NZD in the doldrums
The New Zealand dollar saw heavy selling pressure on Friday amid weak inflation data, which confirms the Reserve Bank’s cautious stance. The Kiwi fell 0.53% against the greenback and hit $0.7230. Indeed, headline inflation eased to 1.1%y/y in the first quarter, down from 1.6% in the previous quarter. After increasing 0.5% in the December quarter last year, tradable inflation contracted 0.40%y/y, while non-tradable inflation eased to +2.3%y/y. The relative strength of the Kiwi during that period explains most of the reduction in price pressures. However, the sector factor model, which is used by the RBNZ as a core measure of inflation, shows that the picture is not that dark as the core gauge held steady at 1.5%y/y (the central bank is targeting 2% +/-1%).
In our opinion, it is reasonable to expect further downside in NZD/USD as the interest rate differential continues to move deeper in negative territory, making short NZD bet costly. In addition, speculators are still net long Kiwi (non-commercial position: net long 40% of total open interest) and will most likely to unwind position as the currency nosedive.
On the downside, the next key support can be found at 0.7188 (low from March 29), then 0.7154 (low from March 21). On the upside, a resistance lies around 0.74 (high from mid-April). All in all, a return towards 0.70, or even below, seems reasonable.
Market Confusing
FX markets continue to send of complex and puzzling signals. Risk appetite seem to be recovering supported by EURCHF testing 1.2000 level. Yet demand for EM remains weak. Brent nearing $75 threshold on the back of supply concerns, declining US inventories and OPECs announcement that the supply glut that has been weighing on prices is now gone. Participates are using higher oil prices to pick winner and loser form the EM FX space.
The correlation between FX and interest rate spreads has weakened, yet now with US 10’s nearing 3.00% market are pointing to the sudden attractiveness of US assets. However, Trump tax cuts will clearly widen US fiscal and current account deficits introduction fundamentals headwinds. If our comments feel confusing that because they are. Markets have been too quick to embrace current driver completely reversing well-established themes. This fashionable right now thinking makes us skeptical. For example Indian Rupee. Despite solid structural fundamentals and cyclical upturn risk in oil price has triggered absolute fear of capital flight due to energy related current account deficit.
In addition, US Treasury report placing India to the watch list of currencies to be closely monitored, oddly freak everyone out. However in reality India is far from being labeled a currency manipulator due to persistent current account deficit. While higher oil prices have already trigger the RBI vigilance on inflation spillover and potential of early then expected interest rate hikes. True jumping early on the bandwagon would have been profitable, but right now we need to focus on the longer term. With global yields low, volatility low and growth solid this is what we will trade on. However if you must trade the now, higher oil should support NOK, CAD, ZAR, BRL and AUD.
Germany’s producer price inflation increases after six months of decline
After publication of disappointing consumption data in February, German economy shows signs of recovery in March, supported by an acceleration in March producer price index given at 1.90% on y/y basis (0.10% m/m) after a series of decrease during 6 months, suggesting an increase in demand from German consumer during the month. Along with an improving trade balance in February and stable inflation in March, the German economy is set to reinforce economic growth in 2018. Jointly backed by five statistical institutions, German economic forecasts are placed higher, as gross domestic product estimates are expected to accelerate at 2.20% in 2018 (initial estimates at 2%), thus supporting our optimistic view for the Euro region.
As soft economic data remain high for the month of April, with GfK consumer confidence and ZEW current conditions given at 10.90 and 87.90 (2 years averages at 10.30 and 75), we suspect the German economy to continue its acceleration, though at a slight lower pace compared to previous year.
Since EUR/USD currently trades at 1.2324 and remains neutral for the month of April, below the 1.24 threshold, we suspect the pair to continue to decrease until the end of the month, heading along the 1.2310 in the short-term
