Chinese Yuan to be included in SDR reserve currency basket; easier monetary policy and low volatility environment helping NZD & AUD climb

By Raiko Shareef

NZD is back near resistance at 0.66, at the top of a G10 leader-board in which high-yielding currencies have outperformed. EUR sunk to fresh seven-month lows.

The broad rally in high-yielding currencies seems to have been sparked by a sharp gain in CNH. This comes after the CNH-CNY spread blew past 600pts on Friday and early yesterday morning. 

As an aside, the IMF formally announced that the CNY would become part of the SDR reserve currency basket in October 2016, with a weight of 10.9%. That was very much in line with market expectations, and there was little discernible reaction.

NZD was a key beneficiary, along with AUD, of the move higher in high-yielders. We also suspect that the prospect of an expanded easy-money policy (via the ECB), combined with low volatility, has contributed to NZD’s outperformance.

NZD/USD flirted with another test of the 0.6600 level, but that remains strongly resistant. We still favour selling NZD/USD rallies.

The gain in AUD comes despite another shunt lower in iron ore prices, which fell 3.4% to $42.97, a fresh cycle low. Iron ore has been less of an influence on AUD than broader metals indices or oil prices, but we are wary this could start to gain more attention.

In Japan, Governor Kuroda delivered a speech, in which he warned that the Bank of Japan had no intention to wait until the April wage negotiation rounds, if it felt the need to ease policy further. Our working assumption is that the BoJ will hold (easing) fire until after the Fed decision this month. But these latest comments have us more wary about a near-term policy move.

There is a lot happening in our local session, including the NZ Q3 terms of trade, but the highlight will likely be the two China PMI releases.

Tonight, the US ISM survey will be closely watched, while the dairy auction is expected to show a small gain in prices.


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Daily exchange rates

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Raiko Shareef is on the BNZ Research team. All its research is available here.