Kiwi

A summary of the weekly Commitment of Traders Report (COTS) from CFTC to show market positioning among large speculators.

As the US dollar took a bit of a breather on Wednesday after a prolonged, three-week rally, kiwi traders were positioning ahead of the Reserve Bank of New Zealand’s rate decision, monetary policy statement, and press conference, all scheduled for Thursday morning in Wellington (Wednesday evening in New York and London).

With the Federal Reserve decision and US monthly jobs report out of the way this past week, currency markets are looking next to two other key central banks that will be reporting their latest policy decisions in the week ahead – the Bank of England and the Reserve Bank of New Zealand.

The US dollar continued to rise broadly against other major currencies on Tuesday as higher expectations of Federal Reserve policy tightening helped to extend the dollar’s recent recovery from multi-year lows. The New Zealand dollar was just one of the many currencies that fell sharply to US dollar strength, extending the kiwi’s fall against the greenback in the wake of an inconclusive New Zealand general election that took place over this past weekend. The election saw no clear majority winner, which will prompt the eventual formation of a governing coalition and the uncertainty that comes with that. A key upcoming event this week that has the potential to impact NZD/USD further will be the Reserve Bank of New Zealand’s policy decision and rate statement scheduled for this Thursday in Wellington.

Amid the highly anticipated start of the Jackson Hole symposium on Thursday and speculation over key speeches to be delivered by Fed Chair Janet Yellen and ECB President Mario Draghi on Friday, the US dollar has remained relatively flat and in a tight trading range this week. One notable exception to this flatness has been the NZD/USD currency pair. Against the New Zealand dollar, the US dollar has extended its strength, pressuring NZD/USD down to a major support area around 0.7200 as of Thursday.

The past three months have generally seen a sharp rise for the NZD/USD currency pair, driven mostly by a heavily pressured US dollar that has fallen significantly against most of its major counterparts. Since the late-July peak above the key 0.7500 resistance level, however, NZD/USD has experienced a substantial pullback that was exacerbated last Friday when the US dollar finally found some relief on a much better-than-expected US jobs report. The latest culmination of this pullback has been a tentative breakdown on Tuesday below a key uptrend support line extending back to the early May lows.

For obvious reasons, the focus in the FX markets is on the dollar this week. Much has been said about it: if Clinton wins, this will happen and if Trump wins that will happen. The truth is, no one knows what will actually happen, though we can have a good idea about what may happen. Now if you are like me, you cannot wait for the elections to be over so that we can actually concentrate on the US economy again and not on politics. If you are like me, you also wouldn’t like to be heavily-exposed to the dollar in the run up to the elections. This is when some FX crosses come handy. One such pair is the NZD/JPY, though it is not entirely immune to US elections, for it is considered to be a risk-sensitive FX pair.

With the focus being almost entirely on the issue of Brexit and the pound this week – perhaps rightly so – traders should not lose sight of many other tradable opportunities that will present themselves in the interim. For example, the NZD/USD. The Kiwi has been climbing stealthily in recent weeks, due in part to a modest recovery in commodity prices. In addition, the RBNZ implicitly admitted at its June meeting that it is finding it increasingly difficult to loosen policy further when it once again warned of inflation in houses prices in Auckland being among its main financial stability concerns. Also boosting the NZD was last week’s release of Q1 GDP data, which came in surprisingly strong, at 0.7% q/q versus 0.5% expected and 0.9% in Q4.

The dollar remains the currency market’s standout performer for the second straight day, gaining value against each of its major rivals after this morning’s as-expected New Home Sales report. Despite consistent strength in the greenback each day this week, the world’s reserve currency is still down from its pre-Fed levels of last week, so it’s difficult to draw any conclusions about the sustainability of the current move, especially due to the lower liquidity pre-holiday conditions.