Update on Kiwi, RNNZ on hold as expected…

The Kiwi has remained under pressure against the greenback since the middle of July when it flirted with its 3-year resistance at 0.8840. Since then, we saw a lower than expected CPI that printed at 1.6% in Q2 on July 15 (vs 1.8% expected) followed by a dovish stance from RBNZ policymakers on July 24th. Despite the central bank raised its OCR by 25bps for the fourth time this year to 3.5% (in line with investors’ expectations), Governor Wheeler indicated that the central bank was considering a pause in the following meeting after the 1% shift.

Therefore, investors lost interest in the currency (probably some take profits above 0.8800) and the negative trend started. I have remained bearish on the currency since the central bank’s last statement, and we anticipated the NZD to depreciate even more against the USD ahead of the RBNZ meeting (September 10th). As expected, the central bank left rates unchanged yesterday and added that ‘softer inflation might limit the extent of rate hikes’, pushing NZD/USD below the 0.8200 level (trading at 0.8175 as you can see on the chart below).

We set our target at 0.8050, which corresponds to February 2nd (2014) low.

KiwiDol(1)

(Source: Reuters)

Buy the dips on NZD/JPY?

It looks to me that the 14-day SMA (orange line) has been acting as a ‘strong’ support on NZD/JPY for the past couple of weeks. Despite our bearish sentiment on the Kiwi, we also turned bearish on the Yen and we believe that bearish Yen is preferable to bearish Kiwi. Therefore, we will try to buy some at around 87.30, stop loss below 86.90 with a target at 88.00.

NZD-11-Sep(1)

(Source: Reuters)

Markets after Yellen…

There have been some interesting developments for the past few days in the middle of this low-volatile environment. Firstly, Fed Chair Yellen opened two days of testimony on Capitol Hill yesterday, delivering the central bank’s semi-annual report to Congress. With the QE-Taper to end in October (already priced in), the market was waiting for more details concerning the ‘future path’ of the Fed Funds target rate (currently at a historical low of 0-0.25%). Despite strong employment data with Non-Farm Payrolls printing above the 200K level for the fifth month in a row in June (288K) and the jobless rate that edged down by another 0.2% to 6.1% (2008 levels), Yellen clearly stated that the US economic recovery ‘is not yet complete’ with the housing market showing ‘little progress’ but still disappointing this year.

However, she surprised the market a bit when she told the Senate Banking Committee that rates could rise sooner than planned. These comments ‘kind-of’ played in favour of the US Dollar, with USD index trading 80.50 at the moment. Its main component, the Euro (57.6%), broke out of his tight 1.3575 – 1.3675 range and is now trading at 1.3540 (see chart below). The next support on the downside stands at 1.3520, the 38.2% Fibonacci retracement of 1.2750 (July 2013 low) and 1.3992 (May 2014 high).

EUR-16-Jul

(Source: Reuters)

The second interesting development was the higher-than-expected CPI figures in UK that gave a boost to Cable after its last two weeks of weakening momentum. Annual inflation came in at 1.9% YoY in June (vs expectations of a 1.6% print), while CPI MoM increased by 0.2% (vs -0.1% consensus). It reinforced the market’s view that the BoE will be the first major central bank to lift rates. Even though some analysts are expecting a first move from UK policymakers later this year, we personally think that Q1 2015 sounds more reasonable. If we have a look at short-sterling interest rate futures, the March 2015 contracts sold off to 98.91 from 98.97, which means that the implied yield from 103bp to 109bp. Earlier this morning, UK claimant counts fell by 36.3K in June, following a revised 32.8K drop registered in May. The jobless rate edged down to 6.5% as expected.

After it reached a high of 1.7191 yesterday afternoon, Cable remains poised for a break above 1.7200 and is now trading at 1.7125. The first support on the downside stands at 1.7100, followed by 1.7060. A more interesting pair would be EUR/GBP, which is now trading at a 22-month low at 0.7900 and is approaching its next support at 0.7880 (see chart below).

EURGBP-16-Jul

(Source: Reuters)

Another surprise came from New Zealand where inflation accelerated less than expected, easing pressure on the RBNZ to continue its monetary policy tightening cycle. As a reminder, the central bank has increased its overnight cash rate (OCR) three times to 3.25% since the beginning of the year, and the market is still expecting a 25bps rate hike at the next meeting on July 23rd. We felt that the Kiwi strength would probably weigh on NZ policymakers’ decision at the next meeting, therefore we were expecting a correction on NZD (see our last trade short NZD/JPY). It was also interesting to play a technical bear correction on NZD/USD when the pair was flirting with its 3-year high as you can see it on the chart below.

NZD-16Jul

(Source: Reuters)

Quick update on BoJ and the Yen: USDJPY continues to trade sideways after the BoJ decided to keep its monetary policy unchanged (as expected), maintaining its target of increasing the monetary base at a annual pace of JPY60-70tr per year. The central bank cut its 2014 growth prediction to 1.0% (down from 1.1% last meeting and from 1.5% last October), but the board (9 members) unanimously maintained its inflation projection of 1.9% in the next fiscal year. If we have a quick look at the chart below, USDJPY is still trading within its tight 101.00 – 103.00 range. It found support slightly above the 101.00 level last week and seems on its way to test its next resistance at 101.94 (200-day SMA).

JPY-16-Jul

(Source: Reuters)

To finish, another currency AUDUSD that we have been trying to play lately is AUDUSD. The RBA minutes didn’t surprise the market on Tuesday despite AU policymakers’ willingness to see a lower Aussie (the minutes stated ‘the exchange rate remained high by historical standards’). We still think it is interesting to go short AUDUSD if the pair trades above 0.9400, with a medium term target at 0.9200 and a stop loss above 0.9560.

AUD-16Jul

(Souce: Reuters)

Watch the Kiwi!

As we mentioned in our previous posts, this low-volatile environment has played in favour of carry trade currencies, and especially the Kiwi. Since the RBNZ has started its monetary policy tightening cycle this year raising its benchmark three times by 0.25% to 3.25%, the NZ dollar keeps appreciating against the major currencies. For instance, NZDUSD is trading at its multi-year high above the 0.8800 level and seems on its way to retest its strong resistance at 0.8840 (Aug 1st 2011).

However, the next central bank’s meeting is on July 24 and Governor Wheeler could announce a pause in the rate hike cycle stating the Kiwi is starting to be overvalued. In our opinion, we could see a pause in the cycle at the next meeting especially as the Fed hasn’t pronounced itself on a potential rate hike (based on yesterday’s minutes).

Therefore, the Kiwi could potentially enter in an ‘overbought’ area in the coming days and it may be a good time to take the opportunity to sell it. We chose NZDJPY: as you can see it on the chart below, the pair has appreciated by a bit more than 4% since the beginning of the month, with the 14-day acting as a support (buy dips opportunity). However, we think that the 90.00 could act as a strong resistance on the topside (year’s high: 89.90 reached on April 1st). We went short this morning at 89.53 with a target of 88.10 at first (Stop loss above 90.20).

image001

(Source: Reuters)

Some overnight developments (Kiwi, Aussie…)

Yesterday evening, the Reserve Bank of New Zealand raised its official cash rate by another 25bps for the third time this year to 3.25%, at a time when most of the central banks have kept their base rates at or near zero. If we have a quick look at the statement, it said that inflationary pressures are expected to increase (as a reminder, CPI came in at 1.5% in the first quarter) and the central bank would like to see interest rates back to a more ‘neutral’ level as it is important that ‘inflation expectations remain contained’. The next meeting will hold on July 25th and some economists already expect another 25 bps rate hike.

With FX volatility at very low levels since the beginning of the week, we have played the typical classical carry trade strategy since Monday by holding a long position on NZDJPY ahead of the RBNZ meeting. If you have a look at the graph below, we thought that it was interesting to buy the pair between 86.80 and 87.00 for a test back towards 88.80 (s/l below 85.80). NZDJPY was helped by the spike in the 10-year yield from 4.22% (end of May) to 4.47%.

NZD-12-06

(Source: Reuters)

We think it is still interesting to play the Kiwi in the short term, potentially against the AUD or the EUR. AUDNZD is now approaching an interesting level, trading around its 50-day MA at 1.0844, and seems to be on its way to retest its support at 1.0800 (second one stands at 1.0780, 100-day MA). We suggest that new joiners should wait for a slight ‘bull’ correction after yesterday losses. In Australia, jobs data were a bit disappointing in May with total employment falling 4.8K (vs +10K consensus) from an upward revised 10.3K the precious month. However, full-time employment rose 22K (vs part time fell 27K) and could explain why the Aussie remains well supported against the yen (trading around 96.00) and the US Dollar (0.9400).

For the Euro, we would continue to keep a bearish view against the British pound in the days to come based on the monetary policy divergence, with a next target at 0.8030 (followed by the psychological 0.8000 level).