BNZ says the next big move in the currency will ultimately be down. But not yet

by Kymberly Martin

NZ Dollar

In a quiet night the NZD/USD has traded sideways above 0.8260.

In the absence of key domestic or offshore data releases there has been little to provide direction for the NZD. In fairly bland markets, benchmark equity indices and bonds were relatively flat.

Our global risk appetite index (scale 0-100%) remains around 58%. The NZD/USD traded a narrow path between 0.8260 and 0.8280 overnight.

The most recent update of our fundamental NZD/USD ‘fair value’ model shows a range of 0.8200-0.8800 is justified. We do not expect the top of this range to be visited.

We believe we have already seen the peak in the NZD/USD and the next big move in the currency will ultimately be down. But not yet.

For now, valuations present little downside risk to the currency. We are comfortable with our view the NZD/USD will trade above 0.8000 for most of H1. Near-term support is seen at 0.8190 and resistance is eyed at 0.8350.

The NZD/AUD failed to maintain a probe above 0.9270 overnight, trading just above 0.9240 this morning. There are no key domestic data releases today. The NAB AU business survey may therefore be the key driver of the cross. The speculative community remains heavily short the AUD so the risk for the cross today may be another solid AU business survey. This could see the cross move back toward recent lows below 0.9170.

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Majors

Most currencies traded tight ranges overnight, in the absence of major data releases. The USD index sits a little lower at 80.60 this morning.

After last week’s excitement currency markets took a breather at the start of the week. As risk appetite consolidated so too did currencies. Equities have provided fairly flat returns. The USD index bobbed between 80.60 and 80.70 overnight.

The GBP/USD has dabbled sideways around the 1.6410 mark. The next key development to potentially impact on the GBP will be Wednesday night’s UK inflation report. This will be accompanied by a press conference where Governor Carney may adjust the Bank’s forward guidance.

It finds itself in a similar dilemma to the US Fed. It is approaching its previous unemployment ‘target’ more quickly than anticipated. The Bank may use a benign inflation report to suggest rates can stay lower than otherwise indicated by the improving labour market.

The AUD/USD has traded off intra-night lows around 0.8910 to sit at 0.8940 this morning. Today, the key for the AUD will be the release of the NAB business survey. If December’s 2 ½ high on business conditions can be sustained, it may instil further confidence in the market that the RBA is indeed ‘done’ with its rate cutting process. Currently the market prices a modest 10% chance of a further cut this year. Near-term resistance for the AUD/USD remains at 0.9000. Support is seen in the 0.8840-0.8870 window.

The key for markets tonight will be the inaugural address by new Fed Chair Yellen.

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