Kiwi Stands Out in Early Monday Trade; Euro Bid on EU/IMF Bailout

An interesting and exciting start to the week, with currencies trading all over the place and in different directions on the back of varying market drivers. The Euro has jumped out to some early gains on Monday with the weekend news of an EU and IMF bailout for Ireland of some Eur80-90B helping to bolster sentiment in the region. However, there are those who feel that the need for the bailout should be viewed as more of a net negative, with fears now spreading to other beleaguered economies within the Eurozone. Much of the attention from those with such views has no shifted over to Portugal, and it will be interesting to see how things play out and if indeed the Euro can sustain the positive momentum from the bailout news.

We continue to find it quite amusing that we now live in a world where news that recognizes major setbacks within the global economy is recognized with a positive sentiment reaction. Whether it is the latest bailout of Ireland, or the announcement from the Fed of more quantitative easing, the markets continue to translate these distressing actions as risk positive which continues to leave us highly concerned and distraught.

Another big story on the day has come out of New Zealand, with Kiwi getting slammed across the board following the news that S&P has revised its foreign currency sovereign debt outlook from “stable” to “negative.” The rating agency cited New Zealand’s “vulnerability to external shocks, arising from its open and relatively undiversified economy” as the main source for its concern. Interestingly enough, we have gone ahead and initiated a position in the Kiwi, but our position is long Kiwi against the Australian Dollar.

The Aud/Nzd cross has jumped well over 200 points on the day to more than double its average daily true range, leaving the hourly RSI above 80. This suggests that at a minimum we should see some form of a corrective move following the parabolic price action, and as such, the short trade makes sense. Fundamentally, New Zealand’s banking sector is largely owned by Australian banks and we contend that any fallout in New Zealand from the rating agencies could very well be a red flag for the Australian economy. Recent tightening actions in China should also not be ignored, and Australia is far more exposed to the fallout from such actions which ultimately will curb growth and force a material slowdown in the overdone Australian economy. This further supports our current Aud/Nzd short position.

Looking ahead, the European session is very quiet on the economic release front, with the only noteworthy data series coming in the form of some Swiss money supply due at 8:00GMT. Eurozone consumer confidence (-10 expected) is due out in North American trade at 15:00GMT, but not before the release of the only US data in the form of the Chicago national Fed activity index at 13:30GMT. On the official circuit, ECB President Trichet delivers his annual report at 15:00GMT, while Fed Kocherlakota speaks in South Dakota at 18:30GMT. US equity futures and commodities prices are fairly well bid on the day.

Written by Joel Kruger, Technical Currency Strategist

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