Weekly Forex & Interest Rate Outlook

Expectations the RBNZ will signal a pause in June should continue to weigh on NZD/USD this week. NZD/USD is heading towards a test of the lower boundary of a two-month old broadening range at 0.8525. Markets expect the RBNZ to downgrade its OCR track and we expect that sentiment to endure at least until the 12 June MPS meeting. A break below 0.8525 would signal a further fall to the 0.8300-0.8400 area. Much longer term, increasing interest rate carry should support NZD/USD and a rebound back into the 0.86-0.87 area is expected. US factors appear consistent with the above: near term the US dollar remains poised for more gains. The bulk of the ‘capitulation’ trade in US bonds appears complete, removing at least one source of downward pressure on US rates and thus the USD. Longer term, though, the FOMC minutes take great care not to insinuate that rate hikes are coming anytime soon, reinforcing the notion that more meaningful long term USD support is not on the agenda until deep into 2015.