By Dean Popplewell
Finally, something to keep the markets interested – the World Cup kicks off later today. This month long event in Brazil could not come soon enough for many, as it's sure to be a lot more interesting than watching how capital markets have been performing under the scrutiny of central banks during their "lower for longer" rate campaign.
Very slowly but surely, the ECB is finally getting its way, forcing the single currency lower. After last week's ECB announcements to tackle both deflation and growth concerns, there is only one way out for the single unit and that is lower. But for investors, cashing out requires patience and good timing when to initiate that trade.
During the past few sessions, the market has been waiting to sell the EUR bounce both outright and on the crosses. It has not really materialized and it has required the more aggressive speculator to step in front and force the fact. All this week the EUR has looked heavy, with its downward trajectory slowed by a number of large option strikes coming off. However, we are finally here, threatening the EUR's outright lows (€1.3505) last visited immediately after the ECB rate cuts last week. Most of the EUR weakness has been cross-driven against commodity-related currencies and high-yielders. The divergence in G10 monetary policy, especially within Europe, is the dominant driving force of these currencies' moves.
Already this morning, the EUR has managed to tumble to a 13-month low against the Kiwi dollar (€1.5575), after Governor Wheeler at the RBNZ raised interest rates +25bps to +3.25% for the third time this year, emphasizing the expanding rift between the 18-member single unit and high-yielding currencies. The Kiwi hike was not a surprise to the market; it was the missing anticipated "dovish" rhetoric to accompany the hike that was the surprise. Traders were anticipating a possible signal for a pause from the RBNZ due to slowing dairy prices and persistent strength in the NZD. However, the Kiwi dollar continues to register gains after the RBNZ projections affirmed Dec.-end 90-day bill rate at +4%, potentially signaling another "two" rate hikes this year – starting with next month.
Fanning the flames was the RBNZ Assistant Governor McDermott stating that its July rate decision would be data driven and added that they are expected to hike rates another +50bps this year. He indicated that a rate pause would be counter-productive. The market speculating a pause was flattening the Kiwi yield-curve. In a passing shot on the current strength of their currency, the central bank indicated that the NZD should fall if people were pricing it correctly. The RBNZ actions and hawkish statement has certainly flatfooted the market that had expected long NZD profit taking to occur; some individuals wanted to close out short positions expecting a dovish statement, while others were looking to book profits. There has only been one winner and that's the Kiwi "longs."
The ECB's rate cutting means that the EUR has been increasingly cheap to borrow and sell in favor of high yielding currencies. EUR rates now trading through the Japanese curve elevates the EUR to be the primary funding currency. For example, it has dropped -1.5% to the NOK (€8.1121), while the PLN (Polish Zloty) now trades at a new 12-month high (€4.1059). Increased low market volatility and rate divergence should continue to promote the "carry" trade and with this overnight shift in Kiwi rate sentiment, dealers can expect the NZD to remain better bid against the EUR, JPY, AUD for starters. For the single currency, the scope is for further losses through €1.3503 and beyond January's low €1.3473. Persistent trading sub-€1.3559 weighs heavily on spot and will vindicate the technical bear. The market continues to see a plethora of EUR hopeful sellers on top – some resigned to missing the boat while others becoming impatient to not participating.