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New Zealadn dollar vrs US dollar

Written by Andrew Isbister on August 12th, 2011.      0 comments

6:40 PM (NZT) This week was always going to be one where extreme bouts of risk aversion and volatility would dominate markets. This has been the case. As a result currency moves have once again directly reflected the level of risk appetite in the market. When trader risk appetite is nonexistent, growth currencies such as the NZD are punished, with the traditional safe haven currencies, such as the YEN, CHF and USD in demand. Risk appetite this week has been driven by rumors, as much as actual substantiated comments from the key players involved in the spiraling Euro zone debt crisis. Whilst the Standard and Poor’s (S&P) downgrade of the US late last week was very topical, it’s impact on the currency markets has been minimal.
Late Monday saw risk aversion levels at the highest point of the week, as equity markets were crushed. The NZDUSD which had tumbled late the prior week from its .8843 recent high, briefly traded sub .8000 (a ten percent drop in little more than one week).  
Rumors (that proved incorrect) that S&P were set to down grade French Govt debt, and that several French banks were in trouble, saw the markets in chaos.
However as the week has worn on, tough talking rhetoric from numerous Govt. officials on both sides of the Atlantic have calmed the markets to some extent, with a bounce in equity markets and a return to some degree of the markets appetite for risk in the last 24 hours. This will no doubt be short lived, if the subsequent tough  decisions needed are not made and acted upon quickly. Given the severity of the issues at play, and the fact that there are no quick or easy fixes (if there were we wouldn’t now be in this mess), then the current risk on risk off trading mentality, with the subsequent massive swings in equity and currency markets, will continue for some time.
With the market driven in this manner, economic data releases which in normal market conditions have a big bearing on currency direction, have largely been ignored. New Zealand didn’t have any tier one data out this week anyway.
In the US however the Federal Reserve (FED) announced their interest rate decision and provided their accompanying statement. The statement is their primary tool to communicate with investors about monetary policy. Given the S&P downgrade delivered last week, this announcement was of course a focus for the markets, perhaps more so than usual. In nut shell, US subdued outlook for inflation over the medium run, combined with other factors, are likely to warrant exceptionally low levels for the FED funds rate (US interest rates) at least through mid 2013.

Their comments with regards to the economy were of course fully expected, given the overall weak data flow of late, and the events of the last week or so. They have left the option of a further round of stimulus firmly on the table, possibly by instigating a third round of quantitative easing (the electronic printing of money).
At present the market is a lot calmer than it was at most points this week. Volatility this afternoon has been minimal. Next week trading will again be dominated by the markets risk appetite. Whilst current levels present far worse levels to sell NZD buy USD than has been the case in recent weeks, with risk aversion set to continue, the NZDUSD is likely to have further downside tests at some point. Whilst this is the case, many exporters who missed the dip sub .8000 earlier this week, are now placing buy NZD orders between .8000 and .8100. So an initial level of some support will exist here.
As I write we are currently trading in the interbank market at NZDUSD .8225