NZD at 0.7325 USD, a consolidation phase expected; NZDAUD at 0.9675 as AUD underperforms in the USD sell-off; USD TWI down 0.7%, down 3% for January

By Jason Wong

The Trump reflation trade continues to unwind, with lower equities, US bond yields and US dollar being a feature of the last trading day of the month. Following on from Trump's travel ban from seven muslim-dominated countries, the market has reacted badly to his firing of the acting attorney general who defied his executive order on the travel ban.

The USD major currency TWI is down 0.7%, taking the cumulative fall over January to around 3%. There have been a number of factors behind the weakness for the session. As well as the unwinding of the Trump reflation trade, trade advisor to Trump, Peter Navarro, said that Germany is using a “grossly undervalued” euro to exploit the US and its EU partners. It’s yet another comment that feeds the view of the Trump administration preferring a weaker USD.  Lower than expected consumer confidence, driven by the expectations component, soft Chicago PMI data and a weaker-than-expected employment cost index added to the weaker USD and lower rates tone.

EUR rose up through the 1.08 mark and is currently just below that level, up 0.9% to 1.0790. The broad USD sell-off was behind that move although, in addition, euro-area CPI inflation in December accelerated to 1.8% y/y, much higher than expected. Data like this adds to expectations that the ECB will have to announce some tapering of its bond purchases later in the year, although importantly the core rate came in as expected at 0.9% y/y and remains well below target. GDP growth in Q4 was 0.5% q/q suggesting that the euro-area continues to grow above trend.

USD/JPY is down 0.7% to around the 113 mark. There wasn't much news from the BoJ's policy announcement, with no intention to change its yield curve control policy settings, and with CPI inflation expected to remain below target for some time yet.

The NZD peaked at around 0.7350 early this morning, a fresh high for the year, helping the TWI drive up through the 80 mark. The kiwi currently trades at 0.7325 and for the first time in two months we can say that the NZD now trades close to fair value (our model estimate now down to 0.7340 on weaker risk appetite), having appreciated from an over-sold level. Further gains will now be harder to come by and we think that a sustained push higher through 0.74 might prove to be a challenge. A period of consolidation is now probably due.

The AUD has underperformed during the broad USD sell-off, which sees NZD/AUD trading up to around 0.9675, surpassing the high seen on the first trading day of the year. The NAB survey showed improved Australian business conditions, but that release had little market impact.

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