NZD currency volatility at 7-year low, and makes interest rate advantage an appealing proposition for the carry-trade

by Raiko Shareef

NZ Dollar

The NZD edged up overnight, and sits 0.1% higher against the USD, at 0.8670.

Some of this is a hangover from the RBNZ’s rate hike and stern commentary last week.

With NZD currency volatility hitting fresh seven-year lows yesterday, NZ’s interest rate advantage continues to present an appealing proposition from a carry-trade perspective.

Ditto for the AUD, compared to the rest of the world.

Price action for both antipodean currencies was unerringly similar over the course of the past 24-hours.

That said, the NZD slightly outperformed AUD during our session, perhaps as investors took note of the continued slide in iron ore prices.

A further 2% slide to $89.0 overnight takes the price within a hair’s breadth of the five-year low of $88.7.

NZD/USD took another look at 0.8700 last night, but was once again rejected. This continues to provide the initial level of resistance, ahead of the 2014-high of 0.8780. On the downside, we expect solid support at 0.8590.

Nothing on the data calendar for NZ today, but the fortnightly dairy auction in the early hours of tomorrow morning will be watched.

We’re becoming more cautious on the prospect of further falls, given how far prices have come already.

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Majors

Another quiet day for G10 currencies, with none moving by more than 0.3% against the USD.

Major emerging market currencies weakened more significantly, with the TRY, RUB, and INR amongst the biggest losers.

Much of that will no doubt be attributed to ongoing concern about the risk about higher oil prices as a result of Iraq’s unfolding internecine violence. Emerging market currencies tend to fare worst in this environment, thanks to a combination of heightened risk aversion as well as worries about that higher oil prices would feed into higher inflation, demanding monetary policy tightening. Little surprise that the MSCI emerging market equity index is 0.3% lower today, underperforming the 0.1% gain in the S&P 500. Safe-havens JPY and CHF were among the better performers overnight.

The US Dollar Index is 0.1% lower, despite a trio of positive US data outturns. The New York Fed’s Empire State manufacturing index rose to 19.3 in June (exp. 15.0, prev. 19.0), and the NAHB homebuilder sentiment index also rose, to 49 (exp. 47, prev. 45). Industrial production gained 0.6% m/m as expected, but upward revisions to the previous month imply a positive report overall.

Any positive USD sentiment the market had from these data may have been soured by the IMF’s latest growth forecasts, released overnight. The Fund downgraded its US GDP forecast for 2014 from 2.8% y/y to 2.0%. This change goes against the grain of market analysts, who are expecting a lift in US growth over the year. The consensus expects growth rates above 3.0% q/q for the latter three quarters of 2014 (which will be offset by the -1.0% seen in Q1).

Nevertheless, the IMF’s reports tend to impact market psychology to an extent disproportionate to its historical forecast performance.

The EUR saw a slight fillip in the wee hours of this morning thanks to reports that the ECB is likely to refrain from new easing measures in coming months, citing anonymous officials. We would suggest that there is little new information in this story, given that the ECB would certainly want to hold fire until its Asset Quality Review of banks is complete by end-October. The market played the headlines anyway, and EUR/USD is 0.2% stronger at 1.3570, having been lower earlier in the evening.

Tonight, inflation prints from the UK and the US will likely be the highlights.

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