Kiwi Takes a Dive

Market Drivers October 24, 2017
New Labor policies drive kiwi lower
EZ PMI data mixed
Nikkei 0.50% Dax 0.16%
Oil $51/bbl
Gold $1277/oz.

Europe and Asia:
EUR PMI 55.9 vs. 56.5

North America:
USD Services PMI 9:45

Asia session trade saw uncharacteristically volatile price action today as markets absorbed the full impact of new policy announcements from the recently formed Labor-led government in New Zealand.

The wide sweeping reforms included the addition of an employment mandate to the RBNZ charter, a mechanism to ban non-residents from buying property and a 1 billion dollar development fund. The agenda was a mix of stimulative approaches and some clear attempts at market control and FX markets reacted badly to the news, reversing the initial pop to .7000 to push the kiwi down to .6925 before buyers appeared.

FX traders are clearly unnerved by the more pro-active policies of Labor, although it is far too early to tell whether the impact of these new initiatives will have a damaging effect on capital flows. Unless Labor attempts to regulate the market become extreme, the value of the kiwi will depend far more on external demand rather than domestic policy. To that end, the proposed increases in the minimum wage could prove stimulative as long as growth from China maintains pace.

The kiwi has deep technical support between the .6800 and .6900 levels and is likely to find some buyers there on any push lower. For now the reaction of the move may be overdone, but FX markets will no doubt keep a close eye on any further policy proposals from Labor.

In Europe the latest raft of flash PMI readings was mixed as the rise in Manufacturing demand was offset by decline in services activity. Overall the composite PMI slipped to 55.9 from 56.5 and does not bode well for those traders expecting hawkish policy shift from Mario Draghi of ECB.

Some analysts expect that the ECB will cut its QE allocation by half to 30 Billion EUR but may at the same time extend the program by six months. Such a move will be viewed negatively by the market which has been primed for a taper by year end. The EURUSD continues to see good two-way action around the 1.1750 level for now but the ECB meeting this Thursday will likely dislodge the narrow range of the pair.

In North America today the calendar is once again quiet with only a smattering of second-tier PMI data, but the pop in US yields continues to help the dollar and if the 10 year can climb above the 2.40% level once again, USDJPY should make another run at 114.00 level as the day progresses.