The New Zealand Dollar has been a leader in the recent swing higher in risk sentiment, and with traders becoming more bullish amid a shift in central bank policy, the carry currency looks poised to outperform going forward.
On Wednesday, the Reserve Bank of New Zealand suggested that it would hike its main interest rate in 2014, a clear sign that economic growth has simply become too fast-paced and the benefits of looser monetary policy – a weaker currency that would help exporters’ sell their goods to foreign consumers – no longer keeping rates at their post-2008 lows.
In fact, a look at the Credit Suisse Overnight Index Swaps shows that traders are now pricing in +97.0-bps into the New Zealand Dollar over the next 12-months. This is the most bullish bet since the first week of August 2011, before the US lost its ‘AAA’ rating with Standard & Poor’s, and before the NZDUSD plummeted from an all-time of $0.8843 on August 1 to as low as 0.7966 on August 9 (-9.92% in seven trading days).
At this point in time, near-term weakness seen in the New Zealand Dollar is likely to have two causes: exogenous anxiety due to emerging market growth concerns; and technical selling as profit is taken amid overbought conditions. Today, amid key US economic data – the August Advance Retail Sales report – there is a chance for a strong reaction at a critical juncture for the NZDUSD (see the chart below).
NZDUSD 5-minute Chart: September 13, 2013 Intraday
Taking a look at European credit, slightly weak bonds have emerged, though peripheral countries remain subdued. The Italian 2-year note yield has decreased to 2.019% (-0.4-bps) while the Spanish 2-year note yield has increased to 1.692% (+0.8-bps). Conversely, the Italian 10-year note yield has increased to 4.533% (+0.9-bps) while the Spanish 10-year note yield has decreased to 4.438% (-1.4-bps); higher yields imply lower prices.
ECONOMIC CALENDAR – UPCOMING NORTH AMERICAN SESSION
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— Written by Christopher Vecchio, Currency Analyst