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The 2 FX Trends That Failed And The 2 That Will Replace Them – Credit Agricole

This week we witnessed the end of two fairly pronounced downtrends – in EUR/GBP and NZD/USD. Data releases and events today and tomorrow will determine whether the downtrends will resume or go into a reverse. The analysis below suggests that the risks of a trend reversal may have grown. We also think that a better way to express any bearish view on GBP and bullish view on NZD should be done via short GBP/USD and short AUD/NZD respectively.

Starting with GBP, evidence that some policy makers remained cautious on the UK's growth and inflation outlook could dampen bets on earlier stimulus removal. In addition, indications that persistent FX strength remains a worry and could delay any hikes should weigh on GBP. Ahead of tomorrow's UK retail sales data consensus is looking for more evidence of strengthening domestic demand. All that may suggest that the bar for potential disappointments maybe relatively low. Indeed, it would take stronger data to see the uptrend in GBP extended.

We further suspect that month-end flows could favour further upside in EUR/GBP in the near term. With EUR/GBP downtrend having stalled of late, investors could start questioning the ability of GBP to decouple from EUR on a sustained basis. We further believe that USD should remain supported as the September Fed liftoff draws near. A new downtrend in GBP/USD could be in the making.

Turning to NZD, we note that the recent comments by the NZ finance minister Key have triggered some profit taking on short NZD/USD positions. Ahead of the RBNZ meeting the rates markets are already fully pricing in a 25bp cut with another 25bp expected in the next 3M to 6M. With some negatives in the NZDprice, the market response will depend on signals of further easing ahead. In its June statement, the RBNZ indicated that: “We expect further easing may be appropriate. This will depend on the emerging data.” Soft NZ CPI inflation and weak dairy prices would suggest that the RBNZ should keep its language little changed today. That said, NZD is starting to look undervalued relative to some ‘fair value’ gauges following the recent moves (NZD TWI is down more than 13% from the May highs). In addition, the renewed weakness in global commodity prices should be seen as a boon to NZ consumers’ real purchasing power and alleviate concerns about imminent domestic demand slowdown.

The RBNZ could struggle to exceed market’s dovish expectations and help NZD consolidate. This could discourage aggressive NZD/USD selling for now but make AUD/NZD selling attractive. The relative AUD-NZD rate outlook is starting to shift again after the somewhat dovish speech by the RBA governor last night. A continuation of the move after the RBNZ could push AUD/NZD lower still.

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