Currency Point: Building on momentum

Currency Point: Building on momentum

The positive risks building in risk currencies has taken a further step forward this week as the Federal Reserve stepped out of the market for the remainder of 2019.

 

Chairman Powell stated that there would be no rate hikes to the Federal Funds rate until inflation moved ‘significantly’ thus upside risk in the USD is now out. While simultaneously stating that “...monetary policy is in a good place” so no further cuts either.

 

With DXY continuing to butt its head against strong resistant at 98.6, the Fed out of the market and the continued positive expectations around the US-China negotiations are a combination of factors that will likely keep a lid on the USD over the next 6 weeks.

 

This provides a base for several interesting trade ideas that have suffered throughout 2019 as traders move against the strong USD. Let’s concentrate on one in particular. NZD/USD

 

NZD/USD

 

Look to enter on a break of the $0.6420 level with a Stop at $0.6340; Target: $0.6590

 

The market has hit NZD hard over the past year. Governor Orr certainly caught it off-guard when he cut the cash rate by 50bps in the middle of the year, which put a premium in NZD short positions and put it at the bottom of the G10 pile.

 

However, positioning has moved away from this bearish setup as seen in the CFTC non-commercial positioning over the past month which has seen the NZD moving from the shortest position among G10 FX to third.

 

NZD-supportive macroeconomics is likely behind this as regional growth and trade improve.

 

The caveat in the short-term is November’s RBNZ meeting. If the Board was to cut, which is becoming less and less likely according to market pricing, the Board will have to acknowledge the 3Q CPI upside surprise which will naturally create a less dovish outlook statement and thus any falls in the pair on the cut will likely be bid up.

 

The long call should be helped by both sides of the ratio on macroeconomic fronts.

 

Trade risks:

 

  • US-China trade discussions currently in progress fall over.
  • RBNZ ignored inflation and states regional and domestic factors in 2020 are great keeping it in a dovish stance.
  • Federal Reserve moves to quell ideas rate cuts could come again in 2020.

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