- Though the dovish rhetoric in the RBNZ’s hold Thursday wasn’t a surprise, it sparked a sharp drop to multi-year lows
- The Kiwi’s volatile tumble is an extreme contrast to the pace seen elsewhere in the market
- Whether you think the New Zealand dollar continues to slide or rebounds, there may be options among NZDJPY, AUDNZD and others
The Kiwi’s Extraordinary Tumble
It is rare nowadays to see high level volatility and/or productive underlying trends. The New Zealand Dollar (Kiwi) seems to be promoting both. The currency has been under significant pressure for some months owing to its steadily deteriorating monetary policy outlook and a general distaste for the historically-low carry the currency renders against a backdrop of uneven risk appetite. The question therefore is: how novel is this fundamental perspective? Does the market need to account for a troubled outlook that is not presently reflected in the value of the currency or has its slide thus far moved the currency to a fair discount? The fade for the Kiwi is up for debate, but the recent event risk has nevertheless stirred a sharp market response. Yesterday, the RBNZ held its benchmark lending rate, but there was enough in the rhetoric to send the currency tumbling. The outcome (no change in the 1.50 percent benchmark rate) was fully expected. Further, the rhetoric voicing caution with a dovish lean came as no surprise. And yet, the Kiwi Dollar collapsed through Thursday’s session – with clear breaks for many crosses and multi-year lows for many more. The concern over growth and financial stability was more novel than the detachment from lackluster inflation. Systemically, this further undermines an already-deflated carry currency. Yet, how much further it needs to drop in order to account for this lost status is up for debate.
Evaluating Whether A Provocative Breakdown Can Sustain Trend
There is little doubt that the New Zealand Dollar’s tumble this this past session is remarkable. Not only is the move intense, it has sheered through a host of meaningful technical levels of support among the crosses while there are further a run of multi-year lows being registered. However, a technical break is one thing and the institution of a prevailing trend something else altogether. To establish evaluate the potential follow through for the Kiwi’s ambitious move, we need to evaluate the circumstances for the broader market and New Zealand markets in particular. Most of the momentum to develop behind NZD lately is the product of its own fundamental charge. While the RBNZ’s views for the future were undeniably dovish – particularly relative to the Fed, BoC and BoE – it is not particularly extreme compared to those central banks still pursuing QE. What’s more, the perspective for the Kiwi has chartered an increasingly dovish adjustment for months. Momentum through this channel requires a systemic risk aversion – not yet apparent – or absolute recognition that the Kiwi is losing its carry status far into the future – an abstract concept for trend interests. The broader market conditions are even more troublesome for those seeking out trend. Development of a clear risk (feeding into carry) trend has been lacking for some weeks, but the seasonality pinch to kick in just recently has drained much of the potential for any trend to arise through this or any other currency.
Having an Option for Different Scenarios
You may disagree on the potential for the Kiwi, risk trends or general activity of the market or you may not. Regardless, you should consider options for various outcomes. The currency’s volatility and the proximity of technicals deserves the attention of traders regardless of our ultimate bearing. If the NZD’s tumble post-RBNZ was a one day affair, we should seek out those pairs that are still range bound with clean technicals and provides a convincing counterpart to amplify the rebalance. For this scenario, I’m partial to GBPNZD given clean technicals, but the retreat in Kiwi could readily be offset by any fear to arise for the Pound via Brexit talk. My preferred candidate a check of the dominant trend would be AUDNZD. This pair neutralizes so many competing fundamental themes (risk trends, trade wars, commodities, etc) and drills down to the foundation. It also has a robust technical bearing. Alternatively, if the Kiwi does continue to dive, we should find a counterpart that has great potential to rally. It is on that necessity that I am writing off NZDUSD. The Greenback has few friends in current conditions. Instead, I like NZDCAD, NZDJPY and NZDCHF. The last two represent safe havens which would best serve if risk aversion to kick in. That is feasible but still a lot to ask given our liquidity conditions. NZDCAD meanwhile can exploit the Kiwi’s weaknesses with a counterpart that is distinctly hawkish without the full speculative saturation that the US Dollar represents. We discuss the volatility behind the New Zealand Dollar, the conditions that will channel its potential and the options for different scenarios in this Quick Take video.
US Sanctions Against Iran May Spark 1970s-Style Oil Crisis Fears
TALKING POINTS – Iran, Sanctions, CRUDE Oil, Trump, Emerging markets
- US oil export sanctions against Iran will be enforced on November 4th
- Net-importers in emerging markets likely to suffer from higher prices
- 1970’s oil crisis, embargo may haunt markets as Trump buckles down
The Trump administration’s trade wars and economic nationalism have caused severe volatility for most of 2018. The White House also withdrew from the 2015 multilateral Iran nuclear deal – known as the Joint Comprehensive Plan of Action – in May, and has re-imposed sanctions. The most devastating will be an oil embargo that is scheduled to be take effect on November 4th.
In the 1970’s, the US imposed an oil embargo against Iran that led to a surge in prices. The jump in energy costs radically affected markets. The US – which at the time was coming on the heels of massive public spending programs– had its inflationary pressure skyrocket.
The administration’s public spending agenda, coupled with the sanctions against Iran, echo a dangerously similar narrative the world saw 39 years ago.
1979 OIL CRISIS
In 1979 – amid the turmoil of the Iranian Revolution – political radicals stormed the US Embassy and took 52 Americans hostage. In response, US President Jimmy Carter froze billions of dollars’ worth of Iranian assets in the United States and enforced an oil embargo.
The decrease in oil exports – adding to growing fears of further disruptions – caused prices to climb. Adjusted for inflation, the price per barrel stood at around $55 in 1978. In 1979, the cost skyrocketed to $97 and peaked at $122 in 1980. In 1981, the hostages were released and the price began to fall.
See our full interactive history of trade wars here.
Some economists and historians argue that “precautionary demand” was an influential contributing factor to the increased cost of oil. This same fear may be rearing its ugly ahead again today.
2018 OIL EMBARGO ON IRAN
After unilaterally pulling out of the nuclear deal – due to allegations that Iran was not cooperating with the International Atomic Agency – the Trump administration hit Tehran with two waves of sanctions. The first included a ban on any transactions involving the US Dollar, gold, precious metals, aluminum, steel, commercial passenger aircraft and coal. The White House has also banned imports of Iranian carpets and foodstuffs.
The second wave will be the oil embargo. Trump warned that anybody who conducted business in the Iranian market would face “severe consequences”. The ban requires that all importers have to immediately cut off their supply from Iran by November 4th. Any countries that violate the ban face the possibility of sanctions. The EU responded by pledging to protect European firms by activating a blocking statute established in 1996. It allows European businesses to operate under US sanctions without incurring any penalties.
The EU’s defiance to the US adds to the growing tension between allies amid the escalating trade wars. The sanctions also empower hardliners in the Iranian government. This makes the possibility of repairing relations and easing international tension much more difficult.
EFFECT ON MARKETS
If the US imposes sanctions or tariffs against the EU for conducting business with Iran, they will almost certainly retaliate. In that event, sentiment-linked assets are likely to suffer and anti-risk currencies like the Japanese Yen or Swiss Franc will probably rise.
Euro Falling on Trump’s Iran Sanctions Announcement
Crude oil has reached a four-year high, with the Brent benchmark trading at around $84/barrel. Rising prices are damaging for net importers in emerging markets. If Trump digs his heels in and commits to limiting Iran’s oil exports, emerging markets are likely to suffer.
Indonesian Rupiah and South African Rand vs the Dollar and Rising Oil Prices
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter
GBP/USD Gaps Lower on Brexit Stall, Eyes CPI and Carney Speech
- GBP gapped lower versus USD, responding to Theresa May’s rejecting of an exit deal
- GBP/USD’s downside momentum continues dominant downtrend for majority of 2018
- Key economic data and BOE Gov. Carney’s speech may further influence the British Pound
Find out what retail traders’ British Pound buy and sell decisions say about the coming price trend!
The British Pound fell against the US Dollar during weekend trading as Brexit negotiations between the United Kingdom and the European Union hit an impasse. UK Prime Minister Theresa May’s Brexit Secretary Dominic Raab and EU Chief Negotiation Michael Barnier were unable to reach an agreement on a draft treaty, leading PM May to label the deal a “non-starter”. Barnier later mentioned that some key issues remain open, including the Irish backstop.
GBP/USD 1-Hour Chart
This is the latest in ongoing Brexit turmoil, and could possibly bode ill for the Sterling’s recent upside momentum. If a deal is not reached, the United Kingdom would exit the EU and be subject to World Trade Organization rules, potentially causing declines in GBP. Furthermore, longstanding political uncertainty and tensions regarding Brexit have caused the GBP to weaken for the majority of this year. Furthermore, an increasingly hawkish Federal Reserve and haven demand amidst EM contagion fears and trade wars have caused the greenback to strengthen, intensifying the currency pair’s bearish action since April 2018.
GBP/USD Daily Chart
Looking ahead, this is a week of high economic activity for the British Pound. On Wednesday, the UK Statistics Office will release consumer inflation data for the month of September. In addition, Bank of England Governor Mark Carney is set to give a speech on Thursday, with forward guidance possibly dictating next moves for the Pound. However, ongoing Brexit negotiations will continue to take center stage and overshadow economic data’s influence on the Sterling. Developments upcoming summit of European Union leaders focusing on Brexit could cause volatility shocks to the currency pair.
GBP/USD Trading Resources
— Written by Megha Torpunuri, DailyFX Research Team
Unsteady Risk Trends Increase Scrutiny on China, Italy and Brexit
Market participants will return with caution this week. Following the rout in speculative assets from shares to emerging markets to Yen crosses, there is an understandable tension amongst investors. In this environment troubling news in trade wars, Chinese growth, Euro-area stability or any number of key themes can readily find traction.
Fresh developments coming out of the U.S. economy may curb the recent selloff in USD/JPY as Federal Reserve officials see a risk for above-neutral interest rates.
After trading to four year highs to open the month, Crude has come off the highs along with risk sentiment, but you crude appears to have fundamental support that could keep bulls confident.
It may be uncomfortable but sitting on the fence is the best place to be ahead of next week’s Brexit updates and EU Summit
Gold was the beneficiary of safe haven demand this week after the Dow lost over 1,300 points in just two days.
The Australian Dollar held up quite well to the intensification of one or two factors which have stymied it this year. Don’t rely on that continuing
China’s weak economic growth could add more bearish momentum to the Yuan; at the same time, Chinese regulators may try to avoid extreme volatility.
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
See how retail traders are positioning in the majors using the IG Client Sentiment readings on the sentiment page.
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