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Quiet trade ahead of the world cup

There's been subdued trade in Asia with limited stock news, but there has been some volatility in the antipodean currencies.

Kiwi dollar
Source: Bloomberg

Any New Zealanders looking to get over to Brazil will be pleased to learn that they have just over 1% more purchasing power, with the NZD stronger by 1% across the G10 space as well. The major event risk has now passed, with the RBNZ forecasting that three-month bills should be at 4% by year-end. Given the swaps market was pricing in 61 basis points (some 14 basis points discount to the RBNZ forecast) you can see why the kiwi has been heavily bid today.

Short-term positioning plays a huge role in trading and while the market was clearly positioned for a more nuanced approach from the central bank (given recent soft diary prices and better migration), the reality was that we are left with a central keen to push interest rates to more neutral levels.

In a world where traders are seeking to be paid to be in positions and with the RBNZ meeting now out of the way; we should see the NZD back as the number one currency to be leveraged too for traders trying to pick up yield and carry. In the G10 currency space New Zealand still have the highest ‘real’ yields when adjusted for inflation, although in the emerging market space many are warming to the Mexican peso, although the technicals don’t advocate short USD/MXN just yet.

The kiwi dollar flying high

A sizeable bearish reversal of AUD/NZD looms large on the daily chart and it’s hard to think we are going to see a close back above 1.0955 to mitigate this reversal. Today’s Australian employment report was marginally negative, with a large increase in full-time jobs being modestly offset by a fall in the headline employment number, downward revisions to the April print and a fall in the participation rate.

AUD/USD has hit a low of 0.9349 today, however there has been a good trend to buy this dip as the employment report won’t alter the RBA’s thought process in anyway. The fact that the swaps market is pricing in nine basis points of hikes over the coming twelve months seems fair.

It’s interesting to see the AUD/USD now has a negative 30-day correlation with the iron ore, coal and CME copper price, so as long as volumes of exports stays robust then the AUD will absorb falls in these key commodities – the AUD is focused on absolute values. Interestingly, Dalian rebar and iron ore futures have hit new lows today, with iron ore futures falling nearly 2%.

Iron ore stocks continue to work well for short sellers

Staying in Australia, there has been little reaction to the jobs report and once the market priced in the falls in the S&P 500, the ASX 200 traded in a narrow range. There has been a strong reaction, however, in mining names; with Fortescue falling over 4%.

Morgan Stanley may have also contributed to the selling as they cut the stock to underweight, while lowering its price target a modest 48% to $4.00. Rather than cut the target in incremental stages like some brokers it seems as they have held on for as long as possible, but at $4.00 it suggests traders could be selling rallies in the short-term. Certainly the trend is down, so any rallies to the $4.80 area look like good levels to work shorts into.

Qantas has followed the global airlines lower, with themes from Lufthansa, Boeing and Airbus largely behind the falling sentiment.

Europe will see a fairly flat open, although it will be an interesting session given there have been calls that yesterday’s trade could be the start of a pullback in developed markets. I would caution against this view as nothing has fundamentally changed. The Dow Jones index may have seen its first 100 point intra-day range since late May, but 20% of the points were subtract by Boeing and we will have to see strong follow through selling tonight for the market to undergo another day of range expansion.

US retail sales will be in focus and the market is expecting a 0.6% increase in May. It seems the risks to this print are to the downside, however what’s interesting is we have started hearing slightly more hawkish language from various Fed officials of late and a strong rebound in the long end of the US bond curve. Both the 10 and 30-year treasury have broken the year’s downtrend, while we have seen better flows into the USD, with USD/CHF looking interesting ahead of today’s Swiss inflation numbers (expected to see a 0.2% fall yoy).

Elsewhere, WTI and Brent are in focus with the former eyeing a test of the March high and quasi-ceiling of 105.21, while in the forex space EUR/JPY has closed through its 200-day moving average for the first time since late 2013. I’ll be watching out for a break of the 138.00 level, but all signs are pointing to lower levels in this cross. Gold has also seen two bullish outside-day reversals in five, which could suggest that the metal is due for modest upside. On the daily chart traders will be eyeing downtrend resistance drawn from the April high at $1290, so this could be a good level to work offers into in the coming days or weeks.

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