EUR/NZD: Tactical long with target of 1.61 - Nomura

Analysts at Nomura expect European currency to continue outperforming over coming months and combined with their cautious NZD stance, prompts them to recommend a tactical long EUR/NZD position. They would look to buy EUR/NZD at current spot (1.5570) and target a move to 1.6190 (stop at 1.5250).

Key Quotes

“Over the course of the Northern Hemisphere summer, we believe the more hawkish stance of some of the global central banks’ could also pose short-term downside risks to higher beta commodity currencies via possible “risk-off” market reactions, particularly if inflation data start to accelerate and validate the hawkish rhetoric. Within the commoditybloc, we think the NZD is the most vulnerable to an adjustment. As we highlighted recently, the low level of market volatility has been one of the key supports to NZD, and a lot of positivity now looks to already be price in. Also, with our cross-market risk indicator having moved away from “risk seeking”, this part of the positive NZD narrative looks to be fading.” 

“Indeed, heightened focus on financial stability and the perceived low level of market risk premia look to be a part of the rationale behind the turn by central banks. The latest BIS’ annual report warned of the dangers of waiting too long to tighten policy while emphasising financial conditions and asset market valuations. Coincidentally, key Fed officials (Chair Yellen, Vice Chair Fischer and NY Fed Governor Dudley) noted financial market valuations appeared “rich” and/or aggregate financial conditions are easing despite the policy tightening already undertaken by the Fed. The threat to global liquidity from the changing central bank landscape points to potential asymmetric moves in measures of market volatility from current, historically low levels.”

“With Europe likely be near the epicentre of any hawkish central bank induced change in risk sentiment, EUR should trade strongly against NZD. Conversely, if the global central bank normalisation process runs smoothly and does not generate much market volatility, EUR should also outperform, as the ECB’s monetary policy regime shift comes through.”