NZD strategy comment: FXWW

From the FXWW Chatroom – It has been somewhat confused price action in markets over the past couple of trading sessions. Correlations have broken down both between and within markets, which makes picking near term direction from here all that trickier. We’ve done the full round trip over the past week or so, with initial bond market weakness driving price action and an equity market sell-off, switching to the meltdown in equities then feeding back into stronger bond performance. And we saw a bit of both on Friday night. Right here and now it almost looks like these two markets are now in a stare-down, waiting for the other to blink, which perhaps explains the confused price action of late.

Whether or not this stand-off resolves itself this week remains to be seen, but there are certainly plenty of things on the horizon to keep a watch out for as Dan and Nate highlighted in their FX Strategy Week Ahead on Friday. Overall, we are still cautious and favour USD strength against ‘risk’ currencies.

In the US, the FOMC minutes will no doubt get some focus, as will the Philly Fed survey. We are also now right in the middle of US earnings season, which to me is likely to be a key factor in determining whether or not this equity rout has legs or not. If “e” holds up its end of the “pe” equation (and certainly the US growth figures have still be decent) then that could see bargain-hunters emerge.

The US Treasury’s report on Currency Manipulators is also due shortly. Could China been named a manipulator? Supposedly it won’t be. But if it is, it will be for political reasons, which is unlikely to be viewed favourably by markets.

The local data this week also has the potential to add to this confused picture. While today there is the BusinessNZ PSI, the main focus will clearly be on the Q3 CPI figures tomorrow and they are shaping as firm, both at the headline level and within the detail. We believe the RBNZ will look through any strength, as a decent part of it is due to transitory factors, and given the risk to the growth outlook, there is the potential for it to not be sustained. But whether markets (who importantly are still toying with the idea of rate cuts) will be as forgiving if core measures rose further (which looks entirely possible admittedly) is another question. That could drive some NZD outperformance, although given the overall jittery market backdrop, I’m still happy to be a seller on rallies.

View the latest market information in the FXWW Chatroom with a free trial.

Leave a Reply

Your email address will not be published.