FX Convictions – Profit protection in NZD/CAD

by: Roy Teo

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  • We keep in place our CAD long versus NZD
  • Stop loss (profit protection) lowered from 0.97 to 0.9350
160718-FX-Conviction-Update.pdf (62 KB)

We keep in place our CAD long versus NZD; stop loss lowered
We keep our Canadian dollar (CAD) long versus New Zealand (NZD) high conviction view in place. For more details please refer to our FX Convictions: Bearish on NZD/CAD. This short NZD/CAD view has currently a total return of 3.1% since it was initiated on 13 July. We have lowered our NZD/CAD stop loss from 0.9700 to 0.9350 to protect our unrealized profit. We expect the Reserve Bank of New Zealand (RBNZ) to cut the Official Cash Rate by 25bp to 2% in the next monetary policy meeting on 11 August as inflation in the second quarter was lower than the RBNZ’s forecast. This monetary policy easing is about 70% priced in by financial markets and hence further weakness in the NZD is likely. Despite the recent decline in the NZD trade weighted index, it remains about 7% stronger than the RBNZ’s forecast for the end of this year. Therefore, the RBNZ is likely to remain dovish on the exchange rate.

Separately, financial markets are still pricing in about 20% probability that the Bank of Canada will lower monetary policy rates this year. This is more dovish than our view. As a result, the CAD should find some support.