Key focus and themes: Foreign Exchange - Asia ex-Japan/Euro Area/Europe

Research evidence excerpt

Key focus and themes: Foreign Exchange - Asia ex-Japan/Euro Area/Europe

et start to price out the rates hike still

expected by the BoE early next year. We think, if anything, the BoE may be looking to

lower rates at that stage , while the RBNZ will have likely be well into a hiking cycle.

Andrew Bailey, Sarah Breeden, Catherine Mann and Huw Pill are all scheduled to speak

next week. We also see scope for medium-term flows to be supportive. Foreign holdings

of NZGBs remain low relative to the recent past, but the same metric for gilts is relatively

high. NZ’s current account deficit has been narrowing, while the UK’s looks stickier.

Although the latter has been funded by FDI and portfolio flows thus far, political changes

later in the year may make these flows less predictable. As such, we open a new, short

GBP/NZD trade, while closing our short AUD/NZD trade (for a loss of around 0.6%). One

risk to this trade is a significant decline in equity prices, with NZD potential more

vulnerable to this than GBP, though we note short positioning in NZD already looks

relatively wide.

Holding short CAD view via extending long USD/CAD target and initiating short

CAD/JPY

Macro and rates divergence continues to play out squarely against CAD. The Bank of

Canada on 10 June emphasised downside growth risks and excess supply, while core

inflation remains subdued with disinflation broadening. Front-end rate pricing has partly

reflected this, but there may be further to run — the last time the 2y swap rate differential

was consistently this high, USD/CAD traded around 1.45. Oil is no longer a tailwind for

CAD, as the US-Iran war is largely in the rear-view mirror, and increased transits through

the Strait of Hormuz could keep oil prices soft, removing a potential source of CAD

support.