NZD/USD Falls Below 0.72, Banxico On The Hot Seat

News and Events:

NZD/USD tumbles as RBNZ delays tightening

As widely expected the Reserve Bank of New Zealand left its official cash rate unchanged at 1.75% and surprisingly changed the tone of the forward guidance. Indeed, Governor Graeme Wheeler, who is expected to step down at the end of the third quarter, baffled investors by further delaying any tightening move. The announcement had a substantial impact on the New Zealand Dollar as it fell as much as 1.60% against the greenback, down to 0.7192 before consolidating above the 0.72 threshold after bouncing back on the 0.7196 support level (Fibonacci 61.8% on November-December debasement).

The RBNZ’s decision could be confusing, especially against the backdrop of improving inflationary outlook. However, we think the RBNZ is betting on the Fed having to hike rates to control rising inflation pressures caused by the “Trumponomic” effect. In such a scenario, tighter monetary policy in the US would cause the USD to strengthen, which would ultimately allow the NZD to weaken. In addition, the central bank cannot take the risk of starting to tighten too soon as there is no guarantee Trump will be able to deliver on any of its economic promises. We expect the NZD rally to run out of steam; however NZD/USD will remain highly sensitive to any political development in the US as the high yielding currency will again attract investors should Trump disappoint.

Inflation should support MXN

In Mexico today strong January inflation data should be the shove Banxico needs to increase policy rates by 50bp. Annual inflation is expected to climb to 4.71% from 3.36. Unfortunately the hawkish move is geared to address the weaker peso (although selling pressure has abated in recent weeks) rather than accelerating growth outlook. In fact, the politically driven uncertainty has materially deteriorated economic forecasts. US President Trump’s recent comments alluding to sending US troops south of the boarder and Mexican President Nieto cancelling his scheduled trip to Washington only highlight the increasing friction between the two nations. The Mexican MoF provided the final data on public finance for 2016 reporting a deficit of 2.9% of GDP. The outlook was already difficult with oil revenues falling, slowing domestic growth and a strap fiscal budget unlikely to support new growth (rather pay increasing pension expansion) – factoring in the Trump risks only limits upside expectations. Yet, ultimately MXN has been driven less by fundamental weakness but rather political pressure. Barring an escalation, with real actions, higher yields in MXN and a lower probability of a currency collapse will inspire the closing of speculative shorts. The Banxico hike should also further support the MXN rally.

Switzerland: Unemployment rate increases

New Swiss labour data was released this morning. The unemployment rate has increased to 3.7% from 3.5% in January. The data is now at 11-month high and this month’s rise is also the biggest increase in a year.

As a result, if the unemployment rate increases, downside pressures on the inflation should also continue which would put the efficiency of the SNB’s monetary policy at stake. It is clear that the SNB is doing its best to maintain an exchange rate of around 1.0700 CHF for a single euro. Stimulating inflation is going to become more and more difficult.

The conditions for Swiss corporates are becoming extremely difficult. In particular when looking at the cost of labour in Europe. This is why the unemployment rate should continue to grow as companies, in order to face market competition, will try, as much as possible, to push productivity. At some point, the difference in labour cost between Switzerland and its neighbours is too significant to be sustainable over the long haul.

Today’s Key Issues (time in GMT):

• Jan Average House Prices, last 2.887m, rev 2.913m SEK / 08:30
• RBA Governor Lowe Speech in Sydney AUD / 09:00
• Dec Mining Production MoM, last -3,90% ZAR / 09:30
• Dec Gold Production YoY, last -9,40%, rev -10,00% ZAR / 09:30
• Dec Platinum Production YoY, last -10,80%, rev -11,40% ZAR / 09:30
• Dec Mining Production YoY, exp -3,80%, last -4,20%, rev -4,50% ZAR / 09:30
• Feb IGP-M Inflation 1st Preview, exp 0,35%, last 0,86% BRL / 10:00
• Bank of Italy Publishes Monthly Report `Money and Banks’ EUR / 10:00
• Bank of Russia Governor Nabiullina Meets With Bankers RUB / 10:30
• Dec Manufacturing Prod NSA YoY, exp -0,20%, last 1,90% ZAR / 11:00
• Dec Manufacturing Prod SA MoM, exp 0,10%, last 0,30% ZAR / 11:00
• Feb 3 Foreigners Net Bond Invest, last -$322m TRY / 11:30
• Feb 3 Foreigners Net Stock Invest, last $33m TRY / 11:30
• Feb 3 Gold and Forex Reserve, last 392.5b RUB / 13:00
• Dec New Housing Price Index MoM, exp 0,20%, last 0,20% CAD / 13:30
• Dec New Housing Price Index YoY, exp 3,10%, last 3,00% CAD / 13:30
• Feb 4 Initial Jobless Claims, exp 249k, last 246k USD / 13:30
• janv..28 Continuing Claims, exp 2058k, last 2064k USD / 13:30
• Fed’s Bullard Speaks in St. Louis USD / 14:05
• Feb 5 Bloomberg Consumer Comfort, last 46,6 USD / 14:45
• Dec Wholesale Trade Sales MoM, last 0,40% USD / 15:00
• Dec F Wholesale Inventories MoM, exp 1,00%, last 1,00% USD / 15:00
• Bank of Canada Governor Schembri Speaks at Western University CAD / 16:20
• Fed’s Evans Speaks on Economy and Policy in Chicago USD / 18:10
• BOE Governor Mark Carney Speaks in London GBP / 18:30
• Jan Foreign Direct Investment YoY CNY, exp 1,40%, last 5,70% CNY / 23:00

The Risk Today:

EUR/USD‘s selling pressures have increased. It seems that strong hourly resistance area is given around 1.0800. The road is wide-open towards hoourly support at 1.0581 (16/01/2016 low) and 1.0454 (11/01/2017 low). Expected to see continued consolidation. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD is still trading below resistance given at 1.2771 (05/10/2016 high). The technical structure suggests that the pair should back bouncing lower towards support given at 1.2254 (19/01/2016 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY is slowly pushing lower towards support at 111.36 (28/11/2016 low). Hourly resistance is given at 115.62 (19/01/2016 high). The break of hourly support given at 112.57 (17/01/2017 low) has confirmed bearish pressures. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF’s momentum is still bearish despite ongoing increase. Key resistance is given at a distance at 1.0344 (15/12/2016 high). We believe that the road is clearly wide-open for further decline if the pair does not break parity. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.