NZD Extends Weakness, US ADP Report ahead

Forex News and Events:

Among G10 currencies, the kiwi records the steepest decline versus USD today; the sell-off from 32-month highs is mainly due to the poor Global Dairy Trade milk auction results. While the sell-off didn’t damage key technical levels overnight, NZDUSD extends weakness in Europe this morning. In UK, the softer construction PMI limited the London rally at 1.6664, yet the bias remains positive. Regarding EUR-crosses, traders continue pricing out any dovish ECB move at Thursday meeting. Later today, the focus will be on March ADP employment report in New York session, the NFP and unemployment data are due on Friday.

NZD sell-off from 32-month highs

NZDUSD hit 32-month high of 0.8702 yesterday yet failed to extend gains given the soft Global Dairy Trade milk auction result. In fact, we see accelerating decline in spot and forward dairy prices since mid-February and yesterday’s auction recorded the biggest fall since mid-2010. This is clearly not supportive of New Zealand’s leading export market yet the impact on NZD’s bullish momentum is expected to remain limited given the RBNZ lean towards further rate hike at future policy meetings. And the rate action is, in our view, a more sustainable reason to long NZD.

March 25th CFTC data witnesses of significant incline in NZD speculative longs, reaching the highest levels since May 2013. Although the high volumes of speculative longs increase the magnitude of potential sell-offs, the broader ascending trend suggests stronger NZD (in line with supportive RBNZ policy). In the short-run, New Zealand sold Kiwi on dairy auction, the weakness now continues in Europe and should also lead to some position adjustments in New York. A daily close below 0.8605 should keep the bias on the downside pre-NFPs (Fri). The first line of support should come into play at 0.8544/55 (Oct 2013 high & 21-dma), then 0.8502 (Mar 20th low). On the upside, the next target is shifted to 0.8745 (Fibonacci 123.6% on Aug-Oct 2013 rally). We see decent option bids at 0.8475 and 0.8550 for Friday expiry, waiting to be activated pre-weekend.

Fed’s efforts to balance hawkish expectations

On March 19th FOMC meeting, the Fed Chair Yellen squeezed the markets removing the unemployment and inflation thresholds on forward guidance and saying that the first rate hike is to come roughly 6 months after the end of tapering, meaning mid-2015. While the previous market expectations were set to end-2015 / early 2016, the hawkish comments from the dovish banker Yellen (at least previously thought to be so) immediately lifted the 2-year US treasury yields by 7 basis points – the largest intra-day move since 2011, the 5-year yields by 16 bps, thus clearly steepening the US yield curve on the front-end. While many other Fed Presidents stood behind policy normalization sooner rather than later, the sharp rise in yields didn’t please the FOMC. To counter this move, Yellen is now stating that Fed still needs to continue with extraordinary monetary stimulus given the lack in the labor market. We see limited market reaction to new dovish comments. The Friday’s NFPs will be in focus this week, yet we do not expect NFPs to trigger high volatilities as seen before given that Yellen decoupled Fed’s forward guidance from jobs data (unless significantly unexpected release shocks the FX players). The markets expect the US economy to have added 200’000 new nonfarm jobs in March v. 175’000 in February; the unemployment is estimated at 6.6% (from 6.7% prev).

Today's Key Issues (time in GMT):

2014-04-02T11:00:00 USD Mar 28th MBA Mortgage Applications, last -3.50%
2014-04-02T12:15:00 USD Mar ADP Employment Change, exp 195K, last 139K
2014-04-02T13:45:00 USD Mar ISM New York, last 57
2014-04-02T14:00:00 DKK Mar Foreign Reserves, exp 460.2, last 475.4
2014-04-02T14:00:00 DKK Mar Change in Currency Reserves, exp -15.0B, last -0.3B
2014-04-02T14:00:00 USD Feb Factory Orders, exp 1.20%, last -0.70%

The Risk Today:

EURUSD continues to bounce after the test of the support at 1.3708. However, the declining trendline still favours a bearish bias. An hourly resistance can be found at 1.3847 (25/03/2014 high). Another resistance lies at 1.3876. In the medium-term, the break of the support at 1.3834 (11/03/2014 low, see also the rising channel) coupled with general overbought conditions favour a move lower towards the support at 1.3643. The recent high at 1.3967 is likely to act as a strong resistance.

GBPUSD is digesting its recent rise. However, the short-term momentum remains positive as long as the hourly support at 1.6598 (28/03/2014 low) holds. Hourly resistances can be found at 1.6684 and 1.6718. Another hourly support stands at 1.6555 (27/03/2014 low). In the longer term, prices continue to move in a rising channel. As a result, a bullish bias remains favoured as long as the support at 1.6460 holds. Another key support stands at 1.6220 (17/12/2013 low).

USDJPY is moving above the key resistance 103.76. Another resistance stands at 104.92 (16/01/2014 high). Monitor the hourly support at 103.44 (31/03/2014 high) as the current rise looks short-term overextended. Another hourly support lies at 102.75 (intraday low). A long-term bullish bias is favoured as long as the key support area given by the 200 day moving average (around 100.66) and 99.57 (see also the rising trendline from the 93.79 low (13/06/2013) holds. A major resistance stands at 110.66 (15/08/2008 high).

USDCHF continues to weaken. Prices are now challenging the support given by the rising trendline. Hourly horizontal supports stand at 0.8814 (01/04/2014 low) and 0.8787. An initial resistance can now be found at 0.8852 (intraday high), while more significant resistances lie at 0.8896 and 0.8930. From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. The recent technical improvements suggest weakening selling pressures. A key resistance lies at 0.8930.

Resistance and Support: