Market Drivers for September 27 2014

RBNZ confirms intervention kiwi tumbles more than 150 points

Dollar strength persists

Nikkei 0.50% Europe -0.26%

Oil $92/bbl

Gold $1219/oz.

Europe and Asia:

EUR Spanish CPI -0.2% vs. -0.3%
GBP UK BBA Mortgage Approvals 64K vs. 66K

North America:

USD PS/PI 8:30

USD Pending Home Sales 10:00

The New Zealand dollar tumbled hard on the first trading day of the week, dropping more than 150 points off its opening highs after the RBNZ revealed that it had intervened in the currency market in August to the tune of 521 million NZD.

The news took the market by surprise as currency traders assumed that the RBN was only engaged in verbal intervention up to now. The figure was above the 500M threshold considered to be significant by the market and therefore had an immediate negative impact on the NZD/USD exchange rate which slid to a low of 7706 in Asian session trade before rebounding slightly in European dealing.

The kiwi received a further shove lower from the comments of NZ PM John Key ( a former Fx trader himself) who noted that the currency’s fair value is somewhere around the 6500 level or more than 1200 point lower than current prices.

The New Zealand dollar is now more than 1100 points off its yearly highs much to the pleasure of the country’s fiscal and monetary officials who would like to see a weaker unit to help improve the terms of trade. The prices for dairy products – New Zealand primary export – have been trending lower for the past 12 months as demand has been hampered by the high exchange value of the kiwi. The rapid depreciation of the currency achieved over the past several months should go a long way towards making milk exports a lot more competitive to Chinese buyers.

The fact that RBNZ actually committed capital to formal intervention shows the seriousness of New Zealand authorities in depreciating the value of the currency. The kiwi is therefore likely to remain under heavy selling pressure as markets will fear further intervention actions by the central bank. However, the unit which now almost in a free fall has become grossly oversold.

In addition to the intervention threats the kiwi has been under relentless liquidation from carry trade speculators on the assumption that US Fed will begin a tightening cycle in Q1 of 2015. Yet US fixed income markets remain sceptical of this thesis with benchmark 10 year rates still hovering near the 2.50% level. This Friday’s NFP report could prove pivotal to the the long dollar trade. If the data shows second consecutive month of decelerating job growth, the greenback could come in for a sharp profit taking correction and the kiwi could see a sharp short covering rally as late shorts scramble to reverse the trade.

On a more near term basis, today the market will get a glimpse of the US personal spending and income figures. The market is looking for an improvement in both reports which could fuel a further rally in the dollar as it would suggest that US workers are finally seeing the benefit of higher wages. USD/JPY which rose as high as 109.75 in Asian session trade could make a run towards the 110.00 level. However, a miss could push the pair back to 109.00.
The 109.00-110.00 corridor remains the key battleground between bulls and bears as it forms the final level of resistance from the 2008 highs. Therefore the markets will watching this price range very carefully this whole week as it will provide a good barometer for the strength of the current dollar rally.

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