Kiwi trades to six-week high despite geopolitical risks

Kiwi trades to six-week high despite growing geopolitical risks.

By Garry Dean (Sales Trader, CMC Markets New Zealand)

The week started with a bang for the Kiwi, with the release of data showing annual migration for the year through May of 36,400 – the highest level in more than a decade, and well above the levels forecast by the Reserve Bank. The demand pressures created by this surging immigration was the key factor behind the OCR increase earlier this month, and yesterday’s data underpinned the currency, with heightened expectations of a further 25pt OCR increase in July. A strong Chinese Manufacturing PMI reading yesterday afternoon lifted the Kiwi further, with six-week highs of 0.8750 seen in Asian trading.

Kiwi remains well supported on the back of the hawkish tone of the RBNZ, but it received a further boost last week from the dovish tones of the US Federal Reserve. The FED chose to look through an upward spike in inflation, and while nudging the Fed Funds Rate forecast for 2015 and 2016 up, they lowered the forecast rate further out. This is seen to be increasing the FED’s accommodative stance, and has seen the USD Index weaken to one month lows. The continued accommodative stance of the FED, combined with the ECB measures recently, have led to an air of complacency in the markets, with US equities grinding to new highs, and the VIX Index of Volatility trading at historically low levels. Volatility has remained subdued despite the recent build-up of Russian troops on the border with Ukraine, and a deterioration of the Iraqi situation as militant forces take control of three towns yesterday, and continue to make gains. This has the potential to see a spike in volatility, a move that could take the Kiwi lower on renewed risk aversion should events deteriorate further – certainly something to keep an eye on.

We saw last week a +0.9% increase in the most recent GlobalDairyTrade auction – breaking a string of eight negative results which had seen a 23% slump in dairy prices. Much has been made recently of the divergence between our commodity prices and the extended level of the currency, but this divergence alone is unlikely to create a significant correction at present. Kiwi support is seen currently at 0.8700 and more significantly at 0.8680. Last night’s high of 0.8750 has seen some technical divergence emerge, with a period of consolidation within recent ranges favoured for the remainder of the week.

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