NZD/USD
Labor Shortages Spur Rise Expectations: With interest rates continually on the minds of market participants, resurgent buying underpinned Kiwi dollar strength in the overnight. According to Statistics New Zealand wages rose 0.8 percent higher as employers were forced to pay rosier wages in the face of a labor shortage. Increasing wages look to bolster further consumer spending in the economy and ultimately lead to further expansion in the region. However, with higher expansion and growth, inflation is expected to once again loom, forcing further considerations of a rate hike by policy makers come December. Reserve Bank of New Zealand Governor Alan Bollard raised the official cash rate to 7 percent last month in order to curb already lofty consumer prices. With anticipation of further tightening and a widening interest rate differential, traders bid the underlying currency higher.
Dollar Weakness: Additionally lending to the directional shift, traders pared back long dollar positions, taking profits from recent strength. Notably, there has been increased bid interest of U.S. denominated assets. On the session, 10-year notes were higher as the yield reached 4.66 percent. Since then interest has bucked the three week downtrend pushing the yield lower to 4.56 percent.
Technically Speaking: After hitting stops below the 0.6750 support, the price action has now climbed above to test the 23.6 percent fib level at 0.6822. Currently hovering, near term support looks to hold, suggesting continued upside as we enter the Asian open. The next ceiling should be tested at the 38.2 percent fib level at 0.6878 where previous consolidation also occurred.
EUR/JPY
Rising Riots Add To Downward Pressure: Although further profit taking mounted on the session as carry traders pared back positions to lock in gains, escalating violence in the French riots has placed some unwanted pressure on the euro single currency. New updates have revealed the implementation of a curfew and a call on police reserves by the government. However, even more pessimistic is that fact that the riots reflect a deteriorating infrastructure exposing sluggish growth and an unresponsive government. Ultimately, coupling these two themes, further downward pressure may be exerted dependant on the duration of the current situation.
Again, Yuan Speculation: Further yuan speculation disseminated throughout the market as traders entertained the thought of further, if any, revaluation efforts prior to the U.S. President Bush's visit to the region on November 18th. With most expecting a widening of the trading band the likely scenario, such a move has potential following earlier comments by Treasury Secretary Snow. At the start of the session, Snow had pushed once again for China to continue it's efforts in bolstering a flexible yuan.
Technically Speaking: Finding a bottom near the 137.65 support, the cross currency is hovering the near term 138.00 figure. At this point, a penetration below would certainly set up for a test of the October 19th spike low.
Should bullish strength in the cross be revitalized, a temporary test of the 23.6 percent fib at 138.59 would be inevitable. However the duration looks to favor the bears should downside be sparked.
CHF/JPY
Swissie High: Establishing a fresh yearly high of 1.3170, the Swiss Franc was subject to a bit of profit taking on the day fueling previous declines in the cross currency at the onset of the week. Downward pressure on the euro single currency in the face of escalating riots spilled into the Swissie leg as traders now mount focus on the upcoming U.S. trade balance being released this Thursday. Expected to rise to a deficit of $61.3 billion, the release, and subsequent negative sentiment, would be the highest on record and compete with HIA related corporate repatriation activity heading into the last month of the year.
Technically Speaking: Hovering near term support at the 89.30 bottom tested on October 24th, the cross currency seeks a topside test of the 89.30 figure, 61.8 percent fib from the Oct. 14th-Nov. 5th move. Consolidative action could lead to a penetration above to the 50 percent fib at 89.87 with any further downside dips being capped at 88.95.
Richard Lee is a Currency Strategist at FXCM.
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