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BNZ Daily FX Wrap & Strategy

Fuseworks Media
Fuseworks Media
BNZ Daily FX Wrap & Strategy


It's been a v-shaped 24 hours for the NZD. After starting the week around 0.7550, the NZD/USD briefly slipped to around 0.7500 overnight before recovering again.

The NZD took yesterday's stronger NZ inflation data pretty much in its stride. June quarter CPI increased 1.1% (compared to the market's 1.0% expectation), taking annual inflation to 1.5%. The bigger story, in our view, is that inflation undercurrents are northward inclined which, combined with a number of increased government charges, will send CPI inflation to 5.0% by mid next year.

Still, the focus for the NZD remains firmly offshore. And with the USD starting the week on the front foot, the NZD/USD was forced lower yesterday afternoon. In his Friday address, Fed chairman Bernanke failed to deliver the "all guns blazing" approach to quantitative easing (QE) markets had hoped for, encouraging a mild bout of profit-taking on short USD positions. The NZD/USD was knocked from 0.7550 to 0.7500 accordingly.

However, the dip in NZD/USD again proved short-lived. Overnight, sentiment towards the USD was soured not only by soft US industrial production figures (-0.2%m/m vs. +0.2% expected), but comments from the Fed's Lockhart that "I am leaning in favour of additional monetary stimulus." As the USD reversed its earlier gains, NZD/USD was catapulted back above 0.7570 amid solid buying from leveraged and model accounts.

We noted yesterday that pull-backs in the NZD/USD are expected to be limited to around 0.7450 this week. Sure, the USD is starting to look oversold and the risk of markets being disappointed on the size of Fed QE is growing. But lofty NZ commodity prices (watch for Fonterra's milk price auction on Wednesday) and buoyant risk appetite should ensure buyers will be found on dips.

According to our short-term valuation model, "fair-value" in the NZD/USD is seen between 0.7350 and 0.7550. Keep an eye out for today's RBA board minutes at 1:30pm.


Yesterday's half-hearted USD rally ran out of steam overnight, such that the USD index ended the night pretty much where it started the week around 77.00.

Over the past week or so, we have highlighted the risk of a short squeeze in the USD given net short positions amongst speculative investors are approaching 'extreme' levels. This is broadly what played out through yesterday's Asian and London sessions, kick-started by Fed Chairman Bernanke's less dovish than expected speech on Friday.

As the USD index bounced off 10-month lows, the EUR/USD was dragged from around 1.4000 to 1.3850 and AUD/USD skidded from 0.9940 to nearly 0.9800.

However, it wasn't long before the bounce in the USD began to fade. Expectations of additional Fed quantitative easing (QE) again knocked back USD sentiment. Not only did September industrial production figures reveal the first contraction in over a year (-0.2%m/m vs. +0.2% expected), but Atlanta Fed President Lockhart said "I am leaning in favour of additional monetary stimulus."

A late rally in US stock markets saw sentiment towards global growth improve, further sapping demand for "safe-haven" currencies like the USD. Better-than-expected earnings reports from Citigroup and Hasbro helped stocks claw back early losses, such that the S&P500 finished the night up 0.3%. The VIX index (a proxy for risk aversion) fell from above 20.50% to nearly 19.50%.

Global markets remain firmly on QE watch. How this week's long line-up of Fed speakers influences market expectations of additional Fed QE will be the key influence on USD sentiment this week. Current market pricing appears to reflect an expectation of roughly US$1tn in additional asset purchases in November. Given the potential for markets to be disappointed, and already heavily short USD positioning, we suspect the pace of USD selling will, in the least, slow in coming weeks. Equally though, a sustained USD rally is unlikely ahead of the 3 November FOMC meeting.

Besides Fed rhetoric, there is plenty of other event risk to keep an eye on this week. The GBP will be vulnerable to any further talk QE is likely from Wednesday's Bank of England minutes, while today's RBA board minutes may provide hints as to why the RBA didn't hike in October. Data-wise, US housing starts (tonight), the Chinese data 'dump' (Thursday) and the German IFO (Friday) will likely attract the most attention. Near-term support on the USD index is eyed towards 76.30, with initial resistance likely to be found on rallies towards 77.50.

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