After a relentless run higher, NZDUSD has corrected from post-FOMC highs, and given the increased likelihood that the Fed will tighten before the RBNZ, the pair is likely to fall further in the near term.
It was an exceedingly quiet night in the forex market with most of the majors treading water in listless Asian and early-European trade. The commodity dollars, however, have been notably weaker as the correction off the post-Fed-announcement highs has continued.
The New Zealand dollar (NZD) was especially weak, as NZDUSD drifted toward the .8200 level, driven lower by the larger-than-expected trade deficit. New Zealand posted a deficit of -1191M versus -700M expected after both imports and exports missed their mark. Imports rose 4.52B versus 4.3B forecast while exports came in at 3.33B versus the 3.54B estimate.
The data puts new pressure on the Reserve Bank of New Zealand (RBNZ) to maintain interest rates at the present level, as any increase would only drive NZD higher and exacerbate the negative trade flows. The central bank finds itself in an untenable position of trying to control the growing housing bubble with one hand, while at the same time trying to lower the currency exchange rate in order to maintain the country's competitiveness.
Given the Fed’s decision to delay tapering, it is very unlikely that the RBNZ will make any tightening moves before the Fed actually begins to curb its own quantitative easing (QE) program. Therefore, NZDUSD is likely to correct further towards the .8100 level over the next few weeks, especially if US legislators come to an agreement on the budget issues and clear the way for the Fed to act later in the year.
Political Pressures Could Weigh on Euro
Meanwhile, in Europe, EURUSD caught a mild bid, rising to 1.3500 in morning dealing as traders were encouraged by the rebound in Italian consumer confidence. The gauge rose to 101.1 from 98.4 the month prior, breaking the 100.00 barrier for the first time in several years. Although the euro (EUR) continues to perform relatively well, the unit still faces stiff resistance ahead of the 1.3600 level.
European Central Bank (ECB) officials are clearly not pleased with the sudden rise in the exchange rate and have been trying to talk down the currency. More importantly, the German election results have yet to produce a ruling coalition government, and it appears that the Social Democratic Party (SPD) is driving a hard bargain with Chancellor Angela Merkel.
Merkel may now turn to the Greens for a possible partnership, but such an arrangement would be inherently less stable than a coalition between her Christian Democratic Union (CDU) and the Social Democrats.
If no deal can be negotiated, Germany may face the prospect of another election, which would no doubt create added uncertainty and put downward pressure on the euro.
2 US Dollar Catalysts for Today
In North America today, the market will get a look at US durable goods and new home sales, with consensus estimates looking for a rebound in both reports. An improvement from last month could boost the US dollar (USD) as traders begin to once again price in the prospects for Fed tapering.
If the numbers disappoint, however, the dollar could come under further selling pressure and EURUSD could test its recent highs at 1.3570.
By Boris Schlossberg of BK Asset Management