The signal in favor of strengthening the dollar was due to the statement given by former Fed Chair Janet Yellen yesterday, who said that she does not consider it useful to regularly comment on the value of the dollar, and she wants to make it clear that the US Treasury under her leadership will not seek to reduce its value.
This approach is in stark contrast to that of the Trump administration, which has tried to bring the dollar down. Meanwhile, according to the CFTC report, speculative rates against the US dollar have hit their highest level in nearly three years, which increases the likelihood of a correction.
Even if the dollar goes up, to which there are certain prerequisites, there is no reason to believe that this trend will be sustainable. The main factors that will put pressure on it will remain unchanged, first, aggressive QE on the part of the Fed and, secondly, the rapid growth of the budget deficit, which will limit the ability to service the national debt in the event of a rise in real rates.
Due to the holiday in the US yesterday, markets in Asia and Europe opened mixed on Tuesday due to a lack of new benchmarks. There will be no strong movements before the American session, in the evening Yellen is expected to make a keynote speech, who will most likely take the post of Treasury Secretary in Biden's cabinet. This performance could increase volatility and strengthen the dollar correction.
NZD/USD
The NZD growth that began in March has slowed down, but there is a good chance that the correction will not be prolonged as the fundamentals of the New Zealand economy give reason for optimism.
The NZIER quarterly report shows further improvement in business confidence in the last quarter of 2020. Strong growth in demand in the construction sector has caused a sharp increase in the load on production capacity, with capacity utilization reaching record levels, which is expected to drive inflationary pressures.
Most firms (+15%) plan to increase the number of employees, (+10%) increase investment in equipment. In sum, the trend indicates a fast recovery, and already 43% of firms report difficulties in hiring qualified personnel, which is close to the pre-crisis level.
As a result, the chances that the RBNZ will introduce a negative rate at any time in the future have sharply decreased. Back in October, the markets assumed that the RBNZ would fulfill its promise to reduce the rate in April 2021, but at the moment the negative rate is not relevant and is not even discussed. The economy rebounded strongly (+14% in Q3), unemployment is declining, and the medium-term inflation outlook also looks more confident on the back of GDP growth and improved inflation expectations. Accordingly, unless there is some unexpected shock that forces the RBNZ to take some stimulus measures, the current development will support demand for kiwi.
The price is directed downwards, which indicates the probability of a correction. The nearest strong technical level is a 23.6% pullback from the recent peak at 0.6873, a strong support zone of 0.6750 / 70.
There is a risk of a decline to one of these levels, so purchases are still premature, but should we proceed from the fact that at this stage there are no fundamental reasons for the weakening of the NZD? Therefore, we are waiting for a signal to resume growth.
AUD/USD
China reported a GDP growth of 6.5% in the fourth quarter of 2020, which significantly exceeded the forecast, while the country's industrial production growth accelerated in December, increasing by 7.3% y/y (compared to 7.0% y/y in November). The rapid recovery of the Chinese economy supports Australia's exports, and, as a result, will not allow the Australian dollar to go into a deep correction.
The latest CFTC report showed strong demand for AUD, a net long position was formed, so the reversal of the price below the long-term average does not look very logical and reflects short-term changes primarily in the debt market.
The employment data for December will be published on Thursday, while the PMI is expected on Friday, perhaps the Aussie will receive additional support, as forecasts are positive. At the same time, it is too early to resume buying AUD, as the likelihood of a corrective decline is still high. The nearest supports are 0.7400 and 0.7277, you need to either wait for a rollback to the nearest one or a reversal of the target price up again in order to expect the growth to resume.
