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The New Zealand dollar moved sharply lower against US and Australian counterparts following a highly-anticipated central bank rate decision. Reserve Bank of New Zealand Governor Alan Bollard made it fairly clear that domestic economic risks remain to the downside and did not rule out further interest rate cuts through year-end. The fact that the RBNZ remains committed to lower interest rates was less surprising than Bollard's explicit reference to the New Zealand Dollar exchange rate.

Continued NZD rallies have limited economic recovery in the export-dependent economy, and Bollard effectively implied that lower interest rates would be necessary to support growth. Though forex traders have generally proven less sensitive to interest rate developments through the global financial crisis, it remains fairly clear that much of New Zealand Dollar demand comes from yield-seeking speculators lured by comparatively high domestic interest rates. A downgrade in yield forecasts subsequently hurts the Kiwi, and forex markets made their disappointment quite clear in sending the NZDUSD sharply lower following the RBNZ commentary.

New Zealand Dollar Exchange Rate

Safe-Haven Demand Lifts the Dollar Despite Worse Than Expected Data

The US dollar was relatively strong on Wednesday despite the release of worst-than-expect data for the US economy. Apparently, investors bought the US dollar as a safe-haven currency after the US Commerce Department said orders for durable goods fell 2.5 percent in June from a again of 1.8 percent in May. The US dollar advanced against the world's most heavily traded currencies but the gains were more noticeable against higher yielding commodity currencies. For instance, the Australian dollar lost nearly 100 pips against the dollar to trade as low as .8126 from a high of .8377 on Tuesday. In addition, the dollar rallied more than 70 pips against the export-dependent Canadian dollar after the release of inventory numbers by the American Petroleum Institute triggered a sudden drop in oil prices. Indeed, less demand for energy commodities is a clear symptom that not everything is well with the global economy. The US Treasury Department and the Federal Reserve have been taking a number of actions to increase liquidity, stabilize financial markets and boost the demand for housing by keeping interest rates at a record low. However, the US economy risks entering a double-dip recession should politicians continue to waste money in pet projects instead of making real reforms. Looking ahead, the current model of economic growth is not sustainable because is purely driven by stimulus plans paid by tax-payers money and we may be on the brink of a major bearish turn in stocks, commodities and higher yielding currencies.
Euro Tumbles Against US Dollar on Skittish Speculators Shed EURUSD longs
The euro finished sharply lower against the US Dollar on a bad day for risk sentiment, with analysts blaming poor German CPI results for noteworthy underperformance against the British Pound. Preliminary Consumer Price Index data showed that domestic prices fell 0.6 percent in the year-ending in July—the first year-over-year decline since German unification. The CPI pullback forced a commensurate pullback in European Central Bank interest rate expectations. Yet markets have shown little interest in central bank forecasts as of late, and we believe that the Euro's pullback had more to do with the fact that skittish speculators aggressively shed long-EURUSD trades. Indeed, we recently wrote that Forex Futures and Options data pointed to a noteworthy EURUSD pullback on increasingly one-sided positioning. Subsequent trajectory for the single currency may depend on tomorrow's key German Employment Change figures, but it will be more important to watch reactions in risky asset classes than looking at the number itself. Though it has found a temporary base at the 1.4000 mark, any further flare-ups in market tensions could force continued EURUSD pullbacks.
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Australian Dollar and Canadian Dollar take hits on commodity tumbles
The Australian and Canadian dollars were among the worst-performing major currencies on the day, as sharp drops in global raw material prices sunk the commodity-sensitive pairs. The AUDUSD tumbled 1.22 percent on sharp pullbacks in Gold and Silver prices, while the USDCAD jumped 0.8 percent on a 6.5 percent rout in the front-month NYMEX Crude Oil contract. Traders punished energy prices following a US Department of Energy report that showed crude oil stockpiles surged in the week ending July 24—sign that demand for crude and crude distillates remains weak. The disappointment forced sympathetic drops in other markets, and the Reuters CRB Commodities Index finished at multi-week lows. Negligible fundamental event risk means that the Aussie and Loonie will continue to track the CRB and Crude Oil prices, and it will be critical to watch whether energy prices can recover some of the day's impressive losses.
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Written by: David Rodriguez, Quantitative Strategist and Antonio Sousa, Chief Strategist for DailyFX.com
E-mail: research@dailyfx.com