The currency, and financial markets generally, are largely in a holding pattern at present – the weakening GBP an exception – in part due to a lull in information releases, in part due to Northern hemisphere holidays and in part due to markets having reached a natural point of inflection. New information is probably required to shift sentiment strongly, one way or other. The US S&P 500 share price index is now 54% above its 6-Mar low. This is about where the rebound rallies ended for Italy and France in the 1960s, the US, Switzerland and Europe in the 1970s and Japan in the 1990s. There were post-crash rebounds at other times that have gone further but we are in the zone where the recovery glow has tended to wane (see Morgan Stanley on the history of bear markets). Meanwhile we also remain within the time of year most prone to share market falls and we have insiders selling while the general public are buying. And to cap it off, we know that governments will have to tighten monetary and fiscal policy at some stage over the next couple of years (the Chinese have started already, contributing to a 3.4% share market decline last week). This makes for nervous markets, and most likely volatility.
From a momentum perspective, the near-term bias is likely to be upwards, there being little to indicate that the ‘good news’ is about to stop. For the NZD, upward pressure is also likely to come from an RBA approaching the time of its first tightening (don’t discount the possibility of a surprise rate hike Tuesday – the Australian cash rate is at emergency levels no longer required and it is now 5 months since their last easing, the same gap waited back in 2002 before the first-in-the-cycle rate hike).
From a value perspective, current levels in the share markets and NZD appear over-priced relative to the risks ahead.
In sum, the NZD/USD at 70c remains a strong possibility. But that need not prevent the NZD/USD again reaching 60c before Xmas as well.