by Raiko Shareef
NZ Dollar
The NZD lost ground amidst a backdrop of USD strength on Friday, with NZD/USD weakening by 0.4% to 0.8610.
The picture was decidedly more mixed on the crosses, however, with slight gains seen against the EUR and the GBP.
Despite the backward step for the USD on Friday, we think the underlying story of low US bond yields and low currency volatility remain supportive of the carry trade.
Note that 3-month implied volatility for NZD/USD collapsed on Friday to 8.05%, the lowest since December 2012.
This week sees the annual Budget officially released, as well as the RBNZ’s semi-annual Financial Stability Report.
The themes from both these centerpiece documents have already been well signaled.
The Budget will show a return to surplus in 2014/15, and the FSR is set to highlight risks in farm debt and conclude that LVR restrictions have proven effective.
Neither should provoke much of a response within currency markets.
Given the dearth of local data today, it looks to be a sleepy start to the week for currencies.
This morning, we eye initial support at 0.8590, ahead of the fairly robust 0.8500 figure. Spurts higher toward 0.8670 should be challenged.
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Majors
After the fireworks following Yellen and Draghi on Thursday night, markets were fairly quiet heading into the weekend. A strengthening USD was the dominant theme in the currency space.
The USD gained against all the majors, especially against the EUR and the CAD. EUR/USD lost 0.6% to fall to 1.3760, extending its post-ECB decline. This takes the single currency to levels last seen in early April, after coming tantalisingly close to breaking above 1.40.
Widespread expectations of an ECB rate cut in June should keep the EUR subdued in the short term.
The CAD jerked lower against the USD after Canada’s April employment report came in much weaker than expected. A 28.9k fall in employment reversed over half of the 42.9k gain seen over March, shocking a market looking for a modest (+12k) rise. The CAD dropped by 0.6% against the USD, to 1.09.
The broad USD strength saw the US Dollar Index climb 0.6%, to 79.90, its chunkiest single-day gain since the Fed’s unintentionally hawkish March meeting.
ECB President Draghi’s swing at the EUR has helped to stem the USD’s inexorable decline, for now.
This week, events out of the US will hold our attention the most.
On the data front, retail sales and inflation numbers will be the highlights, and (amongst other Fed speakers) Fed Chair Yellen’s address to the US Chamber of Commerce will be closely parsed, despite her newfound ability to avoid direct answers.
Across the Atlantic, the advance reading for Euro-zone GDP (Thu) and the Bank of England’s quarterly Inflation Report (Wed) will be key determinants for the EUR and GBP respectively.
Closer to home, China sees its monthly dump of investment, retail sales, and industrial production data on Tuesday.
As important for the AUD will be the Australian Federal Budget (Tue), though much of this has already been pretty comprehensively leaked.
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