Thursday, April 24, 2014

FW: NZD Soars, RBNZ Hikes and Maintains Hawkish Bias


                                       04.23.2014
                                   www.bkassetmanagement.com


Daily FX Market Roundup 04-23-14

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management


NZD Soars, RBNZ Hikes and Maintains Hawkish Bias
CAD: Extends Gains as Retail Sales Growth Slows
AUD: Hit by Softer than Expected CPI Report
Dollar: New Home Sales drops to 8 Month Lows
Euro: Supported by Stronger PMIs
Sterling Bulls Disappointed by BoE Minutes
Yen Crosses Sink Despite BoJ Optimism

NZD Soars, RBNZ Hikes and Maintains Hawkish Bias

Today's decision by the Reserve Bank of New Zealand to raise interest rates 25bp was widely expected but investors were caught off guard by the central bank's continued concern about inflation, which suggests they still intend to raise interest rates in June.  In a nod to the 20% drop in dairy prices and the pullback in consumer demand, the RBNZ started their statement off by saying that future rate rises will depend on economic data.  However this new condition was quickly forgotten when the central bank said inflationary pressures are increasing and are expected to continue to rise over the next 2 years. As a result, they felt that a rate hike was necessary to keep inflation expectations contained.  They tried to talk down the currency by saying that they would assess how the high exchange rate would affect inflationary pressure but actions speak louder than words and until the rising currency stops them from raising rates, its not a huge concern. So while the initial reaction in the New Zealand dollar was modest and limited to only 45 pips, the fact that the statement was more hawkish than most investors anticipated means there could still be further upside in the New Zealand dollar.  When the RBNZ raised rates in March, NZD/USD appreciated only 50 pips in the first hour after the rate hike but then gained another 150 pips over the next week.

At the end of the day, what matters most is yield and even though the Reserve Bank of New Zealand said future rate rises will depend on economic data, their decision to raise interest rates by another 25bp to 3% makes the New Zealand dollar more attractive to foreign investors. Lets not forget that the RBNZ pledged to raise rates form 2.5% to 4.75% by the first quarter of 2016 and today's statement does little to take them off track.  Yet the central bank has given themselves a bit more flexibility and if inflation continues to ease in the second quarter, they could pause but for the time being, they are not expected to do so. Either way, we don't expect this month's rate hike to have the same affect on the New Zealand dollar as the one in March, when the currency pair rose from .8460 to 0.8745 over a one-month period with very little retracement.  Their terms of trade has most likely peaked and with overstretched long positions, there are fewer buyers in the market.

Commodity currencies in general were on the move today with the Australian dollar dropping close to 1% on the back of last night's softer than expected consumer price report.  The Canadian dollar also extended its losses after their retail sales report showed consumer spending growing at a slower pace in the month of February. Despite a rebound in job growth, Canadians have been cautious about spending, reinforcing the Bank of Canada's belief that the recovery will be gradual and in reaction, USD/CAD rose to its strongest level in 3 weeks.

Dollar: New Home Sales drops to 8 Month Lows

There was very little consistency in the U.S. dollar's performance today.  The greenback traded lower against the euro, Japanese Yen and Swiss Franc but strengthened against the British pound, Australian, New Zealand and Canadian dollars. Just as stronger U.S. data failed to lift the dollar, today's disappointing economic reports did not put much pressure on the greenback.  According to a report by Markit Economics, manufacturing activity slowed in the month of April.  New home sales also dropped 14.5%, which was significantly weaker than expectated.  Economists had been looking for a 2.3% rebound in March after the decline in February but unfortunately affordability is becoming a bigger concern and as such, sales reached its weakest level in 8 months. Durable goods orders and weekly jobless claims are scheduled for release on Thursday. While we are eager to se if claims continue to improve and drop below 300k, neither one of these reports are expected to have a significant impact on the greenback.

Euro: Supported by Stronger PMIs

Stronger than expected Eurozone PMI numbers helped the euro avoid losses against the U.S. dollar.  Unfortunately the rally fizzled during the North American session with the euro only managing to hold onto a small part of today's gains.  Risk aversion played a role in the intraday reversal but the improvement was relatively modest. Tomorrow's German IFO report is typically less market moving than PMIs but a good number would be enough to keep the EUR/USD afloat.  In some ways, ECB President Draghi's speech could cause a bigger reaction as investors look to see whether his outlook has improved given the uptick in PMIs.Our colleague Boris Schlossberg provided a detailed analysis today's data.  He said the better than expected flash PMI numbers allayed "fears that ECB would have to resort to a more accommodative policy in order to stimulate growth in the region. EZ PMIs came in at 53.3 versus 53.0 eyed for manufacturing and 53.1 versus 52.7 for services. The gains were led by German readings which were considerably better than forecast. In Germany the Services PMI rose to 55 from 53.5 expected and the manufacturing PMI rose to 54.2 versus 53.9 projected. The results were markedly better than consensus view and were especially good given the geo-political tensions in the region. The one dark spot was the data from France, which saw the PMI readings decrease to 50.9 and 50.3 respectively, but even in France the PMI remained above the 50 boom/bust line indicating that the EZ economy continues to expand. With overall PMI readings better than forecast, the ECB has little reason to act now and the central bank is likely to remain stationary for the time being despite the deflationary pressures that persist. EZ monetary officials are becoming increasingly concerned with the strength of the euro, which they feel contributes to the downward pressure on prices and could hamper exports going forward. So far however, the EZ economy is seeing little negative impact from the strong currency and all of policymakers jawboning is falling on deaf ears as the markets continue to bid euro higher."

Sterling Bulls Disappointed by BoE Minutes
                                            
The 1.6850-level is proving to be an extremely significant area of resistance for GBP/USD.  The currency pair has come close to breaking this level on a number of occasions but its failure to do so indicates that there must be a ton offers at or near that level.  Based on the recent rise in sterling, we know that investors are positioning for an earlier rate hike from the Bank of England and today they were disappointed by the lack of surprises in the BoE minutes. The central bank acknowledged the improvements in the economy and the momentum in the housing market but wage growth and inflation remain subdued.  Although the BoE raised their first quarter GDP forecast from 0.9% to 1.0%, sterling traders were unimpressed.  With near term inflationary pressures easing further in the past month according to BoE Governor Mark Carney, there's no major urgency to tighten monetary policy.  While no one expected the central bank to raise rates next month, sterling bulls were certainly hoping for more hawkishness.  We continue to believe that there could be a deeper correction in GBP this week especially with the strong possibility of retail sales falling short of expectations on Friday.   

Yen Crosses Sink Despite BoJ Optimism

After holding steady or edging higher for the past 8 trading days, the dollar finally backed off against the Japanese Yen.  There was no specific catalyst for the sell-off in USD/JPY outside of increased uncertainty in Ukraine but the larger than expected decline in U.S. new home sales and drop in Treasury yields certainly didn't help.  The fact that the sell-off in USD/JPY began in the early European trading session confirms that a wave of risk aversion in the foreign exchange market was triggered by Russia's warning of a potential military response to events in Eastern Ukraine. Japanese Yen pairs generally suffer during times of political uncertainty and on a day with very little market moving U.S. or Japanese data, the uncertainties in Eastern Europe are weighing on those currencies.  The Nikkei performed well overnight thanks in part to the Bank of Japan's optimism.  BoJ Governor Kuroda expects inflation to exceed their projections in the previous fiscal year and to stay on track to achieving their 2% price target.  Deputy Governor Nakaso said he believes the economy is resilient enough to absorb the effect of the sales tax increase, a line that Kuroda uses often.  Nonetheless both gentlemen did not hesitate to say the BoJ couldk adjust monetary policy if the outlook for the economy or inflation changes. 

Regards,
Kathy Lien 
Managing Director 
BK Asset Management 
233 W 77th St Suite 11G
New York, NY 10024
Direct Line: 1-917-538-6971 
Fax: 1-925-887-4373

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