Currency Market Analysis

Global Themes

NZD

Rampant Kiwi hits 4 month highs

US Dollar Index hits lowest level in 3 years.

The USD Index took a further clubbing overnight, driving the NZD to fresh 4 month highs. Importers took a snatch and grab approach on orders around the 0.73 handle, a level which proved short-lived, although upside momentum remains strong for those that missed the rally. Reports that traders are heavily shorting the USD, amidst concerns around whether the Federal Reserve will actually follow through with rate hikes on the back of improving inflation data, are driving the dollar lower.

At present market pricing and Fed rate hike predictions are not aligned. With the ECB, Bank of England and Bank of Japan recently removing monetary stimulus some commentators believe that 2018 could see more monetary policy convergence than divergence, which may weigh on the USD. Nevertheless there is every chance that the recent weakness will be short lived, and that forecast interest rate differentials will become a reality, leading NZD/USD back to its pre-Christmas levels in due course.

Stock market volatility index edges up

Amidst all time highs comes the first signs investors are nervous.

The VIX (Volatility Index) is beginning to edge up in stock markets, and subsequently in currency markets. While the S&P 500 is up 5% already this year, the VIX has risen 15%, perhaps a sign that investors are starting to get nervous about how much longer this heady equities rally can last.

The NZD/USD has been a significant benefactor of the clear risk preference in markets lately, and after a 7% rally sits broadly at the top of value indicator charts. Importers get an opportunity to hedge a percentage of their longer term exposure today to reduce their risk against budgeted pricing for 2018.

Global dairy trade auction pivotal tonight

Can a positive result add to the Kiwi's momentum?

Tonight's Global Dairy Trade auction results could decide whether the current rally extends or starts to form a top. The NZD/USD has surged 7% in the last 6 weeks, aided by a 2.2% improvement in dairy prices at the first auction for 2018 on January 2. With commodity prices showing solid improvement across the board lately can dairy help Kiwi higher or will a poor number trigger a reversal point?