Saxo Bank | Apr 24, 2014 06:06AM ET
The reserve Bank of New Zealand (RBNZ) hiked rates as anticipated and this boosted the Kiwi across the board. The statement saw the RBNZ leaning a bit against the strong Kiwi by suggesting it could affect the path of inflation (and by inference the potential for hike rates down the line) – though most of the comments on higher inflation were related to “construction and non-tradable sectors”. The market’s forward projection of the RBNZ rate path, has another 84 basis points of hikes priced in out to twelve months, according to a Credit Suisse index. The statement also said that “the Bank does not believe the current level of the exchange rate is sustainable.” Nor do I, though the timing of the currency’s decline remains the critical unknown – the first step would be a move back below the 0.8550 level in NZDUSD. The RBNZ statement notes that dairy prices have fallen 20 percent in recent months. Milk is New Zealand’s largest export product, with the vast majority (over 90 percent) of the milk exported, so prices have a dramatic impact on the country’s terms of trade and another fall of equal magnitude that brings milk back in line with historical price ranges would alter the fundamental picture for New Zealand considerably. The main risk for the Kiwi in the short term, however, would be weak risk appetite. The European Central Bank's Ewald Nowotny rejected the notion that deflation is an outstanding danger for the Eurozone and said that “there is no need for the ECB to act”. He pointed to the June meeting as the possible time for ECB action if the Eurozone sees clear signs of a strengthening in falling inflation trends. General Electric is negotiating to purchase Alstom SA, a French company, in a deal that could be worth USD 13 billion. The exchange rate implications are modest at best for the super-major EURUSD pair. Trading levels: EURUSD – waiting for a directional sign – preferring downside, but no technical indicator on the direction of a potential break. 1.3780 piques the interest and 1.3750 is a bigger break level. GBPUSD — a bit of a bearish reversal yesterday, though with compressed ranges, not compelling enough until we work through 1.6775. AUDUSD – need follow through lower after the 0.9300 break yesterday. Reversal scenario if we trade back above 0.9325 USDJPY – JPY crosses are a bit more in play, with yesterday’s reversals in some of the crosses a bit bearish, though nothing conclusive. Things are generally too quiet, and I suspect that means the downside risks (stronger JPY) outweighs the upside risk in the near term. Note that US president Barack Obama is in Japan through tomorrow. Chart: EURJPY A weak IFO survey today could hit EURJPY harder than EURUSD if we see a bit more risk off today. In any case, the technical situation demand resolution soon after this long bout within the range. Looking lower, the 140.00 level is critical, not only defining the bottom of the recent range, but also the bottom of the Ichimoku daily cloud, which the pair has re-entered today after trying once again yesterday to close above.
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