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An "overstretched" New Zealand Dollar is a sell with TD Securities.
"We add a short NZDUSD trade to our FX model portfolio," says Mark McCormick, Global Head of FX and EM Strategy at TD Securities.
The NZD/USD exchange rate reached its highest level since January 02 at 0.6254 earlier this week, driven by the broader and ongoing pullback in the U.S. Dollar.
But TD Securities thinks the News Zealand Dollar is particularly at risk of a rebound in the USD and deterioration in broader investor sentiment. In addition, "a poor local story (soft growth, aggressive RBNZ cuts)," makes it vulnerable.
Modelling meanwhile suggests the Kiwi Dollar is stretched on short-term valuations.
Recent NZD outperformance has come in tandem with rallying stock markets, which reflect improved investor sentiment ahead of a September rate cut at the Fed.
However, TD Securities thinks this trade is maxing out: "The latest gyrations have created some dislocations across assets. The market seems focused entirely on the US story, where data has provided the Fed scope to start its journey out of "restrictive" territory. Even so, markets have seemed to ignore that the rest of the world is cooling, potentially more than the US now.
TD Securities becomes the latest major institution to warn of an impending Dollar comeback, noting positioning on the currency is now cleaner following its recent bout of weakness (strategists at HSBC are also looking for a rebound).
"Our FX positioning indices now show a clean read on the USD, suggesting longs have been flushed out. At the same time, the USD looks cheap on short-term valuation models like HFFV. That leaves the market quite vulnerable to a mix of stabilising U.S. data trends and surprises or some Fed repricing," says McCormick.
TD Securities targets a pullback in NZD/USD to 0.60.
Interestingly, we reported earlier this week of another strategist who is looking to go in the other deirection on NZD.
Philip Wee, Senior FX Strategist at DBS Bank, says he is 'long' the New Zealand Dollar against the U.S. Dollar as he expects it to fully recover 2024's losses and then push higher.
"NZD/USD can return to the 0.6320 level at the end of 2023 to fully recover this year’s losses. Technically, NZD/USD has broken above this year’s primary psychological resistance level at 0.62," says Wee.