Commodity currencies suffer. Local eyes on today's current account deficit with analysts expecting it to worsen to -3.3% of GDP

By Raiko Shareef

The USD saw a mixed performance overnight, relatively unperturbed by a sharp fall in US housing starts.

The Bloomberg Dollar Spot Index is unchanged for the session.

The EUR managed to hold on to its recent gains, while commodity currencies suffered.

NZD is the worst performer, exacerbated by a sharp fall in dairy prices.

The 17% monthly fall in US housing starts was the sharpest drop in activity in a year, and was roundly blamed on freezing conditions in February. Most analysts expecting a rebound come March, but we note that starts also fell in areas unaffected by the harsh winter, hinting at underlying weakness.

But this is a market that is in no mood to switch positions ahead of the FOMC tomorrow morning. There is certainly a heightened nervousness that the outcome will not be as USD positive as many investors are positioned for. But at the same time, none seem to be particularly willing to cut out of long USD positions, for fear of missing out on (what seems to be) the only game in town.

Ironically, the biggest fear heading into tomorrow morning is that Fed Chair Yellen will call cite USD strength as a reason to be cautious on rate rises.

We are increasingly of the mind that, even if the word ‘patient’ is dropped, the USD will finish the week lower as investors look to exit the heavily-crowded long USD trade.

Oil prices continue to fall, with WTI crude down 1.0% to $43.4. It continues to print post-GFC lows, though we note WTI’s fall has been exacerbated by capacity constraints at its pricing point in Cushing. Nevertheless, this continues to prove a drag on commodity currencies, which were well represented in the bottom half of the G10 leaderboard overnight, with NOK 0.5% lower.

Falling dairy prices saw NZD/USD push lower, though its decline started well before the auction. As we noted yesterday, our bias for this auction was negative, and we are not particularly surprised by the magnitude. We envisage a period ahead where dairy prices remain subdued, before further recovery in the back-end of 2015.

NZD/USD found support just above 0.7300, and it trades with a heavy bias. We favour further (modest) weakening heading into the FOMC meeting tomorrow morning. This morning’s local current account data could provide some impetus, with the deficit set to worsen from -2.6% to -3.4% (mkt: -3.3%).

NZD’s decline outstripped the AUD overnight, seeing NZD/AUD drop back below 0.9600.

Yesterday’s RBA minutes showed little sign of a Bank itching to cut rates, but the subdued data since that meeting suggests another cut is needed. Our NAB colleagues assign a 50:50 chance of a rate cut in April, and forecast at least one cut by May.

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