Rate cut expectations in Australia will support the NZD which could see a new push to 98 AUc

By Raiko Shareef

Friday night saw a reversal of Thursday’s reversal of Wednesday night’s FOMC-driven USD sell-off.

Confused?

Take pity on the investors who piled into long USD positions on Thursday night, confident they’d seen the last of the squeeze.

Not so. The Bloomberg Dollar Spot Index fell by 1.3%, very nearly hitting post-FOMC lows.

In a light data night, here was little fresh news to inspire the moves, certainly not of that magnitude. The first two Fed speakers out the gate (after Chair Yellen, of course) generally affirmed the view that the recent rapid gains in the USD contributed to the FOMC’s freshly cautious tone.

Chicago Fed President Evans, a noted dove, mentioned that the strong USD was one reason that growth forecasts had been cut, through the impact on net exports. Atlanta Fed President Lockhart, a centrist, said his level of concern on the impact of USD gains had risen, but this was “not a game changer”. He still views a rate rise as warranted in June, July, or September.

A good indication of how all-consuming the USD sell-off was on Friday was the reaction to an abysmal Canadian retail sales report. Core retail sales (ex auto) dropped by 1.8% m/m, much worse than expected. CAD initially weakened by 40pts, before falling in line with the broader USD move. It ended up 130pts stronger relative to its level just before the data release.

NZD was the outperformer in the broader USD sell-off, and we suspect this outperformance will continue in the near-term.

No doubt the offshore investors community will hungrily be eyeing NZ’s yield advantage. There will be little local information to dissuade them, at least ahead of NZ’s Q1 CPI report in mid-April.

We are now back at levels where we would actively consider re-entering USD long positions, though would understand if investors felt a little gun-shy. EUR above 1.09, AUD above 0.78, and NZD above 0.76 look attractive. We remain constructive on the USD heading into year-end.

Earlier in our session, RBA Governor Stevens delivered a speech which reaffirmed the RBA’s easing bias, in our view. While not stridently dovish, reading between the lines plays into the view that the RBA is close to cutting rates once more. 

Stevens noted that Australia will experience a period of sub-average growth, and that households and business remain downbeat.

Whether the RBA cuts in April or May remains a line-ball call.

Our NAB colleagues still believe May is more likely. In any case, the possibility of an April cut will keep NZD/AUD well supported in the near-term.

The cross hit a fresh post-float high on Friday night, before running out of steam ahead of 0.9750. We remain close to those levels this morning, and would not be surprised to see an attempt made at 0.9800, especially if Fonterra affirms its 2014/15 milk payout forecast at $4.70kg/MS.

The week’s data calendar is very light. We’ll be keeping an eye on no fewer than 10 Fed speaking engagements, with highlights likely to be Vice Chair Fischer (Tuesday) and Chair Yellen (Saturday).