No surprises here as NZ dollar continues to underperform - ING

"Expect the NZD's paltry performance to continue till the looming elections and central bank FX intervention threat doesn't fade," argues Viraj Patel, Foreign Exchange Strategist at ING.

Key quotes:

"Given the heightened domestic political uncertainty and prospects of significant policy changes by the next government, our base case for the kiwi dollar is to trade with a negative bias ahead of the elections. Indeed, while our AUD/NZD financial fair value model suggests the pair is trading with a modest upside skew in recent days, we would conclude there is scope for a more significant NZ political risk premium to be priced in. At peak political uncertainty ahead of the elections, there could be a further 1-2% idiosyncratic NZD weakness to capture the event risk."

"The Reserve Bank of New Zealand has been saying no thanks to a strong NZD for a while now and ramped up its jawboning attempts in August by dropping the threat of intervention into the mix. While the threat of FX intervention remains non-credible at this stage – as the costs of an RBNZ rate cut in terms financial stability risks outweigh the benefits of a weaker NZD – we attribute part of the kiwi's recent underperformance to the verbal jawboning by RBNZ officials."

"Earlier in the week, RBNZ Governor Wheeler reiterated the need for a lower currency and ongoing verbal jabs might see long NZD speculative positions neutralise further in the weeks ahead. Equally, a slowdown in house price growth is reducing any tail risk of near-term rate hikes to address any financial stability concerns; we note that three-year implied policy rates have fallen back towards their 2017 lows in recent months, thereby justifying the recent NZD weakness."

"Bottom line: Further NZD weakness ahead of the elections"

"With speculative markets still significantly net long NZD and initial signs of a political risk premium yet to reach extreme levels, we suspect a narrower focus on the September elections could spell further weakness for the kiwi dollar. A data-driven recovery in USD sentiment could see NZD/USD temporarily undershoot our 0.71 forecast for 3Q17, with a break of the 200-DMA (0.7130) supporting this view."

"Even worse, under a 'perfect storm' of rising developed market bond yields and greater domestic political uncertainty, we think NZD/USD could drop towards the 0.68-0.69 lows seen earlier in the year. We would also expect AUD/NZD upside to extend to the 1.11-1.12 area if markets see the NZD as an easy political target in the near-term."