The week got off to a rather staid start for most currencies, with Tokyo markets closed for Marine Day.
The NZD outperformed, as PM John Key helped shake out some of the weaker short positions.
NZD sat atop the G10 leaderboard, after PM John Key sparked something of a short-position squeeze amid light trading conditions.
Key stated that the NZD’s fall has been “further and faster” than expected. He also sounded more upbeat about the prospects for the local economy than many local analysts.
These comments, out of the PM’s weekly press conference, are rather innocuous, in our minds. That they sparked a near one-cent rally in NZD/USD says a great deal about how short the market is.
That said, we do not see many fundamental reasons to be optimistic on NZD’s prospects, and would be sellers on rallies.
We would look to get short NZD/USD above 0.66, with an eye on our year-end target of 0.62. While the market is indeed already bearish, we forecast the RBNZ’s policy rate to fall faster than the market currently expects.
We forecast a 2.50% OCR by October, while the market prices 2.55% by March 2016.
NZD/AUD saw a sharp reversal of fortunes from last week’s tumble, and is up by 0.9% on the day to 0.8920.
The 0.8750 level looks likely to put up a fight, but we still believe the cross will make fresh lows before long.
We see room for NZ swap rates to fall further, and AU short-end rates to rise modestly.
With rate differentials the key driver of this cross, we’d forecast NZD/AUD to decline to 0.86 by September.
There is very little to report from elsewhere in the world. In the commodities space, WTI crude oil is back below $50, after Iran’s oil minister stated the country will focus on regaining market share after sanctions are lifted.
In Europe, Greece repaid about €6.8b to the ECB and IMF, helping smooth the path to debt relief negotiations. The payment to the ECB was rather critical. If it had been missed, the ECB would have been forced to pull emergency funding to Greek banks, likely sealing a Greek exit from the euro-zone.
Many analysts are still pessimistic about the prospects of Greece remaining part of the single-currency bloc, but markets have relegated that issue to the back-burner, for now.
Another light data calendar today, with only the RBA’s July Minutes likely to garner much attention.
Our NAB colleagues expect these to be virtually unchanged from last month, and instead suggest focusing on the AU CPI report and RBA Governor Stevens’ speech tomorrow.
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Raiko Shareef is on the BNZ Research team. All its research is available here.