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The global reach for yield set to continue and likely to underpin NZD in interim

Currencies
The global reach for yield set to continue and likely to underpin NZD in interim

by Raiko Shareef

NZ Dollar

The NZD has given up some of its post-FOMC gains, falling 0.3% against the USD to 0.8710.

Some of the wind was taken out the NZD’s sails by an as-expected GDP outturn. The economy expanded at a 1.0% q/q pace (3.8% y/y). The result was close to enough to published forecasts, but in the days before, analysts had been talking about upside risk, warning that the outturn could be in the region of 1.3%-1.4%. The market looked to be positioned for that result, and was disappointed.

Combined with a bit of profit-taking on the FOMC-inspired gains, the NZD stepped back, but remains above the 0.8700 figure. Positioning looks more neutral, but the near-term data calendar seems void of any directional cues.

Fundamentals suggest the NZD/USD should be lower, with our short-term ‘fair-value’ model signaling an 0.8120-0.8710 range. But with the global reach for yield seemingly set to continue over the northern-hemisphere summer, it’s hard to see a sharp correction any time soon.

Today, ANZ job ads and consumer confidence readings won’t trouble anyone looking for a quiet Friday. We expect NZD/USD to be bound by the 0.8700 figure on the downside, with the 2014-high of 0.8780 providing topside resistance.
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Majors

Major currencies are little changed from the post-FOMC wash-up, as markets realign themselves for a Fed willing to keep policy easy for longer.

The market’s reaction yesterday was one of positioning. With US data steadily improving over the quarter, investors had braced for Fed Chair Yellen at least slightly more upbeat. This was not to be.

Thus we begin this morning with major currencies having broken big levels: EUR/USD above 1.3600, GBP/USD above 1.7000, AUD/USD above 0.9400, and NZD/USD above 0.8700. Gold saw its largest gain in nine months, leaping 3.8%.

GBP in particular continued its inexorable upward march, thanks to BoE speakers that continue to signal the prospect of rate hikes. Last night, MPC member McCafferty said that an early start to interest-rate increases may be warranted. GBP/USD is the best performing major currency overnight, up 0.2% to 1.7040.

With another three months before the Fed next publishes economic projections, the northern hemisphere summer is shaping up to be very, very quiet. The continued contraction in volatility will likely see the reach for yield extended, supporting AUD, NZD and the emerging-market set.

The decline in the USD was arrested somewhat by positive USD data. US continuing claims fell to 2561k, the lowest levels since early 2008. Separately, the Philly Fed Index rose from 15.4 to 17.8 in June, beating expectations for a smaller gain.

There are no top tier data due tonight – markets should cruise quietly into the weekend.

Other news:

*Norway’s central bank (Norges) warns it may need to cut interest rates; NOK plunges 1.9% against USD.

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Source: CoinDesk

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