Saxo Bank | Dec 03, 2013 10:31AM ET
As the USD index refuses to do anything directional, it’s worth noting that all of the G10 currency trading action lately, both in terms of trading ranges and trends, has been in the JPY crosses and the commodity dollars versus the European majors, especially GBP. The commodity dollars in particular are at relative extremes versus one another and versus the broader market as we scratch around for what is driving the action here.
New Zealand dollar
The story here is rather simple — it’s the hottest economy among the AA or better-rated countries in terms of growth and the prospects of the central bank removing accommodation. The market is enthusiastically piling into the kiwi carry trade, lately probably funding it with JPY, but perhaps also in US dollars and even Canadian dollars (as the Bank of Canada has kept rate hike expectations at nil lately). Still, it is interesting that the little commodity dollar that could has been able to rally strongly on a day when European equities are having their weakest day in recent memory. It will likely take a combination of weaker numbers from New Zealand or an ugly continuation of today’s risk-off move to derail this currency’s strength — that and/or a stronger message from the Fed on a tapering of asset purchases, which tends to put a pinch on the less liquid currencies. The kiwi is overvalued and its housing bubble will eventually end in an eventual hangover, but its momentum remains impressive until proven otherwise.
Chart: AUDNZD
The path of the kiwi and the Aussie have diverged to an impressive degree this year. There may not be much more to eke out of this trend from a valuation perspective (the 1.0500 area has been the bottom of the range a number of times since the 1980's). Also, if risk goes from the “wildly on” of late to decidedly off, the kiwi is one of the least liquid currencies in the G10 and would likely correct from extreme strength to extreme weakness as it should be one of the highest beta currencies in such circumstances.
Chart: USDCAD
A major break for this pair, though one that needs to survive the Bank of Canada meeting tomorrow and the key US data through the end of the week for better confirmation of its validity.
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