Reserve Bank of New Zealand Intervenes

Forex News and Events

The USD continues to show broad strength, pulling with FX volatility higher, which in turn is putting selling pressure on high-yielding FX. Despite the rally in USD, traders are discussing the extent which America “exceptionlism” is at work verse leader (due to recovering domestic demand) in a weak growth environment. Last week’s sell-off in global equities, punctuated by S&P 500 ending the week lower, suggests that investors are becoming skeptical of asset pricing. Between unprecedented corporate stock buybacks and Fed policy driving asset price inflation rather than real growth recovery, there is a feeling that US robust data has become artificial. Our view is more in the middle ground. So we suspect that a major setback in stocks is unlikely given the ECB, BoJ and even the PBoC heading towards additional stimulus due to weak growth forecasts (equities still have value over bonds). While in the US and UK central banks will continue to reinforce divergence in monetary policy. Given this deviation we remains constructive on the USD and GBP while generally supportive of global equities. That said with growth forecast further to erode commodities and related currency bloc will have difficulty finding buyers in the near term. Yet, the relationship between US interest rates and commodities remains strong and since US yields upside will be constrained due to Europe’s yeilds downward pressure we could see stabilization in commodities prices (although risk to downside remains).

Selling NZD

In the FX markets, NZD was back in the spotlight. NZDUSD dropped nearly 2% to 0.7710 from 0.7868 (lower by 12% since Julys peak) as the Reserve Bank of New Zealand announced that it has intervened actively in the FX market by selling NZD521mn in August verse selling a NZD2mn in July. This was the large invention since 2007 and most likely the RBNZ continued to sell in September. Last week in an unscheduled statement RBNZ Governor Graeme Wheeler hinted that invention had taken place, stating that the NZD’s price was “unjustified and unsustainable”. Interestingly this wording was not new yet the unexpected nature of the release clearly signaled that the RBNZ wanted to send a strong message that the threshold for direct FX intervention had been crossed. Yet prior to today, most of the market participants, never suspected RBNZ aggressive intervention was not the root cause of NZD weakness. Rather, weak dairy prices, intensive verbal jawboning and RBNZ shifting to a dovish stance was believed to be the core drivers. Moving forward the combination of USD strength and aggressive rhetoric alongside direct selling has been extremely, effective suggesting the RBNZ has more for move activity. The spike in NZD implied volatility is clearly overdone and unsustainable, indicating the rate of decline will slow. However, trader should expected more NZD downside at most fairvalue estimates remain overvalued.

Today's Key Issues (time in GMT)

2014-09-29T09:00:00 EUR Business Climate Indicator Sep 0.1 0.16
2014-09-29T09:00:00 EUR Services Confidence Sep 2.5 3.1
2014-09-29T09:00:00 EUR Industrial Confidence Sep -5.8 -5.3
2014-09-29T09:00:00 EUR Economic Confidence Sep 99.9 100.6
2014-09-29T12:30:00 USD PCE Core MoM Aug 0.00% 0.10%
2014-09-29T12:30:00 USD PCE Deflator YoY Aug 1.40% 1.60%
2014-09-29T12:30:00 USD PCE Deflator MoM Aug -0.10% 0.10%
2014-09-29T12:30:00 USD Personal Spending Aug 0.40% -0.10%
2014-09-29T12:30:00 USD Personal Income Aug 0.30% 0.20%
2014-09-29T14:00:00 USD Pending Home Sales YoY Aug -1.40% -2.70%
2014-09-29T14:00:00 USD Pending Home Sales MoM Aug -0.50% 3.30%
2014-09-29T14:30:00 USD Dallas Fed Manf. Activity Sep 10.5 7.1

The Risk Today

EURUSD EUR/USD has broken the strong support at 1.2755 and is now challenging the one at 1.2662. The short-term momentum is negative as long as prices remain below the hourly resistance at 1.2901 (23/09/2014 high). An initial resistance can be found at 1.2816 (22/09/2014 low). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) is challenged. An eventual break lower is expected. A resistance lies at 1.2995 (16/09/2014 high). Another strong support lies at 1.2043 (24/07/2012 low).

GBPUSD GBP/USD is weakening after its recent rebound from the low at 1.6052. A test of the hourly support at 1.6162 (16/09/2014 low) is favoured. Hourly resistances can be found at 1.6342 (intraday high) and 1.6416. In the longer term, the collapse in prices after having reached 4-year highs has created a strong resistance at 1.7192, which is unlikely to be broken in the coming months. Monitor the recent rebound as it could signal the start of a medium-term consolidation phase. A support lies at 1.6052, while a strong support stands at 1.5855 (12/11/2013 low). A resistance stands at 1.6644.

USDJPY USD/JPY has broken to the upside out of its horizontal range defined by the hourly support at 108.26 (23/09/2014 low) and 109.46 (19/09/2014 high). Monitor the major resistance at 110.66 (15/08/2008 high). A first hourly support can be found at 109.19 (intraday low). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The recent new highs confirm a strong underlying bullish trend. A break of the major resistance at 110.66 (15/08/2008 high, see also the 50% retracement from the 1998's top) is eventually favoured. Another resistance can be found at 114.66 (27/12/2007 high).

USDCHF USD/CHF has broken the strong resistance at 0.9456. Friday's strength has alleviated short-term concerns stemming from Thursday's shooting star. Hourly supports can be found at 0.9452 (25/09/2014 low) and 0.9433 (18/09/2014 high). From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. Then break of the strong resistance at 0.9456 (06/09/2013 high) confirms this scenario. Another key resistance lies at 0.9751 (09/07/2013 high). Supports can be found at 0.9301 (16/09/2014 low) and 0.9176 (03/09/2014 low).

Resistance and Support: