Why Are Commodity Dollars So Weak?

Market Drivers January 28, 2015
GE CPI turns deflationary
Aussie battered to 7800
Nikkei -1.06% Europe -.83%
Oil $44/bbl
Gold $1276/oz.

Europe and Asia:
AUD LEI 0.1% vs. -0.2%
EZ GE Unemployment -9K vs. -9K
EZ CPI -1.0 vs. -0.2%

North America:
USD Weekly jobless 8:30
USD Pending Home Sales 10:00

Its been a tough night for commodity dollars in the currency market with both Aussie and kiwi under pressure from continuing expectations of further easing of their respective central banks. The kiwi drifted lower throughout the night breaking below the .7300 level as the aftermath of the RBNZ decision washed its way through the market.

The RBNZ in its quarterly communique noted that it will remain neutral for the rest of the year leaving rates at the current 3.5%. The central bank also jawboned the market, stating that the kiwi remained "unjustifiably" high although there has been scant evidence of intervention by the RBNZ as data showed that central bank sold only 16M in the month of December.

We suspect that RBNZ is content to keep NZD/USD below the .7500 rate as anything below that level is likely not to impinge on export demand. From a carry point of view the kiwi remains an extraordinary bargain as the unit's 3.5% yield is the highest in the industrialized world by a wide margin. However, the flows at this point are being driven by momentum and margin liquidation and the pair could easily drift to .7100 before finally finding some sort of a meaningful bottom.

Part of the reason for the weakness in kiwi is the absolute belief by the fx market that its neighbor across the Tasman sea will cut rates at its next meeting in February. The Australian business press is full of articles that the RBA will follow the BOC and surprise the market with a -25bp cut in its February 2nd meeting.

The argument for a rate cut hinges on significantly lower inflation readings that would provide the RBA with scope for further easing. Yet the latest CPI data actually showed a hotter than expected reading, albeit far lower than the numbers from last year. Rather than the inflation readings the RBA may be simply motivated by the fact that other central banks are easing. In a central bank version of "Game of Thrones" it may simply be the case that Mr. Stevens and company feel compelled to keep the downward pressure on their currency in order to stay competitive on the global stage, especially as demand for the country's primary exports has eased.

The Aussie put in a one way move throughout the Asian and European session dropping more than 100 points from its North American close of .7900. The pair remains very weak as traders continue to price in rate cuts and if Mr. Stevens hints that the easing cycle could stay in place for the rest of the year then the pair could ultimately target .7500 figure as carry trade speculators abandon the pair.