Tuesday, May 6, 2014

New Zealand Central Bank attempts to talk down the currency | US dollar hit by falling bond yields

They tried it in the Eurozone, they tried it in Switzerland and they tried it in Australia. So now they are at it in New Zealand. We refer to the practice of central bankers attempting to talk down their currencies, an activity known as “jawboning” Down Under. A press release from the Reserve Bank of New Zealand (RBNZ) has the governor, Graeme Wheeler, making the following pronouncement, among other things:

“The Reserve Bank considers that the exchange rate is overvalued and does not believe its current level is sustainable. Our exchange rate could be expected to weaken if one or more of the following occurs: the US economy continues to improve; global dairy prices continue to come off their recent highs; China’s growth slows; financial market volatility begins to rise; or there is a global ‘risk off’ event such as a correction in global equity prices.”

Mr. Wheeler certainly ticked all the boxes there, and there was at least a short term reaction. The chart above of the Aussie against the Kiwi indicates a fairly sharp retrace in what is still a downward trend. His problem has to be that in all the other cases where words alone were used in an attempt to rein in currency appreciation, the market took the view that that would not be enough. Appropriate action, such as easing interest rates or intervening in the market, which last Mr. Wheeler also threatens to do in his comments in the press release, is the only thing that seems to work in the long-term. But you've got to DO it.

We have a position in the AUDNZD pair. The good news is that we locked in profit by taking off half the position just before said retrace, and moved the Stop Loss to breakeven. So we now have profit in the bank and a free trade on the rest, no matter what transpires.

US dollar hit by falling bond yields

In the absence of meaningful core interest rates in the USA, the currency tends to move in alignment with the yield on government bonds, which are a proxy for interest rates.

Technical Analysis is just as valid for bond yields as it is for equities, currencies or anything else. The chart above shows that the yield on the 10 year Treasury bond is attempting to break through support, having formed a notable pin bar a few days ago. This could be an indication that it is about to break out to the downside, in which case the US dollar will follow suit across the board, i.e., it will be expected to weaken further against all its major counterparts.

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