G10 FX Week Ahead: Clearing The Blocks

NZD: Downside Risks Shrinking



Week ahead bias Range next week 1 month target



Neutral 0.6920 - 0.7090 0.7300

The Kiwi dollar has had a very grim week, losing around 2.5% to the USD and dropping below 0.7000 for the first time since November. The trigger of the drop in spot was a move by the New Zealand government to remove tax incentives to real-estate investors, with the aim of curbing the housing bubble in the country. That prompted a fierce re-pricing of hawkish Reserve Bank of New Zealand rate expectations, as markets expect less pressure on the Bank to hike rates for housing-stability purposes.

As discussed in “Why we think the NZD drop doesn’t have legs”, the downside risks for NZD – in particular relative to other pro-cyclical peers such as AUD – may have shrank significantly after this week’s move.

First, there is no room for a further drop in front-end yields (since a rate hike in the next year has been completely priced out and a cut is off the cards); second, NZD/USD is about 2.7% undervalued according to our short-term fair value model; third, inflation and employment resilience (plus the risk of house prices staying supported despite the government’s measures) may cause hawkish expectations on the RBNZ to rise again soon.

For now, external factors should dominate NZD/USD price action, but we expect any further selling pressure on NZD to be more contained than on AUD.

CAD: Suez and OPEC+ Are The Main Drivers Next Week



Week ahead bias Range next week 1 month target



Neutral 1.2480 - 1.2680 1.2500

The Bank of Canada took center stage this past week, first by announcing the unwinding of some emergency liquidity programs and then providing strong signals that it will be the first developed central bank to effectively start a consistent tapering process in the coming months. Both of these developments were likely warranted: liquidity and market functioning are no longer a concern and the ongoing recovery in Canada is no longer warranting the BoC’s massive balance sheet.

The first steps of the tapering process should be announced in one month's time at the April meeting, although the size of the first move may depend of the health of the bond market at that point, as the BoC will likely calibrate its tapering in a way that does not trigger excessive yield volatility.

BoC’s tapering news likely helped CAD to keep its losses contained this week despite USD strength. Next week, the Canadian calendar includes January’s GDP numbers, although developments in the oil market should be a bigger driver of the currency. The Suez Canal blockage – still unresolved at the time of writing -- has severely disrupted the logistics of commodities’ supply and that ultimately came to the rescue of oil prices in a week where concerns about third virus waves (especially in Europe) prompted a re-pricing of oil demand expectations.

Next week, along with any development in the Suez Canal, the focus will be on the OPEC+ meeting, where the recent volatility in oil prices and virus concerns may indeed play a role and should avert another hike in production.

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Disclosure: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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