The reserve Bank of New Zealand (RBNZ) hiked rates as anticipated and this boosted the Kiwi across the board. The statement saw the RBNZ leaning a bit against the strong Kiwi by suggesting it could affect the path of inflation (and by inference the potential for hike rates down the line) – though most of the comments on higher inflation were related to “construction and non-tradable sectors”. The market’s forward projection of the RBNZ rate path, has another 84 basis points of hikes priced in out to twelve months, according to a Credit Suisse index. The statement also said that “the Bank does not believe the current level of the exchange rate is sustainable.” Nor do I, though the timing of the currency’s decline remains the critical unknown – the first step would be a move back below the 0.8550 level in NZDUSD.
The RBNZ statement notes that dairy prices have fallen 20 percent in recent months. Milk is New Zealand’s largest export product, with the vast majority (over 90 percent) of the milk exported, so prices have a dramatic impact on the country’s terms of trade and another fall of equal magnitude that brings milk back in line with historical price ranges would alter the fundamental picture for New Zealand considerably. The main risk for the Kiwi in the short term, however, would be weak risk appetite.
The European Central Bank's Ewald Nowotny rejected the notion that deflation is an outstanding danger for the Eurozone and said that “there is no need for the ECB to act”. He pointed to the June meeting as the possible time for ECB action if the Eurozone sees clear signs of a strengthening in falling inflation trends.
General Electric is negotiating to purchase Alstom SA, a French company, in a deal that could be worth USD 13 billion. The exchange rate implications are modest at best for the super-major EURUSD pair.
Trading levels:
EURUSD – waiting for a directional sign – preferring downside, but no technical indicator on the direction of a potential break. 1.3780 piques the interest and 1.3750 is a bigger break level.
GBPUSD — a bit of a bearish reversal yesterday, though with compressed ranges, not compelling enough until we work through 1.6775.
AUDUSD – need follow through lower after the 0.9300 break yesterday. Reversal scenario if we trade back above 0.9325
USDJPY – JPY crosses are a bit more in play, with yesterday’s reversals in some of the crosses a bit bearish, though nothing conclusive. Things are generally too quiet, and I suspect that means the downside risks (stronger JPY) outweighs the upside risk in the near term. Note that US president Barack Obama is in Japan through tomorrow.
Chart: EURJPY
A weak IFO survey today could hit EURJPY harder than EURUSD if we see a bit more risk off today. In any case, the technical situation demand resolution soon after this long bout within the range. Looking lower, the 140.00 level is critical, not only defining the bottom of the recent range, but also the bottom of the Ichimoku daily cloud, which the pair has re-entered today after trying once again yesterday to close above.
Scandies – EURSEK needs to find support ahead of 9.00 to keep the rally alive. EURNOK is deader than a doornail in this 8.20-8.30 range.
Looking ahead
We notched another low since 2007 in our average true range (ATR) measure of EURUSD, which has been declining since last summer and began a particularly sharp descent since the beginning of this month as there seems to be a collective scratching of the head on what will trigger a fundamental shift of forward expectations. We have two key event risks this morning that could provide trading interest: the German IFO and a speech by ECB president Mario Draghi an hour later. The latter may provide few policy clues as it is a speech at an event marking the 200th anniversary of central banking in Holland. The German IFO should be closely watched, however, as the expectations component of that survey has been an excellent leading indicator at times in the past, and it dropped sharply in March after a small drop in February and the high for the cycle in January.
Watch for the Bank of Canada’s straight-talking Governor Poloz out speaking later today on the state of the “Hot-and-Not Economy” that will include a press conference. It is clear that Poloz does not like the state of the Canadian economy and hopes that the exchange rate (weaker CAD) will do more to rebalance the economy.
The US Durable Goods Orders and core capital goods orders data have been muted at best in recent months, a bit of a missing link in the US recovery story. These aren’t generally figures that move the market, though extreme surprises either way might do so.
Later in Asia we have the latest batch of Japan CPI figures. The April Tokyo figures will be published in addition to the March nationwide figures. Note that the April figures will take into account the 3 percent hop in VAT from April 1.
Economic Data Highlights
Scandies – EURSEK needs to find support ahead of 9.00 to keep the rally alive. EURNOK is deader than a doornail in this 8.20-8.30 range.
Looking ahead
We notched another low since 2007 in our average true range (ATR) measure of EURUSD, which has been declining since last summer and began a particularly sharp descent since the beginning of this month as there seems to be a collective scratching of the head on what will trigger a fundamental shift of forward expectations. We have two key event risks this morning that could provide trading interest: the German IFO and a speech by ECB president Mario Draghi an hour later. The latter may provide few policy clues as it is a speech at an event marking the 200th anniversary of central banking in Holland. The German IFO should be closely watched, however, as the expectations component of that survey has been an excellent leading indicator at times in the past, and it dropped sharply in March after a small drop in February and the high for the cycle in January.
Watch for the Bank of Canada’s straight-talking Governor Poloz out speaking later today on the state of the “Hot-and-Not Economy” that will include a press conference. It is clear that Poloz does not like the state of the Canadian economy and hopes that the exchange rate (weaker CAD) will do more to rebalance the economy.
The US Durable Goods Orders and core capital goods orders data have been muted at best in recent months, a bit of a missing link in the US recovery story. These aren’t generally figures that move the market, though extreme surprises either way might do so.
Later in Asia we have the latest batch of Japan CPI figures. The April Tokyo figures will be published in addition to the March nationwide figures. Note that the April figures will take into account the 3 percent hop in VAT from April 1.
Economic Data Highlights
- New Zealand RBNZ hikes Official Cash Rate 25 bps to 3.00% as expected
- Germany Apr. IFO Business Climate Survey (0800)
- Eurozone ECB President Draghi to Speak (0900)
- UK Apr. CBI Reported Sales (1000)
- US Mar. Durable Goods Orders (1230)
- US Weekly Initial Jobless Claims (1230)
- US Weekly Bloomberg Consumer Comfort Survey (1345)
- US Apr. Kansas City Manufacturing Index (1500)
- Euro Zone ECB’s Constancio to Speak (1615)
- Canada Bank of Canada’s Poloz to Speak (1845)