tax and trade policies of the Trump Administration. The BoC also projected growth to slow from an
annual pace of 3.8% in the first quarter to just over 2% for the remainder of the year. Despite this the USD/CAD
has been dropping steadily as the USD retreated and WTI oil prices extended higher, currently trading at 1.3380.
However, this trend wasn’t seen against the NZD. NZD/CAD cross rate has seen a slight increase to trade at
0.9430, continuing to track push above the 50 day moving average.
Page 6
Strategy and Tactics | Majors Report | 19 April 2017
Get in touch
Stuart Henderson
Partner
T: +64 9 425 0158
M:+64 21 343 423
E:[email protected]
Roger Kerr
Consultant
T: +64 9 355 8181
M:+64 21 935 288
E: [email protected]
Brett Johanson
Partner
T: +64 4 462 7234
M:+64 21 771 574
E: [email protected]
Chris Hedley
Director
T: +64 9 355 8183
M: +64 21 479 680
E: [email protected]
James McHardy
Director
T: +64 9 355 8342
M: +64 21 263 4282
E: [email protected]
Jason Bligh
Associate Director
T: +64 4 462 7265
M: +64 21 386 863
E: [email protected]
Alex Wondergem
Associate Director
T: +64 9 355 8252
M: +64 21 041 2127
E: [email protected]
Mahesh Chhagan
Treasury Advisor
T: +64 9 355 8301
Tom North
Treasury Analyst
T: +64 9 355 8497
E: [email protected]
James Butler
Treasury Analyst
T: +64 9 355 8265
E: [email protected]
E:[email protected]
pwc.co.nz /corporate-treasury-advisory-services/
DISCLAIMER: This report is for PwC retained treasury clients and is subject to the individual agreed engagement letter and
the following restrictions. This report should not be reproduced or supplied to any other party without first obtaining our (PwC
New Zealand) written consent. We accept no responsibility for any reliance that may be placed on our report should it be
used for any purpose other than that set out below and in any event we will accept no liability to any party other than you in
respect of its contents.
The purpose of the report is to document our current financial market views and generic hedging recommendations. The
statements and opinions contained in this report are based on data obtained from the financial markets and are so contained
in good faith and in the belief that such statements, opinions and data are not false or misleading. In preparing this report, we
have relied upon information which we believe to be reliable and accurate. We reserve the right (but will be under no
obligation) to review our assessment and if we consider it necessary, to revise our opinion in the light of any information
existing at the date of this report which becomes known to us after that date. This report must be read in its entirety. Individual
sections of this report could be misleading if considered in isolation from each other.