NZD up 1.3% to 0.7190; USD weaker across the board on Trump and Dudley speech, USD-TWI down 1%; GBP up 2.8% after May's speech on Brexit exit

By Jason Wong

There has been a lot of news flow over the past 24 hours and the net result is a weaker USD across the board and a much stronger GBP. The USD major currency TWI is down over 1% and it’s been a steady path lower.

The WSJ published additional snippets of its weekend interview with President-elect Trump, with Trump pouring cold water on the border tax idea which House Republicans favour as a means to raise significant tax revenue to pay for tax cuts and reduce the need to put up import tariffs. Trump also said that the USD was “too high” in part because China holds down its currency. With a market that is heavily long USD, these sorts of comments do not inspire traders to hold onto that position.

The Fed's Dudley gave a speech and his comments came across dovish, although that is not unusual. He noted that the economy was not growing much above its sustainable long-term potential, pressures on labour market resources have been increasing, but quite slowly, and that the recent strength of the USD would put downward pressure on inflation.

UK PM May's speech on her vision for Brexit was well received by the market. The core details of her vision were provided to media yesterday, well ahead of the speech around midnight. The comments were aspirational for a truly “Global” Britain, and a stronger UK following a clean break from the EU, while remaining the EU's “good friend and neighbour in every way”. An additional comment in the speech that wasn't pre-released was that Parliament would have a vote on the final Brexit deal.

For a market that has been heavily short GBP, the speech nuggets and the Parliamentary vote idea helped fuel a strong rally in GBP. GBP is trading not far off its highs for the session and is currently up 2.8% to just under the 1.24 mark. The NZD is also strong but NZD/GBP has pulled back to around 0.58.

The NZD is up 1.3% to 0.7190, driven by the weaker USD dynamic. The latest GDT dairy auction showed average prices up 0.6%, with whole milk powder down 0.1%, in line with market expectations. Yesterday, CBA released its NZ commodity price update that covered the holiday period and the latest reading. This feeds directly into our short term fair value model. The data were stronger than we had assumed, taking our fair value estimate up through the USD0.74 mark. Thus, despite the overnight rally in Kiwi we think it can continue to make further gains over the coming weeks.

The AUD hasn't kept pace with the Kiwi, rising by 0.9% against the USD to 0.7550 and pushing NZD/AUD up to 0.9530. Yesterday, new RBA Board member Harper was on the wires talking about a soft Australian economy and talking down the AUD, although there was little market reaction to his comments.

USD/JPY has traded down 1% to the 113 mark, on the softer USD trend and fall in US Treasury yields. EUR broke up through 1.07 and currently trades at that level.

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