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NZD up 0.5%, trading at 0.6910 USD after reaching a high of 0.6926 this morning; the gain is broadly based, except against the JPY, which was the other outperformer

Currencies
NZD up 0.5%, trading at 0.6910 USD after reaching a high of 0.6926 this morning; the gain is broadly based, except against the JPY, which was the other outperformer

By Jason Wong

Amidst a day lacking in newsflow, the NZD and JPY have outperformed, while the US yield continues to flatten.

It was a pleasant surprise to wake up and see the NZD trading stronger, up 0.5% to 0.6910 after reaching a high this morning of 0.6926.  The gain has been broadly based, except against JPY, which has been equally strong since last week’s close.  Our spot desk reports selling on the AUD/NZD cross has been a key factor in the move.

Our running thesis is that the NZD has been slightly oversold on unwarranted domestic political fears.  There were hints last week that the selling pressure had become exhausted after the NZD held up despite another surprisingly weak GDT dairy auction.  Net speculative short positions had reached their highest since May, so the hurdle rate for a modest recovery, is pretty low.  Our fair value estimate has been drifting lower over recent weeks on the back of lower risk appetite, lower NZ commodity prices and a narrower NZ-US spread, but is still higher than spot at 0.7180.  Throughout the volatility we’re left our year-end target at USD 0.70.  Seasonally, December is a much better month (up 7 of the last 10 years) for the NZD than November (down 9 of the last 10 years). 

Relative to last week’s NY close, the NZD is up 0.5-0.7% on all the crosses apart from JPY.  This sees NZD/AUD at 0.9080, NZD/GBP at 0.5185 and NZD/EUR at 0.5800.

JPY strength is arguably less deserving than the NZD recovery.  USD/JPY recently broke down through its 200-day moving average and now trades below the 111 mark to a 2-month low, so technical factors might be playing a role.  Over the weekend, BoJ member Hitoshi Suzuki said that it’s possible for the central bank to make slight changes in its yield-curve control program when price growth approaches the 2% inflation target.  He added that “…it wouldn’t be strange if the BOJ conducted fine-tuning so market participants can familiarise themselves with a gradual process; as CPI approaches 2%, there should be a discussion on it.”  It’s a theme we’ve heard before and therefore the comments didn’t sound like news to me.  In any case inflation remains far from the 2% target so the argument is academic. There were also reports that Japan got a signal that North Korea was preparing to launch another missile, but that only had a passing impact on the market.  NZD/JPY is flat at 76.7.

There is little else to report.  In the only key economic release, US new homes sales unexpectedly surged to their highest level in a decade but this has little market impact.  The USD was on the defensive most of the night but saw some life after Trump tweeted that the tax reform bill is coming along "very well."  The various USD indices are now flat for the day.  As I was finalising this report, the Fed’s Kaplan was speaking and the headlines looked to be on the hawkish side, saying he’s mindful of the Fed getting behind the curve.


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