Holidays, low volatility, and resistance define fx markets; bullish equity markets contrast with dovish Yellen

by Raiko Shareef

NZ Dollar

The NZD was among the worst performers on Friday, albeit in an evening where major currencies were little changed.

NZD/USD closed 0.2% lower at 0.8740.

On Thursday, the currency’s resilience saw it outperform other majors to regain most of its losses against the USD after the strong US employment report.

While we wouldn’t read too much into Friday’s decline, we suspect that profit-taking was a motive, given NZD/USD’s failure to breach 0.8800 for a second consecutive week.

With last week’s continued decline in commodity prices pressing at the back of investors’ minds, there looks to be some reluctance to test that topside resistance. But on the other hand, with volatility still very low, there is little incentive for those who are picking up the positive carry from exiting that trade.

This week, the Quarterly Survey of Business Opinion will be the focus, and is expected to hold up well. RBNZ officials Wheeler and McDermott both have speaking engagements, but these are closed to the public, so we don’t imagine too much in the way of headlines.

Today, we pick resistance at 0.8790, with initial support at 0.8700.

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Majors

With US markets closed for the Independence Day holiday, markets were predictably quiet heading into the weekend. Most major currencies were less than 0.2% changed against the USD.

The best performer was the AUD, which pared some the sharp losses it saw after Governor Stevens’ speech on Thursday. A further decline in volatility likely helped, given the AUD’s carry appeal. The VIX dropped 0.5 points to a new post-GFC low at 10.32. The AUD/USD bounced 0.2% to 0.9370.

The US Dollar Index (DXY) managed to edge higher, posting its best weekly gain since late May. The US employment report released on Thursday looks to have given USD bulls a whiff of hope, in the face of Fed Chair Yellen’s relentless dovishness. The DXY closed 0.3% higher for the week.

The week ahead looks to be much quieter, especially where US and European releases are concerned. The US FOMC’s June minutes are unlikely to add anything new to the debate, but investors will keep an ear out for sound bites from the four Fed speakers due to make the rounds (Kocherlakota, Fischer, Lacker, George).

In Australia, the monthly Labour Force report on Thursday will be a highlight, with our NAB colleagues expecting a weaker-than-consensus result. The unemployment rate is picked to worsen further, to 5.9-6.0%, from 5.8% in May.

It should be a staid start to the week. If anything, the state of play in geopolitics might take some of shine off risk assets. In the Ukraine, pro-Russian rebels were dislodged from a key town amid a forceful push by government forces. But markets have generally been sanguine to these risks for much of 2014, and we don’t expect that to change any time soon.

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