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Speculative investor positioning changes removes the crutch for the NZD: BNZ

Currencies
Speculative investor positioning changes removes the crutch for the NZD: BNZ

by Raiko Shareef

NZ Dollar

The NZD drifted higher alongside the AUD over the past 24 hours, and sits 0.3% higher against the USD at 0.8600.

A combination of improved risk sentiment and a steady bid tone for the AUD helped the NZD higher.

The kiwi underperformed the AUD, as investors remain braced for a slightly less hawkish RBNZ tomorrow morning.

With the dynamics currently at play, we suspect that the NZD would receive a mild boost should the Bank fail to incorporate the high TWI into its policy statement.

We note that our momentum model was finally stopped out of its long NZD/USD position at the end of last week. That position was established more than two months ago (on 14 February), and the model held its nerve through the sell-off in early April.

We think the exit of this position is significant, to the extent that it emulates speculative investor activity.

Momentum is one of the forces that has kept the NZD elevated despite deteriorating fundamentals (e.g. dairy prices). The removal of that crutch opens the door to the correction we expect over the months ahead.

Today’s local net migration and credit card data should not see much reaction from currency markets, which remain focussed on tomorrow’s RBNZ meeting. The main hurdle before that will be the HSBC China PMI.

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Majors

The USD weakened against most of its G10 peers on Tuesday, amid improved risk appetite. The US Dollar Index is 0.1 softer at 79.9.

A flurry of corporate acquisition activity, particularly amongst large pharmaceutical companies, supported global equity markets. The S&P 500 gained 0.6% and the Euro Stoxx 50 rose by 1.4% as more than $70bn worth of takeover offers were tabled.

As a result, our Risk Appetite Index rose to 73.2%, its highest level in 2014. The last time risk sentiment was so positive (by our measure, at least) was August last year. It should come as no surprise, then, that JPY and CHF were among the worst performers in the G10 basket, while gold continued to slide.

Positive US data helped to support equities. The Richmond Fed Index, existing home sales, and the FHFA house price index all modestly beat market expectations. Note that Citigroup’s Economic Surprise Index for the US has rebounded from a 20-month low of -46 in early April to -23 today. This recovery in US data tone is a key component underpinning our expectation for a lower NZD over the coming months.

The AUD was near the top of the leader board yesterday, gaining 0.4% against the USD to 0.9360. Markets look be positioning themselves for another strong Australian inflation print, due today. The annual pace of underlying inflation is expected to pick up from 2.6% to 2.9% in Q1 2014. With the last print coming as a surprise to the RBA, there is a small but growing community of investors who think that another strong print may push the Bank to a hiking bias (from its current neutral stance). We think such a shift would be decidedly premature, given that the Australian economy remains growth-challenged. Our NAB colleagues also expect that underlying inflation will be lower in the medium term.

There is plenty of other event risk on the cards for today’s session. The flash reading of HSBC’s China PMI is expected to show a slight improvement to 48.3 from March’s dismal 48.0. A further slide would be unequivocally negative for risk assets, particularly the AUD. Later in the evening, a handful of preliminary PMI releases are due out of Europe, as well as the Bank of England minutes. Lastly, the Markit PMI and new home sales data out of the US will attract some attention.

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Source: CoinDesk

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1 Comments

Market voilatility has slowed so money is drifting back to the US.  
No fundamental shifts occurring, no sentimental panic or movement.

We'll see the NZD drift up, as NZ still has stable economy.

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