Markets liked Wheeler's MPS but Wheeler didn't like the market bidding the NZD up, he sees it falling from here

By Kymberly Martin

NZ Dollar

The NZD surged higher after the RBNZ meeting yesterday morning, and has held its level since then.

It trades at 0.7810 currently.

The RBNZ largely delivered on our expectations yesterday morning. It flattened its projected 90-day bank bill track but maintained a tightening bias.

The latter caught some of the market off-guard, which appeared to have been positioned for the RBNZ to move to a much more neutral stance. The NZD/USD gapped from below 0.7700 to above 0.7800.

It was little surprise that in its statement the RBNZ continued to refer to the NZD as being "unjustified" and "unsustainable". This has now become almost obligatory.

In questioning, Governor Wheeler gave three key reasons why he is confident the NZD will decline. First, NZ’s terms of trade are deteriorating, led by dairy, and essentially the NZD is a commodity-linked currency. Second, we are beginning to see the start of a stronger USD trend. Third, the RBNZ has clearly indicated it is on hold for a prolonged period, whereas the US Fed will be raising rates some time from mid next year. This should reduce NZ’s interest rate advantage.

We would concur with all these views. They form core planks of our reasoning for why the NZD will be a lot weaker by end-2015 (we see the NZD/USD at 0.7000 at end 2015).

However, near-term, the onus will be on the USD to strengthen if we are to see the NZD/USD back at range-lows by year-end. For now we see resistance at the overnight highs of 0.7870, while support is eyed at 0.7780.

This morning the BNZ Manufacturing PMI will be released.

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Majors

USD strength has been the broad theme overnight. The NOK and JPY have been the weakest performers.

Broad sentiment improved overnight, assisted by stronger than expected US Nov retail sales data (0.7%m/m vs. 0.4% expected). This sees the S&P500 up 1.40% currently and US yields higher. The USD is broadly stronger against all its peers, with the USD index sitting above 88.60 this morning.

Against the strong USD the JPY gave up some of its recent gain. The USD/JPY trades back up at 119.30, from early evening lows around 117.50.

But the weakest major currency was the NOK. Overnight the Norges Bank surprised the market with a 25 bps cut, to 1.25%. This was unexpected given recent economic data showed the economy at least in line with the central bank forecasts. But it is likely a precautionary measure against the possible negative impacts to the oil producer, from the recent plunge in the global oil price. The USD/NOK gapped almost 2% higher, toward 7.3000.

The EUR was weaker overnight, in the backdrop of the stronger USD. Sentiment toward the EUR was also not helped by comments from the Germany Economy Minister. He noted “the recovery of the Germany economy is currently lacking dynamism”. The EUR /USD trades around 1.2390 this morning.

Meanwhile the AUD/USD experienced some volatility in the early hours of this morning after an interview with RBA Governor Stevens was published. The AUD/USD fell as Steven’s was quoted as saying the currency should be closer to 0.75 than 0.85. He said it is “quite likely” the currency will be lower in a year from now. However, the AUD recovered a little as Steven’s pushed back against the idea of near-term rate cuts. The AUD/USD trades around 0.8270 this morning, down from early evening highs above 0.8340.

Local attention will fall on the release of China data this afternoon (fixed assets, retail sales and industrial production). Tonight, EU industrial production data, ECB LTRO repayments and the US University of Michigan consumer confidence survey will be released.

All its research is available here.