EUR Funding Helps Kiwi Sentiment

Finally, something to keep the markets interested – the World Cup kicks off later today. This month long event in Brazil could not come soon enough for many, as it’s sure to be a lot more interesting than watching how capital markets have been performing under the scrutiny of central banks during their lower-for-longer rate campaign.

Slowly but surely, the European Central Bank (ECB) is finally getting its way in its bid to force the single currency lower. After last week’s ECB announcements to tackle both deflation and growth concerns, there is only one way out for the single unit and that is lower. But for investors, cashing out requires patience and good timing when to initiate that trade.

During the past few sessions, the market has been waiting to sell the EUR bounce both outright and on the crosses. It has not materialized and it has required the more aggressive speculator to step in front and force the fact. All this week the EUR has looked heavy, with its downward trajectory slowed by a number of large option strikes coming off. However, we are finally here, threatening the EUR’s outright lows (€1.3505) last visited immediately after the ECB rate cuts last week. Most of the EUR weakness has been cross-driven against commodity-related currencies and high-yielders. The divergence in Group of 10 monetary policies, especially within Europe, is the dominant driving force of these currency moves.

RBNZ Says Expect More Tightening

Already this morning, the EUR has managed to tumble to a 13-month low against the kiwi dollar (€1.5575), after Governor Graeme Wheeler at the Reserve Bank of New Zealand (RBNZ) raised interest rates +25bps to +3.25% for the third time this year, emphasizing the expanding rift between the 18-member single unit and high-yielding currencies. The RBNZ’s rate hike was not a surprise to the market; it was the lack of any ‘dovish’ rhetoric accompanying it that surprised. Traders were expecting a possible signal for a pause from the RBNZ because of slowing dairy prices and persistent strength in the NZD. However, the kiwi dollar continues to register gains after the RBNZ projections affirmed the 90-day bank bill rate at +4%, potentially signaling two more rate hikes this year starting next month.

Fanning the flames was RBNZ Assistant Governor John McDermott stating that its July rate decision would be data-driven and he added that the bank expects to hike rates another +50bps this year. He indicated that a rate pause would be counter-productive. The market speculating a pause was flattening the kiwi yield-curve. In a passing shot on the current strength of the currency, the central bank indicated that the NZD should fall if people were pricing it correctly. The RBNZ actions and hawkish statement has certainly flatfooted the market that had expected long NZD profit-taking to occur. Some individuals wanted to close out short positions expecting a dovish statement, while others were looking to book profits. There has only been one winner and that’s the kiwi ‘longs.’

ECB Cuts Lay the Euro Low

The ECB’s rate cuts mean the EUR has been increasingly cheap to borrow and sell in favor of high-yielding currencies. With EUR rates trading through the Japanese curve, it elevates the EUR to be the primary funding currency. For example, it has dropped -1.5% to the NOK (€8.1121), while the PLN (Polish zloty) now trades at a new 12-month high (€4.1059). With increased low-market volatility and rate divergence continuing to promote the carry trade, and with this overnight shift in kiwi rate sentiment, dealers can expect the NZD to remain a better bid against the EUR, JPY, and AUD. For the single currency, the scope is for further losses through €1.3503 and beyond January’s low of €1.3473. Persistent trading sub-€1.3559 weighs heavily on spot and will vindicate the technical bear. The market continues to see a plethora of EUR hopeful sellers on top – some resigned to missing the boat while others becoming impatient to the point of not participating.

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Is The EUR Bear Getting Impatient?

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