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Kiwi separates from the Aussie and the NZD is likely to stay high; only multiple shocks are likely to disturb the trend

Currencies
Kiwi separates from the Aussie and the NZD is likely to stay high; only multiple shocks are likely to disturb the trend

By Raiko Shareef

NZ Dollar

NZD is off its overnight highs, but remains 0.2% higher for the day against the USD at 0.7780.

Curiously, the NZD followed EUR and the other European currencies higher after the ECB failed to deliver fresh news.

In contrast, other commodity currencies such as the AUD and CAD performed rather poorly.

There seems to be a fair amount of support for NZD/USD ahead of 0.7700, with attempts to push below 0.7750 over the past few days failing rather quickly.

Tonight’s US labour market reports, if strong, seem the only likely catalyst for a dip below 0.7700 ahead of a Fonterra announcement next week, and the RBNZ on Thursday.

We mark initial support at 0.7730, and resistance at 0.7840.

On the crosses, the inability of AUD to rally substantially has kept upward pressure on NZD/AUD. The cross is 0.5% stronger at 0.9280, having fallen just of breaching 0.9300. We see important resistance at 0.9310, which caps the downtrend over 2014.

If that breaks, we may see a quick trip to 0.9400.

While our forecasts envisage a return to below 0.90, we suspect this will be difficult before early 2015.

We would need to see both Fonterra downgrade its payout forecast, and the RBNZ to be remarkably downbeat on its rates outlook next week to see a sharp correction in the cross before year-end.

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Majors

Strength in the EUR led European currencies higher against the USD last night, after the ECB failed to deliver fresh policy measures. About half of those gains have been pared since then, as unnamed officials said that the ECB is preparing to ease policy in January.

Yesterday, we noted that ECB President Draghi was liable to disappoint a growing camp of investors who were banking on introduction of new policy measures at the December meeting. It would have been too soon, and we favoured early 2015 as a more likely start date. That view effectively played out overnight.

The EUR initially kicked lower after the market saw that the ECB’s inflation forecasts had been downgraded. The Bank now picks headline inflation of 0.4% y/y in 2014 (from 0.6% expected in September), and 0.7% in 2015 (from 1.1%). Notably, this excludes the most recent moves lower in oil prices, which will further weigh on inflation.

But it quickly became clear that Draghi was not going to deliver anything substantially new. If anything, the market pushed EUR higher on signs of friction among the Bank’s decision-makers. The statement professed stronger commitment to expanding the balance sheet, with the latter now “intended” to rise, rather than “expected”. While Draghi confirmed this was a firming of language, he also admitted that he could not get unanimous acceptance for the change from the 24-member Governing Council.

The upshot of this was that a market that was heavily short EUR/USD squeezed higher, rising from 1.2310 to above 1.2450 before pausing for breath. Our London-based NAB colleagues continue to expect corporate and sovereign bond purchases in early 2015, with short EUR/USD one of our top trades.

That view was given some succour a few hours ago, as financial media reported that the ECB was preparing for a broad-based quantitative easing package for the 22 January meeting. The reports cited unnamed “euro-zone central bank officials”. The package is said to include “all kinds of bonds”. If this turns out to be true, we would be wholly unsurprised. We are also sympathetic to the view that the reports may have been a deliberate leak from an ECB uncomfortable with the EUR’s spike higher. EUR/USD dropped nearly 100pts to 1.2370.

There was little other fresh news over the past 24 hours. The AUD cannot catch a break, even after surprising robust retail and trade data. Retail sales rose by 0.4% against market expectations for a 0.1% gain in October, building on a very strong 1.3% rise in September. The trade deficit was also smaller than anticipated, supported by rising export iron ore volumes that somewhat offset tumbling prices.

These data will give some reassurance to the RBA and its current (neutral) policy stance. But the AUD was one of the worst performers overnight, falling 0.3% against the USD to 0.8380, even as iron ore prices rose 2.9% yesterday.

Tonight is all about the US labour market reports. The market is picking headline payrolls growth of 230k in November, and the unemployment rate is expected to remain at 5.8%. Following that, US factory orders and Fed Vice Chair Fischer’s comments to an IMF conference may also attract attention.

Other news:
* US jobless claims 297k, near expectations.

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Source: CoinDesk

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