• NZDUSD declines more than 0.5% on comments regarding possible RBNZ “reform”
  • stocks in China slightly down, no major impact from Congress so far
  • Gundlach, the “Bond King” warns about 2018

The New Zealand’s dollar is by far the weakest G10 currency in Asia as it still feels repercussions of the recent elections that produced an inconclusive result. Let us recall that although the Conservative Party won, it was short of majority and instead a Labour struck a coalition with populist NZ First. Markets were right to fear this outcome because the revelations coming from the new PM could be a reason for concern. At first she promised a major rise in minimum wage and we saw some positive reaction on the NZD (as this could spark wage pressure and trigger higher interest rates) but this optimism faded instantly when she hinted at “reform” of the central bank. The RBNZ would be expected to care also after the labour market and not just price stability and markets may fear this will be a sort of assassination on the Bank’s independence. Looking at NZDUSD today’s move could have some far reaching consequences. A prolonged weakness o the pair was still “ok” when it was a correction withing a long term upwards channel. However, with a lower limit of the channel now broken, things can spin out of control for the kiwi (much to the amusement of the central bank, by the way). The nearest support is at 0.6830 but the downside could actually by even larger. Although positioning in the NZD is neutral (as opposite to CAD or AUD where it’s pretty extreme on the long side) investors could drag it into negative territory on such stability concerns. 

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NZDUSD cracked through a lower limit of an upward channel and could see more downside. Source: xStation5 

The Asian session was quite calm on equity markets with Japan (JAP225) slightly up and China (CHNComp) down somewhat. The Party Congress in China is about to end tomorrow but there has not been a major impact so far. 

Things could look calm on the surface but a so called “Bond King” Jeff Gundlach said they could deteriorate going forward. He pointed out that both stock and bond markets were still inflated and a policy reversal in 2018 could curb liquidity and had a detrimental impact on the markets where risk is very cheap at the moment and resulting valuations high. Let us recall that the ECB decision on a possible taper is expected this Thursday and today we will get the final relevant data – PMIs from major euro zone economies.