What’s wrong with the Kiwi dollar?

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by Chris Becker

While the Aussie dollar has participating in the broad USD weakness, rallying nearly 5 cents to 80c against the USD, the same dynamic has not played out with the Kiwi. In fact the New Zealand dollar fallen more than four cents to 73c against the USD as the US Dollar Index lost nearly 7%:

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Given the similarities with the Australian economy, although with a far more competent and market savvy central bank, it begs the question why the Kiwi is falling sharply and the Aussie isn’t.

The crux of course is rates, and with the RBNZ holding relatively high at 3.5% since July last year, and a potential unwind of the carry trade as global yields rise. From Adam Button at Forexlive:

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With China cutting rates and dairy prices continuing to decline, the market has quickly become infatuated with the idea of an RNBZ rate cut on June 11. That may still be early but the OIS market has now fully priced in a 25-bps cut at the Sept 10 meeting.

The interest rate futures market has lowered implied probabilities about 4 basis points in the past four days, that’s not enough to justify the rout in the kiwi. The second factor is an overall rise in bond yields. It appears to me that carry trades funded in dollars or euros are fleeing and that’s spilling over to NZD.

A kiwi 10-year yields 3.55% and with the T-note up to 2.23%, the different may not be enough to justify hanging onto the trade. Technically, there is virtually no support until 0.7200.

Adam is right about the technical outlook, and indeed beyond 72 cents there’s barely any support, just like the long term Aussie chart, a cut next month could spell the reversal of the Kiwi carry trade and with it see this whole edifice topple over into the 50s again:

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