NZD/JPY

BNZ MARKETS

Jason Wong, Senior Markets Strategist

22 February 2019

BNZ MARKETS

Summary

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• The cross is currently close to its average of the past year and near the middle of the 72-79 trading range.

• Our projections this year suggest more of the same – around the mid-70s – but this cross is apt to swing around due to its sensitivity to risk appetite.

• BoJ policy is suppressing the yen and this is likely to continue, but policy easing has reached practical limits.

• Given the yen’s cheapness, on a medium-term view our forecasts are biased to the downside.

BNZ MARKETS

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Technical picture • We assess the cross as being

on a broad downward trend since peaking at the end of 2014.

• Trendline resistance is around 77.5-78.0.

• There is strong support around 72, dating back to 2016.

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2012 2013 2014 2015 2016 2017 2018 2019

NZD/JPY

Source: BNZ, Bloomberg

BNZ MARKETS

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Long-term valuation model • NZD/JPY has been above our

long-term purchasing power parity estimate for much of the past 16 years.

• This reflects very strong NZ terms of trade over that timeframe.

• The spot rate and our model estimate have been converging over the past four years.

• Long-term fair value is currently assessed around 67-68.

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1996 1999 2002 2005 2008 2011 2014 2017

PPP-15

NZD/JPY

Source: BNZ

2 stdev error

bands

BNZ MARKETS

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Economic Growth • Apparent sluggish Japan GDP

growth reflects a falling population, which the IMF currently estimates at -0.25% pa, and worsening to -0.5% pa over the next five years.

• After accounting for population, Japan and NZ economic performance has been similar over recent years.

• Japan’s economic performance, as measured, has been more volatile than NZ since the GFC.

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Real GDP per capita

Source: BNZ, Bloomberg

NZ Japan

Y/Y%

BNZ MARKETS

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Business confidence • Japan business confidence is

currently stronger than NZ, and at an above-average level, supported by low rates and a cheap currency.

• Recent slippage probably reflects the global economic slowdown.

• NZ business confidence is improving, after being beaten down after the change of government in late 2017.

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2002 2003 2005 2007 2009 2011 2013 2015 2017

Business Confidence

Source: BNZ, Bloomberg

NZ (ANZ own-activity)

Japan (eco-watchers)

z-score

BNZ MARKETS

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Inflation • NZ underlying inflation is

creeping higher towards the RBNZ’s 2% inflation target and we project this trend will continue.

• Despite the BoJ’s aggressive monetary stimulus programme, inflation remains well below target and we don’t see the 2% target being met over the next few years (or even necessarily being an appropriate target).

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2005 2006 2008 2009 2011 2012 2014 2016 2017

Core CPI Inflation

Source: BNZ, Bloomberg

NZ (RBNZ sectoral factor model)

Japan Core (ex

fresh food)

Japan Core-Core

(ex fresh food and

energy)

2% Target

Y/Y%

BNZ MARKETS

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Monetary Policy – Policy Rates • The market sees a small

chance of an RBNZ rate cut this year.

• We see NZ rates on hold for some time.

• With inflation running well below target, there is little chance of the BoJ changing its policy rates of -0.1% for the o/night rate and 0% for the 10-year JGB.

• NZ-Japan policy rate differentials are likely to remain unchanged over the next year. -1

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2012 2013 2014 2015 2016 2017 2019 2020 2021

Policy Rates

Source: BNZ, Bloomberg

NZ OCR

Japan o/night rate

Market

Pricing

%

BNZ MARKETS

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Interest Rate Differentials • With policy on hold, inflation

differentials are the key driver of real interest rates and spreads.

• The relationship between the real rate spread and the cross rate over the last couple of years hasn’t been strong and we’d expect the weak relationship to continue over the coming year.

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

NZD/JPY vs NZ-JP Real 2-Yr Swap

Source: BNZ, Bloomberg

NZD/JPY

NZ-JP real 2-

yr swap (rhs)

BNZ MARKETS

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Monetary Policy – Balance Sheet • With rates at rock-bottom

levels, the BoJ continues to buy bonds and equities as a means of generating some policy stimulus.

• But with little to show for the massive expansion of its balance sheet and the diminishing holdings of JGBs owned by the private sector, the rate of change in BoJ asset holdings is falling.

• However, the policy serves to keep the yen at an overtly cheap level and will continue to do so. -20

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2010 2012 2014 2016 2018

BoJ Assets on Balance Sheet

Source: BNZ, Bloomberg

Level (lhs)

Annual change

(rhs)

Tn yen Tn yen

BNZ MARKETS

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Commodity Prices • At times, NZ commodity prices

can be a force on the cross rate.

• NZ commodity prices bottomed late last year and currently have some positive momentum.

• Any further upside from here is likely to be fairly limited against the backdrop of a slowing global economy.

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2010 2012 2014 2016 2018

NZD/JPY vs NZ Commodity Prices

Source: BNZ, Bloomberg

NZD/JPY (lhs)

NZ Commodity Prices (rhs)

BNZ MARKETS

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Risk Appetite • With yen being the

preeminent safe-haven currency, the cross is highly sensitive to our risk appetite index.

• The best chance for a downside break of support at 72 would be if a global shock sent risk appetite spiraling down.

• The recent recovery in risk appetite has supported a higher cross this year (not obvious in the chart which smooths risk appetite).

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2000 2003 2006 2009 2012 2015 2018

NZD/JPY vs Risk Appetite

Source: BNZ, Bloomberg

NZD/JPY

(lhs)

Risk Appetite - rolling 3-

mth avg (rhs)

BNZ MARKETS

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Short Term Valuation Model • The BoJ’s massive stimulus

programme keeps the yen cheap. Without it, short-term fair value for the cross would be 66. Any hint of the BoJ stopping/reversing that policy would be highly negative for the cross.

• After accounting for the BoJ’s growing balance sheet, current fair value is around 73-74 and our model (estimated through to 2012) has closely tracked the spot rate out-of-sample.

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2004 2006 2008 2010 2012 2014 2016 2018

NZD/JPY Model

Source: BNZ, Bloomberg

BoJ Balance Sheet

NZD/JPY

Model estimate excluding

BoJ balance sheet

Model estimate including

BoJ balance sheet

Model based

on risk

appetite, NZ

commodity

prices and

NZ-JP rate

spread

BNZ MARKETS

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Forecasts • The cross is currently close to

its average of the past year and near the middle of the 72-79 trading range.

• Our projections this year suggest more of the same – around the mid-70s – but this cross is apt to swing around due to its sensitivity to risk appetite.

• That said, our medium-term forecasts are biased towards the downside, given the yen is super-cheap.

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2005 2007 2009 2011 2013 2015 2017 2019 2021

NZD/JPY

Source: BNZ, Bloomberg

Forecast

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