New Zealand Dollar is a Buy, Swiss Franc a 'Sell on Strength' say Westpac

Strategists at Westpac say the New Zealand Dollar is showing the promise of further strength while selling the Swiss Franc continues to look ready to fade from overbought conditions.

Westpac's foreign exchange strategy team are recommending traders buy the New Zealand Dollar. 

NZD/USD is a buy at 0.7035 with a stop loss at 0.6935, due to “improved momentum and a, “strong bounce off the solid 0.70 base,” argue analysts in a recent briefing to clients.

They also view the economic outlook as positive, forecasting that data in the week ahead is likely to be positive and that this combined with USD consolidating should see upside for NZD/USD:

“The week ahead for NZ sees updates on business confidence, the housing market, construction, trade, and dairy prices which overall should keep the positive NZ story alive.

“With the US dollar consolidating, that story can now be expressed via a higher NZD/USD in the week ahead

Selling the Swiss Franc is meanwhile the bank’s highest conviction 'short' signal.

“CHF remains our favoured currency short on technical, macro and model grounds.

“We buy USD/CHF at 0.9995, stop 0.9890,” said Westpac.

Methodology Behind the Recommendations

Westpac’s conviction trade model combines three main signals – technical, macro and ‘model’.

Each provides a score between +5 and -5 depending on whether the signal is a buy (>0) or sell (<0).

The ‘technical’ signal is derived from an analysis of price action, the ‘macro’ signal from economic forces and the ‘model’ from the difference between the interest rates of two currencies in a pair.

According to these criteria, Westpac’s recommendation to buy NZD/USD scores 5 out of 15 and for them represents a moderate to high conviction trade.

The recommendation to sell the CHF on weakness gets a -6 meanwhile which is also indicative of high to moderate conviction.

Shorting the Yen

Westpac also advocate selling the Yen – or shorting it in trader’s parlance, even though it only scores a -4 on their trade recommendation model.  

“Buy USD/JPY 110.20, stop 109.20.

“BoJ likely sidelined for a while with retail sales, jobs to applicants and household spending all stronger lately and higher commodity prices coupled with the weaker ¥ signaling an improved pulse in prices and inflation expectations.

“USD/JPY will be all about the FOMC in Dec and Trump in Jan. We stick with the view that mth-end/yr-end flows favour profit taking and a dip back toward the 200dma at 106.50. Buy that dip,” said Westpac.

Positive About the Dollar

The US Dollar scores a +4 on the trade recommendation model indicating it is a mild conviction buy on weakness.

Westpac back this up in their commentary by saying they see a possibility of the currency pausing after the relentless post-Trump surge, with bond markets showing an easing in the difference between US Treasuries and Eurozone bonds.

“USD index can ease back to 100 but doubt it morphs into a bigger pullback: if US yields stabilise here this would oddly make it one the briefest and short-lived sell-offs in recent history,” comments Westpac’s Strategist Imre Speizer.

That is because after a temporary cessation they expect Dollar Strength to resume based on expectations of a high volume of repatriation flows from money overseas, a more hawkish Fed and European political risk.