by Mike Jones
At around 0.7880, the NZD/USD is opening the Asian session threatening to break through the top end of the 0.7685-0.7900 range.
A surging AUD and broadly weaker USD have both conspired to send the NZD higher.
Yesterday’s seemingly innocuous RBA minutes proved to be the catalyst for a sharp rally in the AUD. The RBA retained its easing bias, but noted the inflation outlook was now stronger thanks to the 10% depreciation in the AUD.
In response, Aussie interest rate markets trimmed the chances of an August RBA rate cut to around 50% (from closer to 70%), and the AUD/USD jumped around a cent to above 0.9240.
The AUD’s outsized reaction probably had a lot to do with the fact short positions in the AUD had been running close to the highest on record.
The offshore trading session was dominated by profit-taking and position reshuffling, as market’s brace for tonight’s Congressional Testimony from Fed chairman Bernanke. The USD was sold aggressively as investors trimmed large net longs in the greenback.
This morning’s GDT dairy auction also bolstered NZD sentiment. Dairy prices rose 4.9%, a very positive result given the already high level of prices. Restricted offshore dairy supply remains a key driver. The upshot is there is now clear upside risk on Fonterra’s current season milk price payout (of $7.00 per kg/ms).
For today, there is scant local data to look out for. Expect markets to play the waiting game ahead of tonight’s Bernanke testimony. The NZD/USD will take its lead from any shifts in USD sentiment following the testimony.
We suspect the risk here is for a firming in the greenback (see Majors). The key level to watch for in the NZD/USD is 0.7900. A daily close above here would pave the way for a move back above 0.8000. Initial support is expected on any pullbacks towards 0.7810.
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Majors
The USD weakened against all of the major currencies overnight. The DXY index is down around 0.6% at 82.50.
Positioning was the dominant driver of FX markets overnight. Economic data took a back seat.
We noted on Monday that speculative long positions in the USD had been built up to very high levels. Interest to square up these USD longs ahead of tonight’s Bernanke testimony pitched the greenback lower overnight.
Upbeat US data only briefly interrupted the general sell USD theme. US CPI inflation came in above expectations (1.8%y/y vs. 1.6% expected), thanks to higher gas prices, and the NAHB housing index climbed to a fresh 7-year high (57 vs. 51 expected).
While the AUD/USD was the night’s clear outperformer, the NZD/USD and EUR/USD weren’t far behind, the latter breaking through previous resistance at 1.3100 (currently around 1.3165). USD/JPY, meanwhile, reversed most of the day’s previous gains in sliding back to around 99.20. A small undershoot on UK inflation (2.9% vs. 3.0% expected) ensured the GBP underperformed.
Global equity markets also succumbed to profit-taking as the investment community brace themselves for Mr Bernanke. The Eurostoxx 50 fell 0.8%, with the S&P500 currently down a more modest 0.4%.
Looking ahead, we suspect markets are heading into tonight’s Bernanke Testimony on the back foot and fearing that the Fed is ready to warn once again that it will push back on higher bond yields.
This suggests to us the risk is perhaps shaded towards a move higher in US yields and the USD, on a repeat of the “tapering later this year” line.
Still, the Fed will be careful not to let the tightening in US financial conditions run too far, which means the extent of any USD gains is still expected to be limited.
Other news:
German ZEW index disappoints expectations falling from 38.5 to 36.3 (40.0 expected).
Event Calendar:
17 July: JN BoJ minutes; UK BoE minutes; UK ILO unemployment; US housing starts & building permits; CA Bank of Canada announcement;
18 July: G20 begins; NZ ANZ consumer confidence; UK retail sales; US Fed’s Bernanke begins Testimony to Congress;
19 July: NZ net migration; NZ credit card billings; UK public sector borrowing.
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