RISK HAVEN NO MORE - Quite a nice change over the past 24 hours. Equity markets are back under pressure having now cleared Monday's low, and USD/JPY and EUR/CHF have extended declines. There is no denying that trading markets requires a great deal of conviction and patience, and while I have fortunately not been tested all that much in this regard with my short equity strategy this year, it certainly applies to the currency side, where I have been holding a short Kiwi position for what feels like an eternity. But despite this position tracking out of the money for most of the time I have been holding, I still believe quite strongly that Kiwi will soon underperform across the board. The New Zealand Dollar is well overvalued on a PPP basis, and by the own admission of the RBNZ. The currency has been a risk haven for investors starved for yield, but at the same time, should start to see good sell interest at current levels by longer-term cyclical highs.
TIDAL SHIFT - Fundamentally, there have been some signs of a cooling within the economic data, and this is always how things start. The fact that the overnight employment data fell short of expectation should not be overlooked, and this in conjunction with a suffering export sector, resulting from an unwelcome appreciation in the local currency, could do a great deal to influence the RBNZ at the next policy meeting. Market participants have been pricing in successive rate hikes into year end, and this prospect is looking less promising in light of recent developments. I also believe the RBNZ has failed to properly assess potential external threats to the local economy, and should we see a liquidation in global equities, and more signs of slowing out of China, this could have a dramatic impact on the central bank's tightening bias. Still for me, the most comforting variable for my bearish New Zealand Dollar outlook is the technicals. Just as the Australian and Canadian Dollars backed away from respective longer-term cyclical highs, so to will the New Zealand Dollar. As highlighted in Tuesday's analysis, look for a break and close back under 0.8650 to confirm and accelerate declines towards critical support at 0.8515. Below 0.8515 should open the floodgates.