Synopsis:

HSBC has turned bearish on the New Zealand Dollar (NZD) due to a trio of reasons that were previously providing support. The bank now holds a short NZD/CAD position, targeting a move towards 0.7830.

Key Reasons for the Bearish View:

1. Unimpressive Inflation Data:

   • The 3Q inflation data for New Zealand was weaker than anticipated.
   • The market has, for the most part, ruled out a rate hike in November. HSBC expects the NZD Nominal Effective Exchange Rate (NEER) to stay pressured unless the 3Q labor market report is significantly positive.
   • Long-term, HSBC foresees a convergence in the rate cut outlook between the Federal Reserve (Fed) and the Reserve Bank of New Zealand (RBNZ).

2. General Election Results and Fiscal Policy:

   • New Zealand's general election results will be made official on 3 November. Depending on the formation of the coalition, there might not be a budget update until the end of December.
   • Potential coalition candidates for the National Party, ACT and NZ First, have indicated a fiscal policy that's slightly tighter than what the National Party proposes. This provides no immediate support for the NZD.

3. Vulnerability to External Factors:

   • Absent substantial idiosyncratic support, the NZD is highly susceptible to U.S. exceptionalism, risk aversion, and a possible intensification in Middle Eastern geopolitical tensions.

Trade Idea: HSBC recommends a short NZD-CAD position, capitalizing on Canada's relative economic robustness and a potential surge in oil prices. This position also ensures neutrality regarding the evolving risk appetite.

Conclusion: The New Zealand Dollar (NZD) faces headwinds from multiple fronts, leading HSBC to adopt a bearish stance. Key concerns include weak inflation data, potential shifts in fiscal policy post-elections, and increased susceptibility to global risks. The bank is leveraging these insights with a short NZD-CAD trade idea.