Macro and Vol Commentary
GBPNZD strengthened in March after months of marginal softness, breaking above the robust resistance of 1.95 to now trade at 1.9750. As the markets digested the key central bank decisions this week, what is the outlook for the pair in the near term?
New Zealand Economic Slowdown
- Economic performance in New Zealand continues to underperform.
- The country’s GDP contracted by 0.2% in the final quarter of the year, impacted by cyclone Gabrielle, and the economy is now flirting with recession.
- We have seen quite a bit of slowing in large parts of the economy.
- Business PMI continued to expand slightly at 51.2 in February; however, the extent of the jump was below market expectations, and the move was downgraded from 52.0.
- Activity outlook and business confidence are recovering from the recent lows but still remain near historic levels.
- Retail sales continued to weaken, falling by 0.6% q/q in Q4’22; this is down from the previous month’s level of 0.4% and a consensus figure of 0.2%.
- The decline is driven by a fall in non-perishable goods, such as furniture and electronics, suggesting a lower propensity to spend on big-ticket items.
- At the same time, to finance the expenditure, consumers are relying more on loans, with credit card spending increasing by 17.9% y/y in January.
- Unlike the US, New Zealand consumers are struggling under the weight of higher prices and elevated interest rates.
- The inflation reading settled at 7.2% in Q4’22, remaining broadly unchanged from a similar reading in Q3’22, which is only 10bps lower than recent highs.
- Whilst the reading is below the RBNZ estimate, the historic strength points to further tightness from the CB.
- Wage inflation accelerated to 4.3% y/y, the series highs, as an acute labour shortage has been fuelling price pressures on employers to lift pay to retain workers.
- This could create upside pressures for inflation in 2023.
- The recent cyclone Gabrielle has added pressure on economic performance, costing billions for the economy, and restructuring activity is set to take place in H2’23, further weighing on inflation pressures.
RBNZ and BOE
- The CB began to hike rates in October 2021 and has accelerated the pace of tightening throughout 2022, with hikes averaging at 50bps.
- In its latest meeting, the CB increased interest rates by 50bps, up to 4.75%.
- This slowdown in rate hikes opens the door for further softening in tightening from RBNZ.
- The implied rates now point to no chance of another 75bps rate hike, and given the recent banking woes, markets instead bet on a 20bps increase in April.
- RBNZ is poised to remain hawkish in comparison to its western counterparts, given its resolve to quell inflation.
- As a result, we anticipate an accelerated contraction in 2023.
- We expect RBNZ to peak at around 5.25-5.50% and, in line with the US, keep the rates higher for longer before pivoting the monetary policy late this year or early next year.
- With that in mind, the BOE increased interest rates by 25bps, and this could be the last hike of this tightening cycle.
- Despite banking woes weighing on key central banks in recent days, inflation jumped higher in February, growing by 10.4%, up from 10.1%
As central banks face tensions between inflation and financial stability, we have seen the markets downgrade on their monetary policy's tightening expectations sharply, with only 25bps now on the table for the upcoming meeting. With that in mind, the near-term outlook for key economies will be that of higher terminal rates for longer, and we expect markets to pay attention to signs of a pivot closer to the year-end. The driving force behind currency pair moves will be primarily driven by the monetary policy outlook from the two nations: with the RBNZ expected to slow down on the rate of hikes ahead of the BOE, as markets expect a 25bps and 56bps increase by the end of the year, respectively. This should give the GBP a further boost against the NZD in the coming months, keeping the pair elevated above 1.95 in the near term (1 month).
Sources: S&P Global, Statistics New Zealand. Reserve Bank of New Zealand, Bank of England, UK Office for National Statistics
GBPNZD is breaking to the upside of a recent 6 month range 1.8850 – 1.9500. NZD has been underperforming since current account deficit reached record levels. A print of -9.458 bn and a revision lower to the previous quarter due to a large increase in imports shows the deficit now standing at 8.9% of GDP. GBP on the other hand is showing positive signs in the underlying economy with recent resilient data. Inflation came in higher than estimates prompting BOE to hike by 25bp. Currently estimated 78% chance of RBNZ hiking by the same amount in April. If the RBNZ kept rates on hold, we will see further upside momentum in GBPNZD.
Vol is realising above implied for the first time since August when we saw a big move in the cross. Given the upside break and fundamentals, we suggest a trade benefitting from spot heading higher.
GBPNZD 1-month Implied vs Realised Volatility
GBPNZD Trade Idea
- Long Seagull
- Price in 5mio GBP per leg
- 3 month expiry
- BUY GBPNZD Call spread. Strikes 1.9800 and 2.0500 (cost 58k GBP)
- SELL GBPNZD Put. Strike 1.94 (receive 47k GBP)
- Total cost 11k GBP
USDBRL NDO Positioning Data 09/03/2023 - 16/03/2023
The trading range for USDBRL tightened once again into 5.10-5.30 in the week expiring March 23rd. The smaller notional size suggests a lack of strong appetite for prices out of the current ranges, and an equal number of both puts and calls confirms this. The range is widening slightly in the first week of April, but there are no option expiries taking place until April 19th. We expect further consolidation in USDBRL around current ranges in the near term.
USDBRL NDO Positioning Data 16/03/2023 - 23/03/2023
USDCNY Vanilla Positioning Data 09/03/2023 - 16/03/2023
We have seen USDCNY's positioning tighten for the near-term expiries in the week ending March 23rd. The size of the notional decreased for the expiry taking place in March, but the number of calls increased, suggesting a marginal upside in the near term. For April, this upside trend is seen intensifying, with the size of notional growing while the number of expiries declining, confirming the stronger upside conviction. The covers are extending from 6.70 to 7.10, still a much narrower range than what we have seen in the options of the week ending March 16th.
USDCNY Vanilla Positioning Data 16/03/2023 - 23/03/2023
GBPNZD Vanilla Positioning Data 23/01/2023 -23/02/2023
GBPNZD option expiry appetite is much smaller in comparison to other traditional currencies, given the number of expiries taking place. In the month ending March 23rd, the momentum changed, with the range widening to 1.8-2.0, and the number of options fell slightly, suggesting markets are pricing increased volatility from the range of 1.9-2.0 that we have seen in the month ending February 23rd. With the recent move on the upside above 1.95, options expiries point to a lack of momentum for higher levels, with the next big expiry only taking place by the end of June at 1.8. With that in mind, we expect the momentum to remain broadly unchanged in the near term.
GBPNZD Vanilla Positioning Data 23/02/2023 - 23/03/2023
Charts and Tables
Historical Spot FX Volatility (30D Rolling)
FX Matrix (today)
Key Events & Releases
JP Morgan Global FX Volatility
The index softened in recent days, following the sharp rally, breaking below the 50 MA level to trade at 10.56. The longer-term moving averages are holding firm at 10.45, and to confirm further downside, the index needs to break below these levels before it can test 10.17. The stochastics are continuing to fall, and momentum is seen on the downside in the near term. The %K/%D has converged on the downside once again, falling deeper into oversold, but the MACD diff is negative and converging. Stochastics are painting a mixed picture, but we expect downside momentum to slow down with the moving average levels intact. On the upside, appetite back above current levels could set the scene for 50 MA at 10.95 and then 11.00. We expect some downside in the near term, but for the index to struggle below the moving average levels.
The index continued to soften in recent days but found support at 102 and is now seen edging back to 103. At the same time, the moving averages are capping upside momentum. The stochastics are rising, highlighting continued trends on the upside. The MACD diff is positive and diverging. To confirm the acceleration of the upside trend, the index needs to break above the resistance of 103 before testing the 50 MA at 103.52 once again. Alternatively, if the index was to break back below the 102 level, we could see levels retest at 101, the February low. The indicators point to a build-up of upside momentum in the near term, but we expect the index to remain capped by moving averages at around 103.50-104.
The pair continued on a longer-term upward trend in recent months, breaching resistance of 1.95 in March and now trading at 1.9703. Still, the pair remains range-bound, supported by the moving average levels of 1.9599 and 1.9512, respectively, on the downside. Today’s candles pointed to further upside momentum as the pair rejected prices below 50 MA. The indicators confirm further upside pressures in the near term. The stochastics are diverging on the upside, and the MACD diff is negative and converging. The next robust level on the upside is at 1.98, and if the pair breaks above this level, we could see future gains to 1.9815. We expect GBPNZD to strengthen slightly but remain within the longer-term ranges.