EURNZD: how quickly things can change

June 5, 2015

It’s a quiet final session for the week in Asia, although the kiwi has been able to claw back some lost ground against the euro and US dollar. Though today’s messily gains for the commodity currency haven’t made much of dent in EURNZD’s massive six-week rally. Since the 22nd of April, which is when the RBNZ sparked a large sell-off in the kiwi, EURNZD has risen over 11%, which is a lot in the FX world. In fact, at its highest point the rally was around 2,000 pips, undoing most of the pair’s weakness in late 2014 and early 2015.

A brief history of recent NZD weakness and why next week’s policy meeting at the RBNZ is so important

The thing that really sparked the kiwi’s recent slide was the notion that the RBNZ may be looking to cut interest rates. This was brought to the forefront of investor sentiment by RBNZ Assistant Governor McDermott when he stated that the bank isn’t considering hiking interest rates at this stage and weaker demand and inflation would prompt rate-cut talk. This was followed by a string of softer than expected economic indicators from NZ and a more dovish stance from the RBNZ, increasing the likelihood that the RBNZ will move to lower the official cash rate.

The RBNZ’s next policy meeting is next Thursday and the market is split on whether the bank will move to loosen monetary policy. Current pricing in the OIS market indicates that there’s around a 45% chance that the official cash rate in NZ will be lowered by 25 basis points, up from a 15% chance at the beginning of May – the bank’s last policy meeting was on April 30. According to a recent survey from Bloomberg, 6 of 14 economists surveyed expected the RBNZ to lower the cash rate next week and nine of those same economists expected the bank to lower the OCR to 3% by year end, from 3.50% presently. This is a big weight for the NZ dollar to carry, considering it wasn’t too long ago that the RBNZ was hiking interest rates.

The EUR’s redemption

All of a sudden the situation in Europe isn’t looking so dire. There’s been rebound in sentiment regarding the possibility of a Grexit and, more importantly, a steady recovery in the eurozone’s inflation outlook. The latter has been represented by a rebound in German bund yields recently and is the main factor pushing the euro higher as the market’s expectations for the duration of ECB QE is tightened.

EURNZD

The outlook of EURNZD is heavily dependent on the factors that have underpinned this latest rally; the possibility of looser momentary policy in NZ and an improving inflation outlook in the eurozone. On the upside, we’re keeping a close eye on 1.6000 and then 1.6200, both of which are important long-term resistance zones for the pair. However, there are some technical indicators that suggest price may be due for a correction in the medium-term, in which case there’s a lot of room for further downside towards 1.54/55.

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