By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The biggest event risk this week will be Wednesday’s Reserve Bank of New Zealand monetary policy announcement and since we usually publish at the end of the NY trading session, we wanted to share our outlook well ahead of the event. The RBNZ is widely expected to leave interest rates unchanged but the sell-off in the New Zealand dollar over the last 48 hours tells us that investors are positioning for less hawkishness from the central bank. When the RBNZ last met in June, it overlooked the 4% rise in NZD/USD between the last 2 monetary policy meetings and chose to say the “lower currency would help rebalance growth.” It was able to do so because the New Zealand economy actually performed better between May and June. However since then as shown in the following table, there has been significant deterioration in New Zealand’s economy on top of which, NZD/USD rose another 3 cents before peaking in late July. For all of these reasons, we believe that the Reserve Bank will be less optimistic but at the same time, we don’t need to reach far for reasons that could disappoint investors who have been selling the New Zealand dollar before the policy announcement. The New Zealand dollar is trading not far from where it was at the last meeting against the U.S. dollar and is actually 3.8% lower against the currency of its most important trading partner, the Australian dollar. Given how NZD has been trading, the one thing that we can be certain of is that there will be a big move in the currency after the rate decision. If the RBNZ succumbs to the data’s weakness and expresses caution about the economy and the currency, NZD/USD will extend its losses to 0.7250 and lower. However if they seem unfazed, such unexpected optimism will take NZD/USD back to 74 cents and possibly even higher.
Unlike the New Zealand dollar, which extended its losses on Tuesday, the Australian dollar ended the NY session unchanged against the greenback on mixed data. Australian business confidence increased in July despite weaker import and export demand from China. China’s trade surplus rose but the improvement was driven by deterioration in internal and external demand explaining why Monday night’s economic reports did not boost the currency. With that in mind, lower highs and lower lows suggest that it will only be a matter of time before AUD/USD drops to 78 cents. After 6 straight days of gains, USD/CAD finally pulled back slightly. As oil prices declined, there was no specific catalyst for the move outside of the broader picture of improving fundamentals but Canada's housing starts and building permits are scheduled for release on Wednesday.
The U.S. dollar ended the day steady to higher against all of the major currencies except for the Japanese yen. USD/JPY was actually up at one point during the day but ongoing geopolitical tensions between the U.S. and North Korea continue to plague the currency. Investors were mildly excited with the JOLTS report, which showed job openings hitting record highs in a sign of strong labor-market demand. Treasury yields also increased, confirming the more positive view for the U.S. economy. However 111 seems to be rock-solid resistance for USD/JPY this week and it may not be until Friday’s CPI report that this level is broken — if the data is strong enough.
As for euro and sterling, they traded heavy throughout the North American session with both currencies experiencing healthy losses. GBP/USD dropped below 1.30 although it drifted back up by the end of the day while the EUR/USD sank to fresh 1-week lows. No data was released from the U.K. but as we anticipated, Germany’s trade balance missed expectations. After Monday’s German industrial production report we said the trade data could miss and that’s exactly what we saw as German exports and imports sank in June and euro's recent appreciation may have only added further pressure to trade activity.