AUD more vulnerable than NZD against the USD, BNZ sees a bounce above 0.90 in the near-term

By Raiko Shareef

NZ Dollar

The NZD continues to make headway lower, having followed the AUD lower over the past 24 hours.

NZD/USD is 0.4% weaker at 0.8240.

Yesterday, support at 0.8260 gave way in the face of a broad USD rally, which shows little sign of letting up.

The increase in currency volatility has certainly played its part. In this environment, it is hard to build the case for significant upside in NZD.

We remain comfortable with our below-market forecasts (0.80 by year-end).

With all the action occurring against the USD, it is worth noting that movements in NZD crosses have, for the most part, remained subdued.

Overnight, NZD/EUR and NZD/GBP came off recent highs, moving back toward well-worn ranges. NZD/JPY maintained its station between the 100- and 200-day moving averages.

NZD/AUD has bounced off this year’s lows to swing above 0.8950. Having been rather nervous about the prospect of an extension lower, we are slightly relieved to see this tentative rebound. Our end of year target remains at 0.91, and with AUD appearing to be more vulnerable than NZD against the USD here, we are looking for a bounce above 0.90 in the near-term.

Today, we see initial support for the NZD/USD at 0.8200, ahead of 0.8120. We mark resistance at 0.8330.

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Majors

Another day, another lurch higher for the USD, with very little news or data to inspire the move.

With most major currencies lower, the broad Bloomberg Dollar Spot Index is up 0.2% overnight. EUR failed to participate in this move, bucking the trend to sit 0.2% higher today at 1.2920.

For the second day, the AUD was the weakest amongst its peers, falling by 0.9% against the USD to 0.9190, the first time it has been below 0.92 since March. Investors seemingly ignored broadly positive signals from NAB’s business survey, where business confidence trimming to +8 from a too-good-to-be-true +11 last month. Here, the survey remains at the top end of the range seen over the past three years.

But the market’s attention was elsewhere. Some of the downward move will have been supported by increased attention on the iron ore price, which continue to make fresh cyclical lows. Overnight, iron ore slipped another 0.5% to $83.2, its lowest since 2009.

More important, though, is the fact that currency volatility has spiked significantly higher this week. Three-month implied volatility for AUD/USD spiked 19% higher yesterday to a five-month high though still well below historic norms. Similar (if not larger) moves in volatility have been apparent in other majors.

Among the set of high-yield currencies, a rise in volatility is understandably negative, as it sharply undermines carry-trade returns. Recall that depressed volatility has been a defining feature of markets in 2014, and has encouraged the likes of AUD, NZD, and emerging market currencies to hold higher than fundamentals might suggest.

For the AUD specifically, there may also be an element of catching up with the rest of the G10 set. AUD has been notably loath to move along with the rest of its peers against the USD in the broader depreciation seen since July. It has kept a 0.92-0.95 range since March. As it stands, it sits just above the 200-day moving average at 0.9180, and we favour further downside both in the short- and medium-term. We pick 0.88 for AUD/USD by year-end.

In data news elsewhere, UK industrial production beat expectations to rise by 0.5% m/m in July (exp. +0.2%). The US NFIB small business optimism index held near cyclical highs, printing at 96.1 (exp. 96.0).

Today’s data calendar is even less inspiring, with none of any real significance due tonight. We remain wary of a sustained rise in volatility (yet to spill over in the equity or bond space), which at the moment looks to drive the USD stronger still.

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