With majors such as the euro and dollar-yen languishing in tight ranges this week, it came as somewhat of a surprise to see select currencies, such as the Aussie and Canadian dollar, the New Zealand dollar, and Brazilian real, trading with such a firm tone.
For Aussie, kiwi, loonie, and the Brazilian real, shifting domestic fundamentals and positioning have been supportive factors, analysts said.
In addition, new FX carry trade demand (buying a higher yielding currency against a lower yielding currency such as the yen or Swiss franc) has given these currencies an added lift, they said.
Looking first at Aussie, four to six weeks ago, the pair struggled to break above $0.9100 and stalled on several occasions in the $0.9050/$0.9080 range, weighed by uncertainty about China growth and weak Australian data (employment and capex).
Market players envisioned that Aussie would soon revisit the 2014 lows near $0.8660 (seen Jan. 24), break $0.8500 and potentially keep going to the May 2010 lows near $0.8060/70, if U.S. outperformance led to higher U.S. Treasury yields.
On March 6, the day before U.S. non-farm payrolls, Aussie broke above $0.9100, aided by extended short positions, improved risk sentiment and upbeat Aussie trade data, only to fall to $0.8924 less than a week later as Chinese yuan weakness, a slide in copper prices and risk aversion due to the Crimea referendum weighed.
Since then, Aussie, trading at $0.9257 in afternoon action, has been on a one-way path higher, underpinned by extended short-positions and a shift in sentiment regarding the Reserve Bank of Australia.
Earlier Thursday, the pair topped out at $0.9272, the highest levels seen since mid-November 2013. The market does not rule out a move to the Nov. 20, 2013 peaks at $0.9448.
There also has been no stopping the kiwi, which earlier broke above the April 11, 2013, peaks at $0.8676, to post a new high of $0.8686. The pair has since stabilized at lower levels around $0.8675.
The Reserve Bank of New Zealand was the first of the major central banks to begin raising rates. The central bank raised the official cash rate (OCR) by 25 basis points to 2.75% March 13.
JP Morgan Technical Analyst Nial O’Connor said, “With the recent pullback holding key support in the $0.8500/.8416 zone (stays important), the upside risks are back on track” for kiwi.
“Moreover, today’s push through the next line of key resistance at the $0.8678 high from April ’13 shifts the focus back to the $0.8845 high from 2011,” he said.
Just as global investors scrambled to sell Aussie dollars a few weeks ago, the same accounts were convinced that the loonie would fall further also, with dollar-Canada likely to test C$1.1500 before year-end.
After topping out at C$1.1279 only last week (on deemed dovish Bank of Canada comments and vaulting key technical resistance), dollar-Canada reversed course, breaking below pivot support at C$1.1224, which was the prior peak seen Jan. 31, now support.
The loonie subsequently has marched higher, with dollar-Canada Thursday breaking below its 55-day moving average (C$1.1067) for the first time since mid-October 2013 to test lows near C$1.1026, the lowest levels since March 18 (C$1.1026 low)
Dollar-Canada was trading at C$1.1034 in afternoon action, down from an overnight high of C$1.1107.
“Factors supporting CAD sentiment include the key oil differential narrowing and testing levels last seen in July 2013,” said RBC Capital Markets strategist Elsa Lignos in a note.
In addition, the Canadian government approved four long-term liquefied natural gas (LNG) export licenses, she said.
“Approval of these licenses will allow the proponents to export up to 73.38 million tons of LNG per year and aid market diversification in the longer term,” Lignos said.
“The National Energy Board (NEB) is now responsible for issuing the final permit,” she added.
Finally, the Brazilian real has been a true come-back kid this week, shrugging off a downgrade by U.S. rating agency Standard and Poors (long term foreign currency sovereign rating to BBB- from BBB and long-term local currency sovereign credit rating to BBB+ from A-).
However, the improved real trend has been in the works since late January, when at the peak of emerging market turmoil (Turkey at the time), dollar-real topped out at Brl2.4505, nearly back at the 2013 highs near Brl2.4550, seen last August.
Global investors, who shunned Brazilian assets because of underlying fundamentals (current account deficit, fiscal issues, uncertain growth), preferred Mexico as a Latam alternatives, with many entering into Mexican peso longs versus Brazilian real shorts.
In recent weeks, emerging market currencies overall have done well but the real (at mid-November 2013 peaks) has tended to outperform the peso (at January peaks) and some of these positions have been unwound.
Brazil’s COPOM earlier published its first quarter inflation report, which showed higher inflation forecasts for 2014 and 2015 (see MNI mainwire story at 8:49 am ET).
This served to underpin the Brazilian real further, with dollar-real, currently near Brl2.2630, falling to four-month lows near Brl2.2595 earlier Thursday.
Initial support was seen at Brl2.2513, the lows from Nov. 19, 2013, traders said.
Dollar-real dipped below its 200-day moving average (currently at Brl2.3030) Wednesday, but did not close below it.
If the pair does close below Brl2.3030 today, this would be the first close below the 200-day moving average since mid-May 2013 and would be deemed BRL supportive.
This would suggest that dollar-real was moving back into a BRL2.20-2.25 range.
Brazil’s Bovespa was up 3.13% at 49,468 Thursday afternoon. At the 49,565.02 high seen earlier, the index was down 3.8% year-to-date, but up 10.4% from the 44,904.83 lows posted March 14, when EM markets were under pressure.
Traders attributed much of the strength being seen in these currencies to unwinds of short positions, rather than new long entries.
Nevertheless, recent gains, well beyond important technical resistance points, have emboldened global investors to try a long position.
“Who are the major participants right now? People, who playing, are hungry for yield,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
Even with views shifting that the Federal Reserve might begin to raise interest rates as early as mid 2015, the perceived certainty of this has some players looking at FX carry trades, he explained.
They figured there will be no interest rate change in G-7 countries for at least six to nine months and say “I can do the carry trade,” Chandler said.
Later in the year, as market players start to position for 2015 trading, some of these carry trades may be unwound, but for now, the thinking is “what do you have to worry about,” he said.