RBNZ Blasts NZD Lower, USD Strength Broadening

 | Jul 24, 2014 03:25AM ET

There has been little activity in the major currencies overnight, with the EUR remaining weak, while the JPY remained resilient and the USD’s strength is broadening somewhat. The big mover overnight was the NZD, which plunged on the RBNZ’s guidance (more below).

The flash July HSBC Manufacturing PMI for China was out stronger than expected, suggesting that the recent Chinese stimulus is taking hold. This had AUD on the bid overnight, though a glance over at iron ore prices, for example, suggests grounds for caution on any durable AUD upside on this data point. AUD is getting overdone, though it won’t likely correct lower until this rabidly risk-on environment experiences headwinds. I would imagine that at some point out in the future, if we see an ugly sell-off in risky assets – besides EUR/EM pairs, EURAUD would be a massive gainer. For now, the market is content to sell the EUR hand over fist, however, and I remain sympathetic to the EURUSD downside view. The Reserve Bank of New Zealand lifted rates overnight by 25 basis points as expected, bringing the Official Cash Rate to 3.50 percent, but its guidance was very dovish relative to market expectations, as the bank clearly wants to shift to a more neutral stance: “It is prudent that there now be a period of assessment before interest rates adjust further towards a more neutral level.” There was also a very pointed mention of the overvalued NZD: “…the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.” Ouch. NZDUSD
A steep sell-off overnight in NZD is taking NZDUSD to the brink of a entirely breaking the back of the previous rally, as the 61.8 percent Fibonacci retracement at 0.8570 is under threat. Breaking through there could set up a test of the next supports down toward the 200-day moving average near 0.8450 and the previous 0.8400 area lows and usher in a structurally bearish outlook from here.