Kiwi Loses Flight, FX Awaits Yellen

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Market Drivers for May 7 2014

RBNZ’s Wheeler – kiwi is overvalued

AU Retail Sales miss

Nikkei -2.93% Europe -.25%

Oil $100/bbl

Gold $1314/oz.

Europe and Asia:

NZD Unemployment 6.0% vs. 5.8%

AUD AIG Construction 45.9 vs. 46.2

AUD Retail Sales 0.1% vs. 0.4%

EUR GE Factory Orders -2.8% vs. 0.3%

EUR Retail PMI 51.2 vs. 49.2

North America:

CAD Building Permits 08:30 AM

USD Yellen testimony 10:00AM

Just a day after setting fresh yearly highs, the kiwi sold off sharply in Asian and early European trade today as dovish comments from RBNZ chief Wheeler weighed on the unit. The RBNZ governor, speaking in front of the Dairy farmers forum stated that the New Zealand dollar is overvalued and that its current price is unsustainable.

New Zealand monetary authorities find themselves in a difficult position as the central bank must battle the housing bubble in the country and thus continue to raise rates, but at the same time maintain the exchange rate competitive. Already the high value of the kiwi has weighed on demand for New Zealand milk – a major export for the country.

Mr. Wheeler noted that the rise in the currency will be factor in assessing future interest rate policy and even went on to suggest that is all else fails the central bank may resort to direct currency speculation and sell New Zealand dollars in order to keep exchange rate down. His jawboning had the intended effect and the kiwi dropped 3/4 of a cent as the night wore on as late longs liquidated their positions.

Still, despite Governor Wheeler’s ardent rhetoric, the 3.00% money market rate of the New Zealand dollar will remain an attraction for yield starved investors in a world where US 10 year rates remain close to 2.5%. Indeed, the fate of the kiwi is likely to be driven more by Fed policy rather than RBNZ’s. If US rates begin to pick up, they will provide a natural challenge to NZD/USD, but if they remain moribund or sink even further, the kiwi is likely to make fresh yearly highs despite the RBNZ’s best efforts to contain its rise.

Elsewhere the calendar was relatively quiet but German factory orders posted a massive miss coming in at -2.8% versus 0.3% eyed. Export orders dropped a very steep -4.6% as geopolitical tensions and the high price of the EUR/USD are clearly starting to take their toll. The EUR/USD saw little reaction to the news, but as the day wore on the pair started to drift lower and may test the 1.3900 level later in the day if Janet Yellen’s testimony provides any lift for the dollar.

Ms. Yellen’s testimony in front of Congress will be the marquee event of the day as traders await her comments on the US economy. As our colleague Kathy Lien noted, “Investors have been selling dollars aggressively over the past month despite better than expected economic data and further losses are likely unless Janet Yellen steps in to stop the slide in the currency tomorrow, but why would she? Unless inflation is skyrocketing, central bankers rarely have a problem with a weak currency especially in an environment where growth is a premium. Federal Reserve officials have also gone to great lengths to prevent yields from rising as they unwind Quantitative Easing so they won’t be eager to say or do anything that could risk sending yields sharply higher.” In short Ms. Yellen is likely to stick to the script and that will keep the dollar in doldrums for now.

Boris Schlossberg
Managing Director

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