Article / 10 August 2017 at 8:27 GMT

FX Update: RBNZ touts intervention risk, North Korea risks weigh

Head of FX Strategy / Saxo Bank
  • Markets tried to shrug off heated exchange of words between US and North Korea
  • RBNZ said it wants a lower NZD for balanced growth
  • NZD sold off after the market got the RBNZ's hint
  • NZDUSD looks structurally capped after selloff, AUDNZD could aim for 1.10-1.1300
RBNZ Governor Graeme Wheeler
 The markets did not immediately comprehend the RBNZ's statement, so the bank made 
it explicit that it wants a lower NZD for a balanced economy. Photo: RBNZ webcast

By John J Hardy

The Reserve Bank of New Zealand apparently wasn’t happy that the market mis-read its statement, specifically the new language in the monetary policy statement indicating that the RBNZ not only wants a lower NZD, but could make it weaker: “A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.”

RBNZ assistant governor McDermott specifically indicated that the new phrase is intended as “a little nudge” to markets, signaling the bank’s unease with current levels and a first step toward intervention. Alas, the market got the message after being pounded over the head with it, and the kiwi adjusted sharply lower after an initial shoulder-shrug on the earlier release of the statement and Governor Wheeler's press conference. NZDUSD looks structurally capped after this latest selloff, and AUDNZD could gun for the 1.10-1.1300 range in the weeks ahead. 

Equity markets tried to rebound from the selloff inspired by the heated exchange between North Korea and the US, a fairly miraculous achievement given the seriousness of the situation. The exchanges have remained heated overnight as South Korea warned North Korea on missile launches and North Korea made threats of a nuclear attack on Guam, a US Pacific territory. Risk appetite did crumble a bit again overnight, with JPY crosses well off their highs.

We firmly believe in a helmets-on stance until the North Korea situation has cleared. Meanwhile, US inflation data tomorrow could extend the USD rally a bit on an upside surprise and the run-up to European Central Bank president Mario Draghi's speech at Jackson Hole, Wyoming later this month is the next step for the euro.


The kiwi weakened forcefully on the RBNZ's explicit warning on intervention, and AUDNZD has bulled back to the 1.0850 pivot point and could progress toward 1.1000 and even higher into the range stretching to the massive 1.1300 area that goes back years.
Source: Saxo Bank
The G-10 rundown

USD – the greenback has firmed across the board, except against the even stronger JPY, a pattern that will likely continue as long as market participants are running for cover and squaring portfolio positions in contemplating the risks of a hot war on the Korean peninsula.

EUR – a reasonable further consolidation on risk-off sentiment and fears of a dovish Draghi broadside could lead to at least 1.1600 in EURUSD, and the trend is not really challenged until we work down through 1.1500-1.1450.

JPY – the yen will remain the currency most correlated with risk-on/risk-off behaviour, with significant risk of accelerated range expansion if geopolitical events enter a crisis phase, given the build-up of positioning and complacency in recent months.

GBP – sterling is weakening again and looking wan versus the USD as 1.3000+ is serving as a tactical ceiling now in GBPUSD. The chart points lower ahead of important data today, including manufacturing production for June and the trade balance, where the deficit may finally be stabilising.

CHF – the Swiss franc joins the JPY as another barometer of risk-on/risk-off tendencies here – a bit of a shame since it would have been interesting to see the potential for a run to 1.2000 in EURCHF without the geopolitical distractions. Let’s keep an eye on whether the North Korea situation has any implications for the weekly Swiss National Bank sight deposit data.

AUD – firmness in the Aussie is likely linked to AUDNZD buying interest, and that pair is running up into the interesting 1.0850 pivot point here, with potential for a run to at least 1.1000 on a break. Elsewhere, AUD may be susceptible to modest weakness.

CAD – strong oil prices and strong Canadian housing starts data ignored as position squaring remains a threat as long as risk appetite wobbly. Technically, the rally runs into more serious resistance in the 1.2900-1.3000 zone.

NZD – explicit hat-tip on intervention guts the kiwi, and the aftershocks could be felt for quite some time as it would seem foolhardy to test the credible RBNZ threat to cap the exchange rate.

SEK – in hibernation until the other side of August, it would seem. We still like EURSEK lower, but risk-off sentiment is not particularly helpful for that proposition.

NOK – the krone is getting a modest boost from the Norway July headline and core CPI upside surprise overnight, but the rate outlook is moribund despite oil prices at the high end of the range, so the situation seems to lack a spark to motivate a EURNOK selloff.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0830 – UK June Manufacturing Production 
  • 0830 – UK June Visible Trade Balance 
  • 1230 – Canada June New Housing Price 
  • 1230 – US Weekly Initial Jobless Claims 
  • 1230 – US July PPI 
  • 1400 – US Fed’s Dudley to speak on wage inequality 
  • 1800 – Mexico Ovenright Rate 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank
11 August
Patto Patto
Astute comments on NZDUSD. The market reaction was in line with what your fellow contributor Max MacKegg predicted in his preview earlier in the week...........The upcoming election (Sept 23) is the next big test for the Kiwi (but, of course, markets will react ahead of time depending on poll results.)


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