Risk off as melancholy mood engulfs financial markets

Daily Currency Update

The New Zealand dollar tracked lower through trade on Wednesday as a general sense of melancholy overwhelmed investors amid growing concerns sustained inflation and sluggish growth will derail the global economic recovery. Having failed to sustain a break above 0.65 US cents the NZD followed equities and other risk assets lower giving up US$0.6450 to mark intraday lows at uS$0.6435. Rising stagflation fears and a downturn in the domestic economic outlook coupled with renewed confidence the Fed will pursue an aggressive path to monetary policy normalisation have forced investors to take stock and unwind recent gains. While entering a relatively narrow handle when pared against the USD, the kiwi has enjoyed greater volatility against other major counterparts. The recent resurgence in global rates and subsequent JPY sell-off has allowed the NZD to extend beyond US$86.5 and eye a break above the April high near US$87. With the Bank of Japan stubbornly clingy to its accommodative monetary policy platform we see ample buying opportunities ahead. Conversely, having broken supports at US$0.9020 the NZD is poised for a significant downward correction against its antipodean counterpart. We highlighted yesterday the break below US$0.90, an extension in this move below supports at US$0.8960 could see the NZD slip toward 2017 lows below US$0.8880 AU cents.

With little of note on the local macroeconomic ticket, our attentions turn to a critical ECB policy update and US CPI data. Expectations the ECB will announce an end to QE and a plan to lift rates out of negative territory have matured in recent weeks as ECB officials signal an end to emergency policy settings. ECB policy change and guidance will prove key in shaping NZD/EUR expectations and broader EUR/USD moves, which could afford the NZD some scope to test a break back above 0.6530 US cents.