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February 27, 2024

NZD: RBNZ Meeting and G10 FX Carry Trades

Global equity markets are at new highs, driving G10 FX carry trades up 4.0%. The NZD leads with a hawkish RBNZ outlook, raising expectations for 2024 rate hikes. The upcoming RBNZ policy update is crucial, favouring long NZD/JPY trades.

Global equity markets have reached new highs in recent weeks, signaling improving investor risk sentiment for the year ahead. This positive sentiment, coupled with the rise of artificial intelligence benefiting corporate revenues, has created a favorable environment for G10 FX carry trades. Bloomberg's G10 Carry Trade index, measuring returns on such trades, has shown a strong increase of around 4.0% since the start of the year, a stark contrast to the negative returns seen in Q4 of the previous year.

The NZD has emerged as the top-performing high-yielding G10 currency in February, driven not just by favorable carry trade conditions but also by a hawkish reassessment of the Reserve Bank of New Zealand's (RBNZ) policy outlook. Market confidence has grown in expectations of further rate hikes in the current tightening cycle, despite the RBNZ's already-high policy rate of 5.50%. This shift in market sentiment places additional importance on the upcoming RBNZ policy update.

While an immediate rate hike is not expected, with only a small amount priced in this week, market expectations point to a probable hike in the first half of the year. To meet these expectations, the RBNZ will likely need to signal a stronger consideration for rate hikes in upcoming meetings. Their previous stance in November indicated a willingness to raise rates further if inflationary pressures persisted. Given these factors, G10 FX carry trades are expected to continue performing well in the near term, with the main risk for the NZD being a lack of backing from the RBNZ for further rate hikes in the upcoming week.

In light of this, we will continue to look for NZD/JPY trades long.

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