Oil futures up 3% overnight, ‘oil-linked’ CAD and NOK follow suit; Brexit could see NZD/GBP back at 0.5000; decline in China's FX reserves slows; AUD/USD up 1% from lows

By Kymberly Martin

In a relatively quiet start to the trading week, the AUD has been the strongest performer while the ‘safe haven’ CHF has fallen from favour.

Following its sharp payrolls-inspired gyrations on Friday night, the USD index has traded a much more pedestrian path since the start of the week. Having given up modest late evening gains it now trades close to the level where it ended last week.

Yesterday’s release of China’s reserves data showed that the decline in the nation’s foreign exchange reserves slowed in February. While reserves fell by US$28b, to US$3.2t, it was the smallest decline since last June. This will provide some relief to those concerned with the rate at which Chinese reserves had been declining, and add to the tentative improvement in sentiment toward China risks.

The GBP/USD has made a notable rebound in the early hours of this morning. Having lingered close to 1.4100 for much of the night it now sits almost 0.80% higher, at 1.4250. The NZD/GBP trades at 0.4770. We think some ‘Brexit’ risk is already reflected in the GBP (Our fundamental short-term fair-value for the cross sits at 0.4400). However, if the UK were to vote to exit the European Union at the June referendum the NZD/GBP could easily find itself back at 0.5000.

The AUD/USD left its bid for glory until early this morning, have traded a fairly tight sideways pattern for most of yesterday. Its surge early this morning coincided with a sharp step-up in the oil price.

While WTI futures have risen more than 3.0%, the AUD/USD has gained 1.0% from last night’s lows. It currently trades around 0.7470. The ‘oil-linked’ CAD and NOK also followed the move higher in the early hours of this morning. However, in the case of the NOK, the move has been insufficient to offset losses last evening.

The NZD/AUD traded down through the 200-day moving average overnight, to sit at 0.9110 currently. This marks the bottom of its year-to-date trading range. A break below this level would bring 0.9000 into view. Our short-term model sees fair-value for the cross at 0.8700 at present. However, the near-term fate of the cross likely lies with Thursday’s RBNZ meeting. In addition, RBA’s Lowe is scheduled to speak today and the AU NAB business survey is due for release.

The NZD/USD has also been bolstered in the early hours of this morning from intra-night lows. From 0.6750, it now trades back at 0.6800.

We continue to eye strong technical resistance around 0.6890, the top of the currency’s trading range since mid-last year. The challenge for the RBNZ on Thursday (assuming it does not cut rates) will be to sound sufficiently dovish to prevent the NZD breaking higher. In the past this has proven to be no easy task.

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Kymberly Martin is on the BNZ Research team. All its research is available here.