Silver lining for bears

SILVER LINING FOR BEARS - I had warned on Wednesday that Kiwi bears should not look for any help from the RBNZ. The central bank has set out on a path of tightening and once again lifted rates as expected by 25bps to 3.00%. But if we are to apply a buy the rumor, sell the fact strategy, I would say there was some silver lining within the policy decision (silver lining for bears that is). Mr. Wheeler and co. were certainly a lot less aggressive with their upbeat language and signalled that any rate hikes from here on would be data dependent (and there have been signs of weaker data and softer inflation that could influence a pause as soon as the next meeting). The RBNZ also upped its rhetoric on the strength of the currency, and was quite vocal with its concern for the elevated exchange rate. I am not going to come out and say that the decision was dovish by any stretch of the imagination, but at the same time, it was less hawkish than markets had been expecting. While market participants are still pricing in rate hikes into year end, I do believe this latest decision could temper those expectations just a bit.

WHEN YOU LEAST EXPECT IT - But I wasn't surprised with the move, and will be looking for Kiwi to find a lower top today ahead of a resumption of the recent weakness we have been seeing. I believe in the broader cyclical flows which warn of a major top in the currency, and I also contend that external global macro pressures will ultimately weigh on the currency. So while NZD/USD has seen a bit of a pop into Thursday, my recommendation would be to wait for the next pullback and sell the pair again on a break back below 0.8550. A break below 0.8550 would negate the post-central bank event risk bullish price action and open the door for more significant declines. The recovery in US equity markets back towards record highs has also been supportive of Kiwi gains, but as I have already highlighted many times, US equities are still long overdue for a serious corrective decline which should negatively influence the New Zealand Dollar. Elsewhere, keep an eye on USD/JPY and EUR/CHF, and look for any downside pressure in these markets to weigh on broader risk correlated assets. I am not sure what the catalyst for weakness will be, but I believe it is just around the corner. It's always funny how markets have a way of reversing at the times when you think there is the lowest probability for reversal. Stay tuned.