Don't expect NZD rally to extend materially as little reason to be bullish in a rising USD environment

By Kymberly Martin

NZ Dollar

The NZD lost ground against the USD on Friday night along with all its peers, weakening by 0.3% to 0.8130.

It opened slightly higher this morning and pushed toward to 0.8160 on a mild relief rally after the National government was convincingly returned to power at the weekend’s General Election.

We don't expect this rally to extend materially, with the USD story likely to overwhelm it as the week wears on.

With NZ commodity prices yet to bounce, and the RBNZ on hold until the end of Q1 2015 at least, there seems little reason to be bullish NZD in a rising USD environment.

The initial rally in GBP as Scotland’s referendum results rolled in saw NZD/GBP test 0.49, but we sit back at 0.5000 this morning.

With the spectre of political risk now lifted, we expect NZD and GBP to fall against the USD at largely the same pace. We see NZD/GBP at 0.49 by year-end.

NZD/AUD continues to benefit from the AUD’s relative underperformance against the USD, with the cross printing at 0.9120 this morning.

This is a timely return to our end-September target of 0.91, around which we expect the cross to oscillate through to mid-2015. In the near-term, we see a risk that the recent move higher extends toward 0.93.

Today, with no local data of note, we expect a fairly subdued session. We mark initial resistance at 0.8190, and initial support at 0.8100

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Majors

The USD strengthened across the board on Friday, sweeping the majors 10-0. The Bloomberg Dollar Spot Index gained 0.3% to rest beneath its recent highs, and looks ripe to make further gains this week.

Most pundits would have picked the GBP to rally as the Scottish referendum saw the independence movement fall short of its goal. 55% of voters electing that Scotland remain part of the UK. While the GBP built on the previous day’s gains as the results rolled in, it lost ground after the final tally. GBP/USD weakened by 0.7% to 1.6300 on the day, to sit middle of the pack amongst the major currencies.

The AUD and the EUR were amongst the biggest losers, both shedding just over 0.7% against the USD. Iron ore prices fell by 1.6% on Friday, taking it to a fresh cycle low of $81.70. This likely contributed the AUD’s softness. We also note that currency volatility seems to have settled at a higher level, with AUD/USD 3-month implied volatility sitting at 8.5%, having dragged its heels around 6.5% for much of Q3 2015. Higher volatility tends to erode the value of high-yielding currencies such as the AUD, which have been the targets of carry-trade investors.

There was no market-moving data on Friday, and the calendar looks fairly light for the week ahead. Highlights include a swathe of PMI releases out of Europe and China, and the third reading of US Q2 GDP, which is expected to be upgraded.

Tonight sees ECB President Draghi testify in front of European Parliament, where he will no doubt be asked about the low uptake of the TLTRO programme last week. Perhaps EUR’s sell off on Friday was some defensive positioning ahead of any swipes Draghi might take at the single currency. The Fed’s William Dudley is due to be interviewed tonight, in the first piece of Fedspeak after last week’s FOMC meeting.

All its research is available here.