Tuesday, October 28, 2014

NZ dollar (Kiwi) is back in focus | US dollar sentiment is strong

Tomorrow (Wednesday) will bring the monthly interest rate decision and monetary policy statement from the Reserve Bank of New Zealand (RBNZ). Since the start of the month, as seen on the daily chart above, the Kiwi has been resilient, grinding its way up from the low established at the end of last month.

Graeme Wheeler and his colleagues at the NZ central bank will not like that. Mr. Wheeler has proved adept at talking down (jawboning) the NZ unit to lower levels, as he believes it is far too high for the good of the domestic economy. While talking down the currency is subject to the law of diminishing returns, as central bankers everywhere from Switzerland to Australia have discovered, the NZ central bank has proved itself well able to enter the market and spend from its reserves in order to depress the currency. There is no reason that they will not repeat both measures, jawboning and intervention, this time round. It is also possible that they will announce that interest rates rises have stopped for the foreseeable future. All this would be calculated to cause the downtrend in NZDUSD to resume.

US dollar sentiment is strong

The two-day Federal Open Market Committee meeting in the USA begins later today and tomorrow we will have an announcement on interest rates and policy. This is widely expected to include the formal end of Quantitative Easing (QE) in the US. In anticipation of this the US dollar has been strengthening against all its major counterparts.

The EURUSD pair got a small lift yesterday, on the back of relief that the bank stress tests passed off with such relative ease (apart from Italian institutions). However, the tendency of the Single Currency against the greenback is resolutely to the downside, with some commentators, notably Goldman Sachs, forecasting significant decline. Using Elliot Wave analysis on the US dollar index, and projecting the findings to the Single Currency, they see the possibility that EURUSD will be just above1.20 in the not-too-distant future. It is now at 1.27.

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