Yield attraction will continue to support the Kiwi

Yield attraction will continue to support the Kiwi.

By Garry Dean (Sales Trader, CMC Markets New Zealand)

The hawkish tone of last week’s RBNZ Monetary Policy Statement surprised a number of market analysts, and resulted in an explosive rally in the Kiwi to 0.8700. To varying degrees, most analysts were expecting the forecast track of the 90-day bank bill rate to reflect a decrease in the number of OCR increases going forward, but the bank’s profile remained largely unchanged from March. Much has been made of the collapse in dairy prices over the past four months, and with Governor Wheeler addressing the disparity between the elevated Kiwi and falling commodity prices in a speech in early May, there was a belief by some that he may pause rate hikes after June to take some heat out of the Kiwi. However, with immigration numbers surging, the Bank highlighted the pressures this is placing on sectors of the economy, and considered it appropriate for rates to move to a more neutral level. They did note that economic data going forward would be taken into consideration when assessing monetary conditions, and they even introduced a range of fan charts to simulate forecasts under different scenarios.

With interest rates globally at historic lows, it wasn’t surprising to see offshore retail investors in search of yield driving the Kiwi higher. A sharp increase in offshore retail investment has been seen in the Aussie recently, with the recent stimulus measures from the ECB fuelling the move even further, and this has flowed through to the Kiwi in turn. The medium-term risk for the currency remains to the topside, with resistance seen initially at 0.8745, before 0.8780 – the highs reached before the RBNZ threatened intervention on the 6th May. Support is seen on any short term retracement to 0.8645.

It’s hard to see just what will take the heat out of the Kiwi at present. News of escalating conflicts in Iraq and Ukraine have caused a spike in oil prices, and lifted gold prices, but there hasn’t been the normal risk aversion move in the Kiwi that would normally be associated with these increasing tensions. With central banks globally increasing their investments in equity markets, we have seen the US markets continue to consolidate just below all-time highs, with the VIX Index of Volatility remaining near historically low levels. The US FOMC meeting on Wednesday night is the key event for the week, with the market largely expecting a further $10 bio taper to the FED’s bond purchase programme. There has been a growing belief that some FOMC Members may be contemplating the prospect of bringing forward the timing of interest rate increases, and any confirmation of this would strengthen the USD, thus counteracting the strength of the Kiwi. Bank of England Governor Carney has indicated that rates there will likely increase sooner than the market had expected, and this has seen the GBP trade to near 5-year highs on Monday night. A move toward a less stimulatory monetary stance from these central banks would be an important step in limiting the rise of the Kiwi, but for the moment it remains well supported, and further upside is favoured.

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