NZ Dollar doesn't look ready to weaken yet

Today's Highlights

• US Fed hints at December interest rate hike
• NZ interest rates on hold but a cut in December is possible

FX Market Overview

The US Dollar rallied significantly yesterday evening after the Federal Reserve inexplicably increased the likelihood of a December interest rate hike. The Euro-US Dollar rate pushed lower again but the $1.09 level is proving resilient and could start to form a support level. Against the Pound, on a day in which there was virtually no UK data, it was understandable that the Pound would slip by a cent or so against the US Dollar but there was more data from both sides of the Atlantic today to stir the blood of traders.

From the UK we got consumer credit and mortgage data as well as the CBI retail sector survey. The mortgage data remained the strongest it has been since April 2008 but the CBI survey was more downbeat, falling significantly since last month. However, it is an erratic beast and often seems to be at odds with the official retail sales data. Sterling stood its ground and even advanced a little on the day.

The US data came in the form of the preliminary economic growth report. As with the UK data, this is based on only a minority of the full dataset but is at least a guide to the state of the US economy. The forecasts suggested the figure would fall from the previous 3.9% to something like 1.6%. The actual number was a tad below there and that hardly makes the case for a US interest rate hike but we shall see.

The Reserve Bank of New Zealand left the NZ base rate on hold at their meeting overnight but signalled they were poised to cut again if the NZ Dollar remained strong. After three previous rate cuts, the pause was kind of expected but many are predicting another rate cut in December because the NZ Dollar doesn't look ready to weaken yet. With a 2.75% yield on NZD funds, the currency is an obvious target for international investors who can borrow at virtually 0% elsewhere. With the opposing forces of a slowing China, a very attractive NZ interest rate and generally improving UK data, it is little wonder the Sterling – NZ Dollar rate is trapped between 2.25 and 2.30. Uncertainty in graphic form you might say. If NZ business confidence fails again as it did last month, I suspect the NZ Dollar will decline overnight tonight. That figure will be released at midnight UK time.

And I'll end with a sweet story. Be ready to say Ahhhh. At a Vet's surgery in Whangarei, New Zealand, the nurses came in one morning to find a box on the doorstep with 4 very young kittens inside. They took them in and started to care for them and the next morning, they found a tabby cat trying to find a way into the surgery. They realised she was a nursing mother and twigged the situation. So they let her in and she lay down straight away to feed her babies. No one knows whether she was abandoned with the kittens or sought them out but it is a sweet story anyway and they have a new home and everyone lived happily ever after. So off you go now with that warm fuzzy feeling and have a great Thursday.

Thoughts for the week

• If you understand Morse code, do tap dancers mess with your head?
• Why is there a light in the fridge and not in the freezer?
• I was offered Mount Everest for £1 million. That's a bit steep isn't it?
• If you arrest a mime artist, do you tell him he has the right to remain silent or is that a given?
• Why does the word 'monosyllabic' have five syllables?
• Why doesn't glue stick to the inside of the bottle?
• Clapping is just hitting yourself because you like something.
• Do you think, if humans could fly, we would consider it was exercise and avoid it?

Since 2013, the Sterling – Australian Dollar rate has been in an upward trend channel and in recent weeks, the Pound has been battering the top end of that range. Australian banks have been shifting their mortgage rates higher in anticipation of what many think we will see in November; an interest rate cut from the Reserve Bank of Australia. With inflation rising less than expected and fears over the slowdown in China weighing on Australia's mining sector, there is clearly scope for the RBA to cut the base rate and every central banker wants a weak currency these days. With all of this in mind and the resurgence of the Pound in the background, it would seem logical for the GBP-AUD rate to head towards A$2.20 again. If it doesn't, there are likely to be plenty of GBP buyers lining up at the 2.08 level and the psychologically significant 2.00.



CAD

Weaker commodity income and weaker US demand are weighing on Canada's export outlook. We have though seen a small scale recovery in crude oil and that may have stabilised things a little. The Bank of Canada seems pretty certain they will not need to cut their base rate any further and that has capped the Sterling – Canadian Dollar rate off at C$2.03 for now. In fact this pair is in a downward trend and has been since the spike we saw in August related to Chinese data. There is support for the Pound at C$1.99 and the two trend lines you can see are converging. So something will be broken soon. As the Canadian Dollar is also influenced by its Canada's largest trading partner, the USA, the strength of the US Dollar is also helping the CAD to strengthen. Whether the Canadian's want that or not is another matter. The trend is downward unless something happens to change the picture.



EUR

Improving UK data and hints of early interest rate rises in the UK are being balanced against the likelihood of further Quantitative Easing in Europe and some petty dire European data. The upward momentum in the Sterling – Euro exchange rate is pretty obvious too. Having found support on the dip to €1.3350, the Pound looks like it may be unstoppable. That isn't a true picture of course; everything is stoppable; we only have to see a smidgeon of poor UK data and traders will take their profit and steal the momentum from the Pound. But for now, we may well see another test of the €1.42 level and maybe higher if it is carrying any pace when it hits that target.



NZD

All central bankers are trying to keep their currencies weak. It helps exporters and the only threat it poses to the domestic economy is that it could fuel inflation. However, with so many falling raw material costs and suppressed demand around the globe, inflation just isn’t an issue right now. So when the Reserve Bank of New Zealand threatens to cut the base rate if they see the NZD strengthen, we have to believe them. In spite of that, the NZ Dollar is still strong against the Pound and other currencies. In the GBP-NZD rate, the markets are happily trading a range roughly between NZ$2.25 and NZ$2.30. However, this exchange rate looks overbought at this level and that means there is scope for a rally. That could take us to NZ$2.40 or thereabouts and it may be that the RBNZ is the catalyst for that bounce.



USD

US growth data was released today and it reflected a marked slowdown in activity. However, this is based on only a small portion of the overall economic data and skewed by a sharp reduction in business inventories. i.e. companies have been using up reserves of stock rather than buying afresh. That suppresses demand and the underlying data looks promising. With the Federal Reserve hinting at early interest rate hikes, the US Dollar is set for a period of strength. That assumes the Fed carries its threats through to completion and, as they are central bankers, we won't rely on that. In the meantime, the US Dollar is relatively strong and the Sterling – USD exchange rate remains caught between a converging pair of trend lines. USD buyers ought to be targeting the $1.54 top and USD sellers have a target level at $1.52. Something will have to give way soon. The direction of that break out depends very heavily on the words and deeds of the US Federal Reserve.