RBNZ Wheeler sees opportunity to sell NZD

Forex News and Events:

The US dollar continues its slow recovery after yesterdays’ heavy sell-off. The reason the USD-unwind raise curiosity given that the economic data has been rather encouraging over the past trading sessions (good NFPs, supportive PMIs, narrower trade deficit,..). The US 10-year government yields retreated to 2.5752%, the lowest since November 2013, while XAU/USD tests the 50-dma on the upside. Seemingly markets are selling Fed’s inaccuracy at advantageous USD levels. Yellen will be speaking at the Joint Economic Committee, any clarification is welcomed.

In New Zealand, the kiwi corrects aggressively after RBNZ Governor Wheeler signaled a potential FX intervention in the foreseeable future. We zoom into the NZ market.

Gold and US yields

The correlation between 10-year US government yields and gold prices on hourly chart has been at month highs this week. The geopolitical tensions in Ukraine, unclear Fed policy keep US government bonds and gold well bid. XAU/USD tests the 50-dma ($1,315.60) on the upside, trend and momentum indicators are positive. With the ongoing USD weakness, investors continue seeing buying interest in gold, the gold prices trading at 61.8% Fibonacci level of the latest Jan-Mar rally ($1,182.60 - $1,392.30). Next resistances are eyed at $1331.20 (April high), then $1,392.30 (2014 high). On the downside, the key support stands at the 200-dma ($1,299.26).

Kiwi corrects aggressively

On broad based USD weakness, we saw NZD/USD hitting a fresh high of 0.8780 (highest since August 2011) in yesterday’s session. The pair failed to consolidate gains above 0.8745 (former year high) and aggressively sold-off to 0.8667 through Asian and European trading. Two key points limited NZD/USD strength over the past hours of trading.

First, the GDT dairy auction showed 1.1% decline in dairy prices for the sixth consecutive month, while the improvement in volumes limited further immediate damage in NZD. The RBNZ Governor Wheeler talked about “The significance of dairy to the New Zealand economy” and highlighted the impacts of strong exchange rate on RBNZ policy. The strong NZD “is likely to be reflected in continued low or negative tradables inflation” he said, thus should influence “the extent and the speed with which OCR needs to be raised”. In fact, the negative dairy prices counterweigh NZD weakness thus may positively impact the magnitude of RBNZ tightening. We may expect to see a third consecutive hike in OCR in June, from 3.00% to 3.25%. Although this is NZD-supportive news, rate hike in June and/or July meetings is already priced in, unlike Wheeler’s warning of a potential NZD sale. “If the currency remains high in the face of worsening fundamentals, such as a continued weakening in export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell NZ dollars" said Wheeler.

Second, the unemployment rate stagnated at 6.0% in Q1 versus 5.8% expected, as the participation rate unexpectedly increased from 68.9% to 69.3%. The y-o-y employment accelerated from 3.0% to 3.7%. Although the slower rise of 0.3% in wages (versus 0.6% over the past quarter) argues against RBNZ’s aggressive tightening, we believe that the NZD strength keep household income relatively sustained at the moment due to cheap imports and thus is not a heavy weighting factor in RBNZ decision.

The hawkish RBNZ divergence from other developed economies is NZD-supportive, especially from a carry point of view. Yet the RBNZ action risk should now keep the upside contained. We see slight drop in long-NZD futures as of April 29th CFTC data.

Today's Key Issues (time in GMT):

2014-05-07T11:00:00 USD May 2nd MBA Mortgage Applications, last -5.90%
2014-05-07T12:30:00 CAD Mar Building Permits MoM, exp 4.00%, last -11.60%
2014-05-07T12:30:00 USD 1Q P Nonfarm Productivity, exp -1.20%, last 1.80%
2014-05-07T12:30:00 USD 1Q P Unit Labor Costs, exp 2.80%, last -0.10%
2014-05-07T19:00:00 USD Mar Consumer Credit, exp $15.500B, last $16.489B

The Risk Today:

EURUSD EUR/USD has broken to the upside out of its recent consolidation between 1.3780 (09/04/2014 low) and 1.3906 (11/04/2014 high), opening the way for a test of the key resistance at 1.3967. Hourly supports can be found at 1.3906 (previous resistance) and 1.3865 (05/05/2014 low). In the longer term, EUR/USD is still in a succession of higher highs and higher lows. However, the recent marginal new highs (suggesting a potential long-term rising wedge) indicate an exhausted rise. As a result, we see a medium-term limited upside potential, especially given the key resistance at 1.3967 (13/03/2014 high) and the increasing overbought conditions.

GBPUSD GBP/USD pushed higher yesterday and is now close to the major resistance at 1.7043. Hourly supports stand at 1.6920 (previous resistance) and 1.6823 (02/05/2014 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 1.6661 (15/04/2014 low) holds. However, we are reluctant to suggest an upside potential higher than the major resistance at 1.7043 (05/08/2009 high), especially given the general overbought conditions.

USDJPY USD/JPY has broken the support at 101.87 (17/04/2014 low), confirming persistent selling pressures. However, prices are now approaching a key support area between 101.20 (03/03/2014 low) and 100.76 (see also the 200 day moving average and the rising channel). Hourly resistances stand at 101.87 (previous support) and 102.19 (06/05/2014 high). A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. Monitor the support area provided by the 200 day moving average (around 101.06) and the rising trendline from the 93.79 low (13/06/2013). A major resistance stands at 110.66 (15/08/2008 high).

USDCHF USD/CHF has made new lows, confirming an underlying bearish trend. A key support can be found at 0.8699. Hourly resistances now stand at 0.8765 (05/05/2014 low) and 0.8784 (intraday high). From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. However, a decisive break of the key resistance at 0.8930/0.8953 is needed to validate a bullish reversal pattern. We have updated our long strategy.

Resistance and Support: