Kiwi dollar rallies and RBA more upbeat. Eyes on RBNZ tone rather than rate cut due tomorrow. But BNZ sees risks to downside

By Raiko Shareef

The USD fell modestly overnight, after nearly a week of steady gains. It lost ground against every major currency.

EUR led the G10 pack higher, but pared its gains ahead of resistance at 1.10.

NZD benefited from some profit-taking ahead of the RBNZ tomorrow.

There were no significant data releases overnight, and markets simply consolidated on recent trends. EUR edged higher early in the London session, and then gained momentum as a fall in US bond yields eroded support for the USD. EUR/USD tripped through stops around 1.09, before losing steam above 1.0950. We remain short EUR/USD from 1.11, targeting 1.0750.

The RBA’s minutes yesterday were the only release of note in the past 24 hours. The Bank sounded slightly more upbeat than in the previous edition, largely thanks to an unemployment rate that has remained stable, as opposed to deteriorating. The RBA attributed this mostly to slower population growth. There were also references to the stronger performances of NSW and Victoria. These Minutes had little material impact on the AUD. The AUD’s 0.7% gain overnight has more to do with short covering in light market conditions.

NZD/USD stands among the top performers, having gained over 1% to poke its head over 0.6650. The broader USD move lower was a key driver, but we also suspect an element of profit-taking ahead of the RBNZ’s OCR decision.

We don’t expect the rally to extend materially, and entered a short NZD/USD position at 0.66, targeting 0.62. Our stop-loss level is at 0.68, but we expect decent resistance at the trend channel upper at 0.6720.

While there is little doubt that the RBNZ will drop its policy rate tomorrow, there has been some chatter about the prospect of the terms “unsustainable and unjustified” being retired. That may provide reason for a modest rally in NZD, but we anticipate the tone of the broader statement to be decidedly downbeat. Also, even if the Bank chose to drop the terms, it would still likely include some wording to encourage NZD to fall further. Something akin to the RBA’s “further depreciation seems both likely and necessary”, perhaps.

The data calendar remains light, with focus on Australia. Governor Stevens’ speech will likely be the more interesting release. He will want to keep the door open to further easing, and may take the opportunity to reassert the RBA’s belief that the AUD should be lower still.

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Raiko Shareef is on the BNZ Research team. All its research is available here.