By Raiko Shareef
The squeeze lower in the USD extended overnight, with the Bloomberg Dollar Spot Index falling below the lows it hit immediately after the FOMC meeting last week. The Index is down 0.7% for the day, with AUD an outperformer.
US data tended to print with the grain of USD weakness, though they were by no means the driver. Existing home sales and the Chicago Fed Index both undershot expectations, keeping the ‘surprise’ in US data firmly in (deeply) negative territory.
There likely is an element of the FX market catching up to the downbeat tone of US data over the past two months. Until the FOMC meeting, investors were willing to ignore the deterioration, choosing to focus on still-strong employment data.
We’d note that the FOMC appears to believe that the softness in US data will be temporary. Overnight, Cleveland Fed President Mester (non-voter, centrist) called the weakness “transitory” and noted that she is “more optimistic” on the outlook. For her, a June rate rise remains a “viable option”.
Fed Vice Chair Fischer (voter, centrist) affirmed that a rate rise remains likely before the end of the year, and the data will determine whether rates lift off in June or September or another date. He also warned that the tightening cycle would not be smooth, unlike the steady pace of rate hikes between 2004 and 2007.
We would characterise the overnight move lower in the USD as a continued wind-back of speculative USD long positions. While the moves may look orderly, we suspect that light liquidity and low conviction has allowed major currencies to drift higher. We are sitting on our hands for now, but are actively looking to enter long USD positions once the squeeze has dissipated.
NZD/USD was the unlikely first mover, and looks to have convincingly broken above the key 0.7610 resistance level. The spurt higher has also broken above the downtrend prevailing from mid-2014, and currently sits above the 100-day moving average. A close here or higher would be seen as a bullish signal, and would invite a crack at 0.78.
From a fundamental perspective, we can see a drift higher in NZD/USD extending, in the absence of secular USD strength. This will mean NZD/AUD and NZD/EUR will remain well-supported, despite sitting at or near record highs. The break above 0.76 in NZD/USD saw NZD/AUD shoot toward 0.98, before falling back. We would be unsurprised to see further pushes toward 0.98, as the 7 April RBA meeting draws nearer.
Today, we see a rash of PMI releases due across the globe. The Fed speakers today (Williams and Bullard) will likely stick to their biases, and should be largely ignored. Keep an eye on noises of out of Europe – a failure to reach an agreement on Greek reforms could mark a quick turn for EUR, which would lead USD higher across the board.
To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.