By Raiko Shareef
NZ Dollar
The NZD trails at the low end of the G10 leader-board against the USD, currently 0.5% lower at 0.7420.
Earlier this morning, NZD/USD flirted with the 0.7400 level.
This underperformance appears to be driven by interest to remain short NZD ahead of the RBNZ meeting on Thursday.
In the lead-up to that, we suspect that NZD/USD will be afflicted by a soft reading at tomorrow’s AU CPI (though NZD/AUD would likely benefit).
We are increasingly wary that the market is looking for too much from the RBNZ tomorrow. Investors are positioned for some sort of ‘clean’ watering-down of the RBNZ’s tightening bias.
But while we can see a case for such a watering-down, we can also imagine the final wording being less than clear-cut.
For us, then, NZD weakness heading into Thursday morning seems like a short-term opportunity.
We are considering taking profit on our NZD/USD short ahead of then, mindful of negative surprises for that position coming out of the FOMC (at 8am) and the RBNZ (at 9am).
There are no local data releases today. We pick a 0.7370 – 0.7450 range for NZD/USD.
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Majors
The USD has stepped back from cyclical highs made on Friday night, after EUR roundly rejected a dip below 1.11, leading the other majors to post gains. JPY was a notable exception.
Early in local Asian session, the USD looked to build on its Friday night gains, but the market was clearly in no mood to brook a EUR below 1.11 yet. Shortly after dipping its toes below 1.1100, EUR/USD shot higher and has hardly looked back since. It currently sits 0.7% stronger from the day at 1.1280.
The anti-austerity Syriza party was declared the victor of Greece’s general election. Having failed to win an outright majority, its leader Alex Tsipras is holding talks with minor parties to decide on a junior coalition party. The market appears to have (rightly) decided that the odds of a Greek exit from the euro-area have diminished, with Tsipras sounding relatively conciliatory in his victory speech. That said, we suspect that debt negotiations with the troika may generate alarming headlines, and thus EUR volatility.
A positive German business survey supported EUR’s gains. The IFO survey’s ‘business climate’ and ‘current assessment’ components both beat expectations for a modest gain, though the ‘expectations’ component did not improve as much as anticipated. Over coming months, we suspect the eurozone economy will start showing the benefits of a sharply lower currency and bond yields. But the diverging paths of the ECB and the Fed will drive EUR lower still. We see EUR/USD at 1.08 by year-end.
JPY continues to trade against the grain, losing against a generally softer USD. The market is mulling comments from BoJ Governor Kuroda over the weekend, where he acknowledged the need to get more creative with policy measures, should the BoJ feel its target was at risk. This will fuel speculation that further adjustments will come via other tools than government bond purchases. USD/JPY is 0.5% higher at 118.40.
In the local session, the focus will be on NAB’s monthly business survey, with investors wary of further signs of weakness in the Australian economy. Tonight, UK GDP and US durable goods orders will be data highlights.
We will also be watching the progress of the massive snowstorm that will shortly hit the US eastern seaboard, including New York, New Jersey, and Boston. Generally speaking, a short snowstorm (even a sharp one) will not have consequences adverse enough to materially impact quarterly GDP. This is in contrast to early 2014’s protracted period of bad weather in the US that cumulatively ground activity to a halt, and severely contracted GDP.
We suspect that, after the USD’s quick ramp higher over the past few sessions, investors nervous about the speed of its appreciation could be easily spooked into taking profit. The snowstorm, ahead of the FOMC on Thursday, might provide such an excuse.
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