NZD is showing signs of forming a base after its initial swoon following the formation of a new government; USD has managed to hold onto gains seen since Friday; GBP has been supported over the past couple of trading sessions

By Jason Wong

The week has begun on a quiet note.  The NZD is showing signs of forming a base after its initial swoon following the formation of a new government. Coming back from a long weekend, locals will note that the NZD is little changed on a TWI basis since leaving the office on Friday. It is slightly weaker against the USD and GBP and slightly higher against the other key developed currencies.

The USD has managed to hold onto gains seen since Friday, with sentiment for the dollar helped by the Senate passing a Budget resolution that allows for $1.5tn of additional budget deficits over next 10 years and adds to the hope that tax reform can be agreed.  To add to that, Trump opened the possibility of both Powell and Taylor in the Chair/Vice Chair roles when he concludes his Fed appointments, with Taylor in the mix seeing to be supportive of higher rates and a USD.  Trump noted this morning that he is “very, very close” to making his decision.  NZD/USD fell through Friday and into yesterday afternoon to a low of 0.6932, from which it showed a small gain to the current level around 0.6960.

NZD/GBP is down to 0.5270.  GBP has been supported over the past couple of trading sessions as the language from the EU on Brexit appears more conciliatory, perhaps aware of PM May’s political fragility and having her knocked out wouldn’t be in best interests of the EU.  European Council President Tusk confirmed that the EU and UK hope to move onto trade talks in December. 

JPY was softer after PM Abe won his snap election decisively, paving the way for the continuation of the massive economic stimulus plan, including easier fiscal policy and Governor Kuroda likely being reappointed, helping extend the BoJ’s asset purchase programme.  This helped the Nikkei 225 index complete a 15-day winning streak, adding just over 1% to close at its highest level since 1996.  USD/JPY hit some resistance at 114.10 and has fallen to 113.70.  NZD/JPY is up a touch to 79.2.

EUR has been soft since Spain’s PM Rajoy said that he will dismiss Catalan President Puigdemont and his government and take control the regional police force, public television and radio channels.  Elections will be held within six months.  EUR is down to 1.1740 and NZD/EUR is up to 0.5930.

AUD has been out of the spotlight ahead of important CPI inflation data tomorrow.  NZD/AUD got down to as low as 0.8883 early yesterday afternoon but has recovered to 0.8925.  NZD/CAD is up to 0.8805, with much of the damage to CAD done after very weak retail sales data and slightly softer CPI data on Friday night saw a reduced chance of the BoC tightening again this year.

So the message on the NZD is one of base forming after falling around 2-2½% on most crosses on the sticker shock of a Labour-led government, which is vowing to make a significant change in economic direction.  We await the details of the coalition agreement, due soon, before jumping to conclusions. 

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