In our latest Currency Strategy we concluded that central banks remain the principal driving force for FX markets, although alterations in central bank policy outside the US clearly have only a marginal effect. Currently, the outlook for Fed funds and the QE3 program remains the most important factor. The anticipation of “tapering” mainly weakened antipodean currencies, while their European counterparts were less affected. With tapering now delayed until early next year, commodity currencies have recovered two thirds of their value lost during summer. However, as stronger commodity currencies will eventually face more formidable obstacles we foresee renewed depreciation in the coming six months. Consequently, we have recommended as well to sell NZD/NOK to reflect our view and based on following factors: 1) Market expecta-tions now fully discount the Fed delaying tapering until well into 2014; 2) IMM speculative positioning is probably outright long AUD and NZD vs. USD (so far we only have data until Oct 8th); 3) RBA and RBNZ are likely to continue to intervene verbally if their currencies appreciate further; also RBNZ could again intervene physically in the FX market (as repeated by Gov Wheeler last week); 4) Since commodity currencies (according to our own valuation models) are the overvalued G10 currencies, we expect renewed weakness as the Fed contemplate and delivers on reducing the pace of quantitative purchases. Near-term we anticipate no change from this week’s RBNZ rate decision, although the balance between how successful it’s newly implemented Macroprudentials (LTV barrier) are and the impact they will have on trimming the need for tighter monetary policy.
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