Selling NZD/USD at 76c an attractive strategy; release of Fed minutes caused some initial volatility, June rate hike now unlikely

By Raiko Shareef

Various measures of the USD have it pegged effectively unchanged overnight, but that masks some pretty disparate (and large) moves on certain currency pairs. NZD and AUD outperformed for no particular reason, while CAD reversed early gains after oil prices cracked lower. EUR has struggled to make headway below 1.08.

It was the initial failure of EUR/USD to break below 1.08 yesterday morning that saw the USD sold across the board.

Why exactly NZD and AUD outperformed is a bit of a mystery. Some of the AUD strength might be laid at the feet of a market now mulling the fact that the RBA seems reluctant to cut rates. The market continues to price a cash rate of 1.70% by year-end, from 2.25% today. That seems a stretch – our NAB colleagues expect just one further cut, to 2.00%.

NZD/USD snapped through 0.7550 after some initial resistance, suggesting the ascent to 0.7600 was technically driven (by stop-loss buying) rather than by fundamental interest. We continue to believe that selling at 0.7600 with a medium-term outlook remains an attractive strategy. 

The release of the Fed’s March Minutes was cause for some volatility, though currencies eventually returned to their pre-release positions. The key takeaway was “several” FOMC members judged that a June rate hike might be warranted, while “others” favoured a time later in 2015, and “a couple” envisaged lift-off in 2016. The market walked away from the March meeting with the view that a June lift-off was very unlikely. The revelation that it was actively being considered was enough to strengthen the USD across the board, albeit modestly and briefly.

Of course, the discussions presented in the Minutes pre-date the woeful March employment report, released last week. But Fed officials that have spoken since that report have generally warned against reading too much into a single month of weakness, including New York Fed President Dudley overnight.

There is very little to get excited about on the data calendar tonight. Barring any material shocks, the market should remain in this holding pattern into week’s end, but still with a bias to own USD.

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