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Article / 23 August 2016 at 7:50 GMT

FX Update: USD wilts anew — RBNZ’s Wheeler surrenders to NZD strength

Head of FX Strategy / Saxo Bank
  • Dollar wilting ahead of Janet Yellen's speech at Jackson Hole Friday
  • GBPUSD pushes towards 1.3200 after big housing stimulus unveiled
  • NZDUSD heads higher after RBNZ chief Wheeler sits on his hands


Plans for invigorating UK housing stock helped boost GBP. Photo: iStock

By John J Hardy

A story on imminent UK government plans for a large-scale housing stimulus to alleviate the UK housing shortage and give impetus to the economy Monday received considerable attention and appears to have provided the boost to sterling that took GBPUSD to the key resistance ahead of 1.3200 and took EURGBP to the 0.8600 support area. 

The Reserve Bank of New Zealand’s Graeme Wheeler spoke overnight and his comments represent a white flag in the face of the global reach for yield. He expressed a reluctance to move aggressively with inappropriately low rates to stem the risks of a stronger currency due to the risks that this creates for the domestic economy.

“An aggressive monetary policy that is seen as exacerbating imbalances in the economy would not be regarded as sustainable and would not generate the exchange rate relief being sought.” He also spoke relatively positively on the economy, especially relative to the last RBNZ statement, and the boost to the kiwi was immediate and sizeable as it plays straight into the global reach for yield theme. Once the hunt for bps is reversed (could the Jackson Hole speech from Yellen serve as a trigger?) kiwi will weaken sharply.

Today, the focus shifts to the flash Eurozone manufacturing and services PMI, but the big event on the horizon is Federal Reserve chair Janet Yellen’s speech at Jackson Hole on Friday, with directional moves ahead of that event difficult to trust.

NZDUSD higher

The pressure higher continues here, though we wouldn’t trust a break higher until validated by the USD situation post-Yellen’s speech on Friday.

How much can we trust this NZDUSD break higher?
Source: SaxoTraderGO
The G-10 rundown

USD: The greenback is wilting once again as Friday’s key speech from Janet Yellen approaches. See our thoughts on this today. The focus is on recent Fed speeches suggesting the longer run natural interest rate is far lower (Williams and Fischer), though a couple of Fed officials have mentioned the need for raising rates soon.

EUR: very neutral relative to other developments – waiting for today’s flash PMIs as a measure of economic strength. The next technical test for EURUSD not far away in the 1.1400/25 area.

JPY: USDJPY pushing on 100.00, mostly on broad USD weakness. The key test there is Friday’s Fed speech and the market’s assessment of the Bank of Japan policy adjustment potential September 21.

GBP: Boosted on the property investment story, but this is fairly thin gruel and it may be more about positioning and stop levels around key resistance in major GBP pairs for the moment until we get the next round of important data over the next two weeks.

AUD: the global reach for yield keeping the AUD from breaking down, though headwinds cropping up lately in the softer commodity prices, and AUDUSD is bogged down in the range, though it did avoid a breakdown through the important 0.7600 area – Friday’s Yellen speech the key trigger one way or another there.

CAD: USDCAD has bounced solidly, but 1.3000 looks like the bigger swing level for a test of the range highs. Dip in oil prices providing a boost for CAD bears.

NZD: the poster child currency of the reach for yield and Wheeler’s comments overnight aggravate recent strength. There may be further upside if NZDUSD can clear the heavily trafficked 0.7300/50 zone after Yellen on Friday, but in the very long term, the kiwi is spectacularly overvalued and will turn south when the global yield reach reverses.

SEK: No yield to reach for here, so SEK a neglected currency – next minor data catalysts for Sweden up on Thursday.

NOK: EURNOK creeping higher and has more or less lost the downside momentum as oil prices slide here. Technical interest for NOK receding fast.

Upcoming economic calendar highlights (all times GMT)

  • 0800 – Eurozone Aug. Preliminary Manufacturing/Services PMI 
  • 1000 – UK Aug. CBI Trends in Total Orders and Selling Prices 
  • 1100 – Turkey Central Bank Decision 
  • 1200 – Hungary Central Bank Decision 
  • 1400 – US Aug. Richmond Fed Manufacturing Index 
  • 1400 – US Jul. New Home Sales  
  • 2245 – New Zealand Jul. Trade Balance  

— Edited by Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank


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