Why Kiwi is Bucking The Against The US Dollar

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Market Drivers April 9, 2015

Dollar buying continues
UK Trade wider that forecast
Nikkei 0.75% Europe 0.46%
Oil $51/bbl
Gold $1195/oz.

Europe and Asia:
AUD AIG Construction 50.1 vs. 43.9
EUR GE Trade 19.7B vs. 20.3B
GBP UK Trade Balance -10.3B vs. -8.9B

North America:
CAD Building Permits 8:30

Dollar remained bid in relatively calm Asian and early European trade today with little meaningful data on the docket as markets continued to digest the message of yesterday’s FOMC minutes. On first glance the minutes appeared to be a bit more hawkish than expected with some members indicating that they were ready to begin normalizing rates as early as June.

Comments yesterday morning by NY Fed Chief Bill Dudley – a known dove – that a June hike was still possible also provided support to dollar bulls. Although a June rate hike still remains a long shot given the lackluster conditions in the US economy, all the rhetoric about normalization suggests that the Fed is getting closer and closer to finally leaving the zero bound level. That in turn continues to fuel dollar buying, making every anti-dollar rally an easy sell for now.

On the economic front the data out of Europe was sparse and mixed with German Industrial Production rising 0.2% from -0.4% decline the period prior, but the Trade surplus coming in just a bit soft at 19.7B vs. 20.3B forecast.

The euro drifted lower testing the 1.0750 support, but managed to hold that level in morning dealing. After failing numerous times at 1.1000 the pair now finds itself at a midpoint of its broad 1.0500 -1.1100 range and further fall here through the 1.0700 figure would signal a possible test of recent lows as the market becomes convinced that US/EU rate differentials will begin to widen.

One currency that bucked the trend of dollar strength today was the kiwi. The New Zealand dollar was propelled by comments from the country’s Prime Minister John Key, a former currency trader himself, who stated in CNBC interview that in his opinion intervention would not work. Mr. Key was referring to the kiwi’s strength especially against the Australian dollar as the cross continues to hover near parity.

In Mr. Key’s view intervention only works at the points of extreme, but is ineffective against a long sustained trend. With RBNZ resolutely set against lowering rates in the foreseeable future the kiwi remains the preeminent carry trade in the industrialized world and that factor continues to prop the unit against G-10 currencies.

With no US data on the docket the market may retain its lackluster tone into the North American session. However if US yields stage another rally as fixed income markets become convinced that normalization is more likely than previously thought then the greenback could extend its gains with EUR/USD probing 1.0700 and USD/JPY testing 120.50 as the day proceeds.

Boris Schlossberg
Managing Director

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