Dallas Fed President Fischer cautions the “feral hogs” of financial markets against overreaction

By Mike Jones

NZD

Investors checked some of their recent enthusiasm for the greenback overnight. A mild pullback in US bond yields and the USD helped lift the NZD/USD from 0.7700 to around 0.7770.

Nervousness about the Chinese liquidity squeeze thumped Asian equity markets yesterday. The Shanghai Composite index suffered its biggest one-day decline in three years (5.3%).

But the negative tone eased through the offshore session as solid US and European economic data assuaged fears of a global slump.

Recovering risk appetite, alongside a stutter in the USD’s recent uptrend, paved the way for a small recovery in the NZD/USD.

The USD may have overreacted to last week’s confirmation the US Fed is set to taper down asset purchases this year. However, the fact that US policy easing is set to be wound up a little earlier than expected is still a clear positive for US bond yields and the USD. For the NZD/USD, the brightening US outlook means the peak appears to be behind us.

However, expectations that the currency will keep falling are misplaced. Lofty commodity prices, rising interest rates, bearish speculative positioning, and healthy momentum in the NZ economy are all NZD supports we’d need to see crumble before we’d become convinced the NZD/USD is heading down to 0.7000 and below. We’re in the process of reassessing our NZD forecasts now, and will release a formal update later in the week.

Local developments have taken a back seat lately as far as drivers of the NZD are concerned. Indeed, the currency looks oversold based on local fundamentals alone. This looks set to continue in the short-term as all eyes remain on the US. However, this week offers plenty of fodder for local economy watchers.

The two data items with most NZD relevance will be 1) Thursday’s ANZ business survey, which looks set to receive a leg-up from improved farming confidence, and 2) May data on RBNZ FX transactions. We suspect this will show net NZD selling by the RBNZ continued in May, albeit at a slower pace than in April.

Overall, we expect consolidation to be the main theme in the NZD market this week. Positive local data and a ‘short’ speculative market may limit the downward pressure from any additional USD gains. We look for a 0.7680-0.7840 NZD/USD range.

There is no NZ or Australian data due for release today, portending a quiet local trading session.

For NZD direction on the day, we’ll be keeping an eye on the Chinese liquidity situation and the follow-on from yesterday’s stock market carnage.

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Majors

Last week’s trend for a stronger USD suffered a setback overnight. Early session gains in the US bond yields and the greenback have been reversed, and most of the major currencies have pushed higher. The high-beta AUD has led the gains, with CAD and EUR the underperformers.

Yesterday’s rout in Asian stocks ensured the mood at the start of the overnight session was anything but upbeat. But the grim tone abated somewhat as the night wore on. Having opened almost 2% lower, the S&P500 has trimmed its losses to around 0.8%. At the same time, the VIX index of risk aversion has slipped from 22% to around 19%.

The recovery in sentiment appears tied to another apparent warning from the Fed that markets may have overreacted to last week’s more hawkish Fed statement. Dallas Fed President Fischer cautioned the “feral hogs” of financial markets against overreaction. This comes hot on the heels of a similar warning from Fed “watcher” Hilsenrath over the weekend. Markets took heed.

From 22-month highs around 2.66%, 10-year US Treasury yields have slipped back to around 2.52%, eroding ‘fundamental’ support for the USD.

USD/JPY gave up a full big figure in tandem with the move lower in US yields (97.70 from 98.70), with AUD/USD, EUR/USD, and NZD/USD all enjoying a late session bounce.

Indications from the June German IFO (see below) that key eurozone data is starting to stabilise had earlier bolstered EUR sentiment.  

The focus for markets looks set to remain on the US this week. There is a smattering of US economic data due for release.

More important will be what a long line up of Fed officials have to say about the economic outlook and what it means for the tapering debate.

Tonight brings US durable goods orders, house prices, home sales and consumer confidence.

Short-term, we wouldn’t be surprised to see the pull-back in the USD continue as speculative longs are pared back. However, solid technical support for the USD is expected to kick-in around 81.90 on the DXY index.

Other News:

*Dallas Fed index outstrips expectations and adds to the improving US data tone (6.5 vs. -1.5 expected).

*German IFO rises from 105.7 to 105.9 in June (as expected).

*PBOC releases statement suggesting they remain reluctant to inject liquidity and ease the Chinese credit crunch. The PBOC noted "overall bank liquidity conditions are at a reasonable level" and directed banks to "prudently manage liquidity risks”.

Event Calendar:

25 June: US durable goods orders; US house prices; US consumer confidence; US new home sales;

26 June: UK BoE testimonies; US GDP revisions;

27 June: NZ trade balance; NZ ANZ business confidence; EU German unemployment; US pending home sales; US Fed speakers;

28 June: NZ building permits; JN jobless rate; JN CPI; US University of Michigan consumer confidence; US Fed’s Williams, Dudley and Lacker speak.

All its research is available here.