NZD could test yearly high in case of Bremain - BNZ

Jason Wong, Currency Strategist at BNZ, suggests that last week the NZD range traded on most of the crosses, biding time ahead of UK referendum at the end of this week.

Key Quotes

“NZ’s economic data flow remains positive, with last week’s offering showing GDP data surprising slightly on the upside, REINZ data suggesting strong house sales and prices, BNZ’s manufacturing PMI extending its above-average level, and the ANZ consumer confidence index lifting a touch back to its average level. If not for a fall in global risk appetite ahead of the UK referendum, the NZD would probably have pushed up higher, possibly revisiting its highs for the year.

The focus for this week will be on the UK referendum, where voting closes at 9am Friday morning NZ time. Results start to trickle out a couple hours later.

While “Leave” had the momentum for much of the last couple of weeks, since the tragic murder of MP Jo Cox, momentum has swung back to the “Remain” camp. The polls this week will be the key to market trading in the lead-up to the vote and could well cause some currency volatility. Traders are likely to close down risk positions as the event draws closer, resulting in reduced liquidity.

Thinking about the end result, a Brexit vote would see much weaker global risk appetite. We’ve stress tested our fair value model. A VIX up to 50 and a 100bps increase in HY and EM credit spreads sees our risk appetite index fall to 14% and triggers an immediate 5% fall in NZD/USD to around the 0.67 mark. Throw in a fall in commodity prices down the track and the lows earlier in the year around the 0.64 mark could be threatened.

On the other hand, a vote for the UK to remain in the EU would be positive for global risk appetite and a brief relief rally in the NZD would ensue, quite possibly seeing the year’s high of 0.7150 being taken out and onward through 0.72.”