Kiwi and Aussie Continue to Correct -Euro Back to Highs?

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Market Drivers for September 25th, 2013
New Zealand Trade Balance -1191M vs. -722M pushing kiwi lower
EU sentiment mixed as French worse Italian better
Nikkei -0.76% Europe -0.11%
Oil $103/bbl
Gold $1320/oz.

Europe and Asia:
NZD Trade Balance -1191M vs. -722M
EUR GFK sentiment 7.1 vs. 7.1

North America:
USD Durable Goods 8:30
USD New Homes 10:00

Its been an exceedingly quiet night in the forex market with most of the majors treading water as in listless Asian and early European trade. The commodity dollars however have been notably weaker as the correction off the post Fed announcement highs continued.

The kiwi was especially weak as it drifted toward the 8200 level driven lower but the larger than expected Trade deficit. New Zealand posted a deficit of -1191M versus -700M eyed as both imports and exports missed their mark. Imports rose 4.52B versus 4.3B eyed while exports came in at 3.33B versus 3.54B.

The data puts fresh pressure on the RBNZ to maintain rates at the present level, as any increase would only drive the kiwi higher and exacerbate the negative trade flows. The New Zealand central bank finds itself in an untenable position of trying to control the growing housing bubble on one hand while at the same time trying to lower the currency exchange rate in order to maintain the country’s competitiveness.

Given the lack of taper from the Fed, it is very unlikely that the RBNZ would make any tightening moves before the Fed actually begins to curb its own QE program. The kiwi therefore is likely to correct further towards the 8100 level over the next few weeks especially if US legislators come to an agreement on the budget issues and clear the way for the Fed to act later in the year.

In Europe meanwhile, the EUR/USD caught a mild bid rising to 1.3500 in morning dealing as traders were encouraged by the rebound in Italian consumer confidence. The gauge rose to 101.1 from 98.4 the month prior breaking the 100.00 barrier for the first time in several years. Although the euro continues to perform relatively well the unit faces stiff resistance ahead of the 1.3600 level.

ECB officials are clearly not pleased with the sudden rise in the exchange rate and have been trying to talk down the currency. More importantly, the German election results have yet to produce a ruling coalition government with SPD apparently driving a hard bargain with Angela Merkel. Ms. Merkel may turn to the Greens for a possible partnership, but such an arrangement would be inherently less stable than the CDU-SPD union. Lastly, if no deal can be negotiated, Germany may face the prospect of another election which would no doubt put downward pressure on the euro as uncertainty reigns.

In North America today the market will get a look at Durable Goods and New Home Sales with consensus view looking for a rebound in both reports. An improvement from last month could boost the dollar as the day proceeds as trader begin to once again price in the prospect of a Fed taper. However, if the number disappoint again the dollar could come under further selling pressure and EUR/USD could test its recent highs at 1.3570.

Boris Schlossberg
Managing Director

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