NZD slides as business confidence falls
The New Zealand dollar extended losses on Tuesday amid a massive in business confidence. During the Asian session, the Kiwi fell 0.60% against the greenback as it reached $0.7215. Business confidence tumbled to zero, the lowest level since September 2015, compared to 18.3 in August. The drop came amid a significant deterioration of expected business conditions, especially in the manufacturing industry. In addition, the uncertainty stemming from Saturday’s election as there was no clear winner. The ruling National Party got only 46% of the vote, while the opposition (composed of the Labour party and the Green) acquired roughly 42% of the vote. The Kiwi is ahead of a difficult periods as the uncertainty will last several weeks. Indeed, both sides will try to get the support of the NZ First Party to build a coalition government.
Investors, and especially leveraged speculators, already started to reduce their long speculative positions. Net long non-commercial futures positions accounted for roughly 63% of total open interest in early August. As of last week, this number decrease to 18%, suggesting that the Kiwi is running out of steam.
From a technical standpoint, a key support can be found at $0.7146 (200-dma), while on the upside the 0.73 area will act as main short-term resistance (50-dma and 38.2% Fibonacci level on July – August retracement). On the medium-term, NZD/USD continues to trade within its downtrend channel. A return towards $0.70 cannot be ruled, especially now that the Federal Reserve in the US is set to tighten monetary policy further in December, while having already announced the beginning of its balance unwinding for October.
Fed Speakers up next
For those in the small minority that enjoys Fed speak, then today is the day for you. For the rest of us we will have to suffer through the microanalysis of language and rogue volatility. The question of the day is where US inflation is. By all accounts, inflation should be significantly higher which makes trading precarious since a reflection point could be anytime. Friday PCE read, or a year from now. A repricing of the Fed shallow curve has plenty of room to run, sending yields and therefore USD higher. In our view, there is growing superficial evidence and general improvement in consumer inflation that suggests we are near to the event. There are six fed speakers today, making expectations for market driving headlines high.
New York Fed President Dudley started the precession sounding hawkish attributing recent inflation weakness to “temporary, idiosyncratic factors” Markets focus will be on Fed Chair Yellen’s speech, which is specifically on inflation and monetary policy (“Inflation, Uncertainty, and Monetary Policy”) in Cleveland Ohio. We anticipate her to reiterate comments at the FOMC press conference last week. Yellen’s comments at the September FOMC meeting were deemed hawkish, causing market to re-price in a December rate hike at 60%.
We suspect there is stillroom for markets to push Fed pricing higher yet unlikely that any of Yellen’s comments will move the needle. With year of discounting the Fed overly, optimistic projections, markets need to see a solid inflation data trend (which makes Friday PCE read so important). Governor Brainard speaking on “Labor Market Disparities” will also have the markets attention. US front-end rally has stalled with 2yr yields stuck at 1.40% yet US/EU rate spread continue to tick higher creating headwinds from EURUSD. Should Yellen increase the hawkish amplitude or we get Core PCE at 1.5% (or higher), trader should watch out for a sudden and sharp USD recovery.
