Continued US Dollar strength keeps Kiwi on the ropes

Prospect of continued US Dollar strength keeps Kiwi on the ropes.

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

The weekend’s gathering of global central bankers at Jackson Hole has reinforced the different challenges facing major economy’s at present, and endorsed the view of a stronger US Dollar. Fed Chair Janet Yellen acknowledges the improving unemployment rate, but remains cautions given the significant slack in the labour market, the low level of participation, high part-time workers and lack of pressure on wages. That said, her address on the weekend was less dovish than expected, and traders seized on her comment that rates may need to rise sooner than expected if the labour market recovers faster than anticipated. This has propelled the US Dollar to levels not seen in almost a year, continuing to keep the Kiwi under pressure.

In contrast, ECB President Mario Draghi’s speech confirmed the ECB stands prepared to respond with all its available tools should inflation drop further, suggesting QE style stimulus is increasingly likely. European equity markets have responded to this dovish address with rallies of close to 2% overnight. Not surprising then to see Euro gap below 1.3200 at yesterday’s open, with the Kiwi losing half a cent in turn. RBNZ intervention rumours seem unfounded, the Kiwis decline merely reflecting the trader assessment that US rate hikes are drawing nearer, and the US dollar has potential to appreciate further in this environment. This suggests Kiwi resistance will again be solid at 0.8400, with key medium-term support seen at 0.8260.

The level of the TWI will be of growing interest to the RBNZ, as we open this morning at 78.80. This is well below the 79.7 September projection detailed in the June MPS, and also below the 79.0 December projection. The MPS for September will be a balancing act, as the RBNZ weigh last week’s large PPI declines, falling RBNZ inflation expectations and weaker dairy prices with the inflationary impact of increasing demand pressures from surging immigration and now a weaker exchange rate. The NZD/AUD cross has broken below the psychological 0.9000 level, but now faces major support at 0.8930. This was a key level of resistance throughout the Aug – Nov period last year, and should provide solid support now, with the downside move in this cross looking accentuated at present.

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