New Zealand to US Dollar 'Conviction Buy' from Westpac, rallies to 0.70 but then tumbles back down

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Australian lender Westpac have published their latest hot list of ‘high conviction calls’ and the NZ dollar appears to be a best-bet

The Aussie bank is overall bullish the commodity currencies versus the dollar, bearish the GBP/USD and bullish the euro against the dollar.

Top of their list is the NZD/USD, which they view as likely to continue gaining ground.

The NZD to USD conversion has risen steadily from January lows of around 0.64.

it then continued higher after the Global Dairy Prices registered a 3.8% average rise at auction on Monday April 17; they are New Zealand's largest commodity. 

This lowered the possibility that the Reserve Bank of New Zealand (RBNZ) would see it as necessary to cut interest rates, which generally weaken the home currency. 

The pair rallied to highs of 0.7053, however, they then rolled over and subseuently fell almost as steeply as they had climbed, and are currently trading at around the 0.6875 mark. 

Nevertheless overall Westpac are bullish the currency, expecting it to recover:

“With all three signals greenlighting an NZD long our signals are even more emphatically bullish NZD this week vs last week.”

Westpac analysts Franulovich, Callow, Song and Rennie, said in a recent note. 

Their reasons include the fact that the Reserve Bank of New Zealand (RBNZ) is now less likely to cut interest rates, as a result of data showing an improvement in the housing market and higher inflation, as well as the aforementioned rise in Global Dairy Prices. 

Westpac are long NZD/USD from 0.6850, stop at entry.

Still Bearish USD/CAD

Another of Westpac’s high conviction calls is to continue selling USD/CAD.

They continue to be bullish the Canadian Dollar as they expect March inflation data released next week to show a rise due to higher energy prices, and this will make it less likely the Bank of Canada will need to cut interest rates.

They also claim the dollar is vulnerable as the Federal Reserve is unlikely to cut rates in light of the expected soft Q1 in the US, thus pressuring the pair even lower.

“We are short USD/CAD from 1.2925, stop at 1.3055.” Ends the section on USD/CAD.

AUD/USD – not as Convinced but Still Bullish

Westpac is bullish AUD/USD but not as convinced as with the kiwi and CAD.

The reasons are that they do not think the Reserve Bank of Australia will cut rates anytime soon, as Unemployment has fallen from 6.0% to 5.7% in two months and Business Confidence is registering high.

Further justification comes from, commodity prices, which remains strong with Iron Ore keeping above 60 dollars a ton.

Although making the call, Westpac would not trade it, however, as that would mean they would be in three similar positions, that is long a commodity currency versus the US dollar, and that would be too high risk.

GBP/USD - Ceiling at 1.4500

The Westpac team remain bearish GBP/USD as they, “Doubt GBP has the vigour to punch much above 1.45, if at all into the UK referendum late June.”

They refute the possibility that sterling might recoup some of its massive Brexit risk premia (8-10% according to some gauges) before the actual vote seals the deal, seeing uncertainty as too destabilizing for the currency to pount a meaningful; rally.

Westpac are selling at 1.4450 with a stop at 1.4610.

EUR/USD - Downside Capped at 1.1000

Franulovich, Song, Callow and Rennie’s final conviction call is to buy EUR/USD at 1.1195 expecting the pair to appreciate, and a stop at 1.1080.

Their main rationale is that the Federal Reserve are unlikely to raise rates soon and the European Central Bank meeting will probably not result in extra stimulus or anything which can materially weaken the euro, so up is the only place to go.