Stonger US$ and sharp losses in A$ hit the NZ$ hard last week; NZ$/US$ down around 1.7%

by Mike Jones

NZ Dollar

The NZD/USD shed around 1.7% last week, thanks to the double whammy effect of a stronger USD and some sharp losses in the AUD. Nonetheless, key support levels continued to hold, and the currency finished the week around the familiar 0.8200 level.

It was a different story in the NZD/AUD. The cross was propelled to 5-year highs around 0.8950 on Friday as the RBA trounced the RBNZ in a Trans-Tasman battle of ‘talk your currency lower’. The fact NZ has an economy threatening to launch, commodity prices near record highs, soaring net migration, and simultaneous dairy & construction booms perhaps rendered a little hollow the RBNZ’s assertions the exchange rate is “overvalued”.

Positive momentum (our momentum model is long NZD/AUD from 0.8850) and the daily close above previous resistance at 0.8925 means a further climb to 0.9000 may well be on the cards for this week. This is a risk we have long flagged. We expect the NZD/AUD to remain above 0.8800 for all of 2014.

It was a wild night for the NZD on Friday. Having bounced to 0.8240 during the day, the NZD/USD stooped as low as 0.8130 during the offshore trading session, before finishing the week pretty much smack in the middle of these two levels.

For tech junkies, this ‘headfake’ pattern (falling below the 200-day m.a and then closing back above it) is a strongly bullish signal, and may bolster the appeal of the NZD this week.

‘Fundamental’ type indicators likewise point to additional NZD gains ahead. According to our QE-adjusted short-term valuation model, fundamental ‘fair-value’ for the NZD/USD held steady around 0.8650 last week.

Going against the grain of the above drivers is negative momentum which, according to our momentum model, will remain in place while the NZD/USD trades below 0.8360. This somewhat mixed set of indicators suggests the NZD/USD may continue to drift sideways this week. This is especially so given the dearth of big market moving events on this week’s calendar. However, we continue to believe another probe to the topside is likely before year-end. Our Q4 forecast is still 0.8400.

Important economic data to watch out for this week include Wednesday’s NZ trade balance, Thursday’s ANZ business survey, Aussie private Capex numbers (Thursday), the European CPI (Thursday), and tonight’s US pending home sales figures.

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Majors

The outperformance of European currencies (SEK, EUR, and CHF) was the most notable theme of Friday’s trading session. The near one cent rally in the EUR/USD kept the (EUR centric) DXY index heavy, although a 5bps decline in 10-year US bond yields also weighed on the greenback.

Friday’s November German IFO helped buoy the appeal of the EUR. The rise in the headline business climate index from 107.4 to 109.3 (107.7 expected) placed the index at the highest level since April 2012. It also supported the signals from the PMI and ZEW surveys that momentum in the German economy picked up in Q4.

From below 1.3500, the EUR/USD was pushed up to almost 1.3560 in the wake of the data, with SEK, CHF, and DKK all being dragged higher in sympathy. At the other end of the spectrum, the AUD lost another 0.7%, to end the week down 2% and take out the title of weakest performing currency over the week.

USD/JPY continued its strong run following the mid-week move back above parity and against a backdrop of increasingly negative JPY rhetoric from Japanese policy makers (weekly close 101.30). Perhaps questioning how far the uptrend can run, Friday’s IMM data revealed the speculative community is short JPY to the tune of 112.2k contracts. This amounts to the biggest net short position since mid-2007.

Outside of currencies, the bull run in US stocks continues to raise eyebrows. The major indices made another set of fresh all-time highs on Friday, with the S&P500 rising 0.42% to 1801 and the Dow Jones index up 0.3% to 16065. The VIX index (a proxy for risk aversion) fell from nearly 13% to 12.2% – its lowest close since August.

The week ahead brings a smattering of potentially market moving data, but nothing to get investors overly excited. The next big event for markets will probably be the 7 December US non-farm payrolls release as the key marker to the Fed’s decision on whether to taper asset purchases at the 19 December FOMC meeting. Currencies may continue to trade choppily sideways in the meantime. The USD index looks well hemmed in by the 80.00-81.50 range.

Note that this week’s important US data (including housing starts and durable goods orders) is crammed into the first half of the week, given the Thanksgiving holiday on Thursday. In Europe, all eyes will be on November CPI data following the shock weakness in October’s CPI (and which was followed up with an ECB rate cut).  The Bank of England’s testimony in front of the Treasury Select Committee looks to be the highlight of the UK event calendar.

All its research is available here.