EUR and NZD: No longer the darling trades of May - Westpac

Sean Callow, Research Analyst at Westpac, explains that it has been a rough week for a couple of the May outperformers, the kiwi and euro.

Key Quotes

“The euro started the week strongly with investors welcoming centrist Emmanuel Macron’s resounding victory over nationalist and euro opponent Marine Le Pen in the French presidential election. EUR/USD rose above 1.10 for the first time since the US presidential election in November. But the pair quickly ran out of steam, down over a cent at time of writing, in the high 1.08s.”

“There is probably little lingering political risk premium in the euro, with Macron’s winning comfortably and German chancellor Merkel’s lead in the polls extending ahead of the 24 September election. This returns the euro’s focus to yield differentials. Some yields outside the US have been keeping pace with the recent rise in e.g. the US 2 year T-note yield. But it is not at all clear that this can continue in EUR’s case, with ECB president Draghi this week hinting that any change of rhetoric on 8 June is likely to be marginal.”

“NZD had been easily the strongest G10 currency from end-April to 10 May, +1.1% against USD, while all others had fallen against the dollar as the FOMC erred on the hawkish side and followed up with a raft of upbeat commentary from officials. The bullish kiwi case was supported by the strong NZ jobs data, rising dairy prices and the Q1 inflation bounce, ahead of the RBNZ decision.”

“This kiwi rally ended up amplifying the reaction to the RBNZ’s steady cash rate, limited change in language and unchanged projection for the OCR to not move until Q3 2019. The RBNZ statement is likely to take the shine off the kiwi for some time, helping AUD/NZD dodge 1.06.”

“AUD/USD though is yet to form a base and seems set to print new 4 month lows under 0.73. Australia’s domestic story is fairly stable but turbulence in China’s financial sector (including iron ore futures) is causing collateral damage to the Aussie.”