Kiwi Above 8800 as Fitch Upgrades-New Highs in View?

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Market Drivers for July 08 2014

NZ upgraded by Fitch pops above 8800

UK MP/IP falls sharply taking cable below 1.7100

Nikkei -0.42% Europe -0.04%

Oil $103/bbl

Gold $1320/oz.

Europe and Asia:

AUD NAB Business 8 vs. 7

EUR German Trade Balance 18.8B vs. 15.7B

GBP UK MP/IP -1.3% vs. 0.4%

North America:

No Data today

The kiwi popped through the 8800 figure in mid morning London trade today when Fitch ratings agency reaffirmed the country’s AA rating and improved its outlook from positive to stable. The ratings agency noted that fiscal consolidation is strengthening the resilience of the NZ sovereign credit profile but also noted that the country is vulnerable to high net external debt and commodity dependence. Fitch forecast that New Zealand GDP will rise to 3.8% in 2014 on the back of reconstruction in Canterbury.

As one of the only two currencies with any appreciable yield in the advanced industrialized universe, the kiwi has been the darling of the yield chasers and tonight’s upgrade by Fitch will only serve to reinforce its strength. The breakout tonight above the key 8800 figure puts the highs of 8843 from 2011 squarely in view.

The high price of the currency is sure to raise the ire of RBNZ, and the central bank is expected to keep rates on hold at its next meeting July 23. Nevertheless with a 3.25% yield and a reaffirmed AA rating, the NZD/USD remains one of the pre-eminent credits in the G-20 basket and unit should remain well bid for the foreseeable future especially if the economic data does not show much deterioration from the high exchange rate and US 10 year yields remain depressed below 2.75% mark.

The news on the kiwi had a positive spillover on the Aussie which broke above 9400 in sympathy with its antipodean neighbor. The AUD/USD was also helped by better than expected NAB business sentiment readings which rose to 8 from 7 forecast. This week, the biggest test for Aussie will be the employment data due Wednesday night. The latest indicators from ANZ job advertisements suggest that a rebound in labor demand is likely and if the headline prints above the 12K expected, the Aussie could make another run at the 9500 level later in the week.

Meanwhile in UK the Manufacturing Production and Industrial Production both missed by a wide margin with former printing at -1.3% versus 0.4% eyed while the later came in at -0.7% versus 0.3% projected. This was the biggest monthly fall in manufacturing in 18 months sending pound tumbling through the 1.7100 level in reaction to the news.

Cable has been a relative underperformer since the start of the week as the 1.7200 figure has proven to be too much of a resistance point and it now appears that the unit has entered its periodic correction phase and may test 1.7000 support over the next few days. Certainly tonight’s news along with slightly disappointing data from PMI Services report last week has stalled the upside momentum in the pair and if the market begins to fear that UK economy may have peaked, then the unit could be in for a much more serious tumble as interest rate hike expectations are pared back.

With no major releases in the North American session scheduled today, the flows in FX may simply be an extension of the European price action. One surprising factor has been the very strong performance of US bonds despite better than expected NFPs last week. With US 10 year yields down to 2.60% again USD/JPY has once again fallen below 102.00 and if the yields continue to drift to 2.55% the pair is very likely to test support at 101.50 as the day proceeds.

Boris Schlossberg
Managing Director

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