Time To Head For The Exit

I'LL TAKE IT - Ok so I had been looking for a pause from the RBNZ and we sort of got it. Although they did go ahead and hike as the rest of the market was expecting, the overall tone was in line with my preview, with the central bank signaling a pause, and adopting a wait and see attitude with the economy finally adjusting to the recent tightenings. More importantly, the initial market reaction was exactly what I wanted to see, with the New Zealand Dollar selling off quite hard following the announcement. Another key takeaway from the RBNZ was the ramped up talk on the currency and the serious level of discomfort at current levels. Mr. Wheeler and co. made it very clear they were not comfortable with the elevated exchange rate and believed it should be trading much lower.

PARTY'S OVER - Overall, a much less hawkish than expected rate decision, despite the actual hike. As highlighted in yesterday's piece, a lot of the currency appreciation has come from external speculative flows that really could care less about the actual economy. Now that there is a sense the party could be over, yield differentials will likely start to narrow back in favor of other currencies and the New Zealand Dollar should become less and less attractive. At this point, we still need to see a drop back below the 0.8400 June low in NZD/USD to really get things going, but I think we will get there sooner than later. Of course, markets are crazy, so if we do get a bounce in Thursday trade, I would just be recommending a sell into the rally.

C'MON EQUITIES - Elsewhere, not much to talk about. New highs for stocks with bulls having nothing to fear as the market embraces complacency and climbs higher and higher despite a desperate need for a healthy correction. I do believe the correlated emerging market currencies are looking a little too bid at the moment and am on the lookout for another intense round of weakness. The recent setbacks in EUR/TRY were rather violent, but look for a bounce in the sessions ahead. Generally speaking, all emerging market and risk currencies should be vulnerable at current levels. Meanwhile, the Euro has been content consolidating declines after a break to fresh yearly lows, while the Pound slowly rolls over and the Yen remains indecisive. But I think everything still goes back to US equities. Once we see weakness there, it will open up the door for some good opportunities.

Speculative long NZD positions could care less about the actual economy. Via @joelkruger

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