📝 NZD Tends to Underperform During Recessions: J.P. Morgan Strategy

We have a suite of shorts (NZD, CAD, SEK) but NZD stands out as an attractive selling candidate at current levels.

N.Z. GDP was particularly disappointing. Factoring in the 4Q disappointment and 3Q downward revisions, the annual growth rate came in 1.1% below consensus estimates, and should call into question the market’s expectation for another 2+ hikes.

Relatedly, NZD’s external accounts are in precarious shape, with S&P recently suggesting NZ’s AAA rating could come under pressure if not remedied.

Moreover, within the global context, NZD tends to be an underperformer historically around recessions, and so is a reasonable choice of hedge to the extent that macro conditions remain challenged.

NZD’s rebound from 2H’22 lows has been the largest among the cyclical bloc of G10, which arguably provides a decent entry level for reestablishing short positions.

Taken together, it may be that NZD ultimately gets squeezed from both local and global factors after a run of surprising resilience in recent months; we stay short vs JPY & AUD.

- J.P. Morgan Strategy