The US dollar index rose to a fresh 14-year high early London but then retraced to be unchanged on the day.

The Kiwis trade balance for October was -$846m which is better than anticipated, with a stronger than projected export performance. There was also a one-off aircraft import of $254m. If this is excluded, the trade balance for October is a marked improvement from the prior two months.

On Valuation terms: NZD remains overvalued; NZD TWI strength is a major concern, together with downside risks to global growth. But TWI strength is not solely yield driven. Growth matters too and lowers interest rates are stimulating growth.

But the dollar remains in the driver’s seat as global yields rise and the market questions whether this is the beginning of the end for the liquidity trade. While RBNZ’S ANY further easing bias slightly hard to justify.

It’s too early to tell (we are biased to say no) and we view recent movements in the NZD/USD as having largely done their dash, noting NZD resilience on a TWI basis. This is the testament to the wider support factors amidst shaky challenges.

Chinese trade exposure: New Zealand has a very export-driven competitive economy with exports accounting for about 30% of GDP.

Most notably, China has been the major trade partner of Kiwis, China overtook the United States at the end of 2008 to become New Zealand's second-largest trading partner, with bilateral trade amounting to $12.7 billion in the year ended September 2011.

China looks to be at the epic-centre of the uplift in export performance at the expense of many other top export destinations. There was a strong lift in dairy, forestry, fruit and seafood export earnings in October.

Much of this headed to China where there has been a notable lift in demand for all these sectors’ products recently. Households appear to be showing continued restraint outside of the odd new car purchase. The fact that consumption goods imports are down 5.3% YoY at a time when many indicators for consumption are strong is telling.

Road map ahead for NZDUSD:

The RBNZ ended its easing cycle on 10 Nov and will now remain on hold for a long time. That will anchor the short end somewhat (although the 2yr-OCR spread – one measure of stretchedness – has been even higher than the current 50bp during past on-hold periods), with the long end free to follow offshore yields.

This APAC pair seems to be vulnerable to falling further below 0.6970.

Why bearish hedging for NZDUSD: The US dollar has had an impressive rise since the US election and has a potential to rise further, not least because the Fed would probably hike in December.

Against that, the NZ economy is strong and dairy prices have risen. Overall we are left with a bearish outlook for NZDUSD, targeting sub-0.70. Technicals also suggest as low as 0.66 could be seen, courtesy of the head-and-shoulders break below 0.7060.