RBNZ unceremoniously dumps tightening bias and NZD sold off immediately; steady-as-she-goes approach from US Fed; only game in town is to be long USD

By Raiko Shareef

NZ Dollar

NZD/USD looks positively sick this morning, at 0.7240. While not at the bottom of the Bloomberg daily currency rankings (which are taken from NY close to NY close), it is a cool 3.0% lower that when we published yesterday’s edition of this note.

To say the RBNZ had something to do with the move would be an understatement. Governor Wheeler and his team took the market (and us) by surprise when they unceremoniously dumped a clear tightening bias. Instead, as far as the policy statement reveals, they believe that the next rate move could well be a cut.

From a currency perspective, this has and will accelerate the decline in NZD we have long projected. While our end-year target for NZD/USD of 0.70 still feels right, we suspect it will hit that level by or before mid-year, as expectations of an interest rate cut continue to mount.

In the second half of the year, though, we believe that NZD will oscillate around the 0.70 mark, effectively trading sideways. By that point, a NZ commodity price recovery and a possibly inflamed local housing market may cause the rate-cut camp to reassess.

On the crosses, NZD has been laid low against the EUR, down 1.4% to 0.6410. On the other hand, the woeful performance of the AUD (see Majors) has NZD/AUD, remarkably, 1.0% stronger for the day at 0.9370.

Local  releases today include building permits and net migration. The former may slip after two months of strong performances, while the latter should remain very high.

We pick a 0.7180 – 0.7300 range for NZD/USD.

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Majors

The USD is stronger across the board, helped by a steady-as-she-goes FOMC Statement yesterday. The Bloomberg Dollar Spot Index is 0.6% stronger today. Among the biggest losers is the AUD, with is off by nearly 2.0%.

The FOMC Statement had something for everyone, but overall, it confirmed to us the notion that the Fed is on track for rate increases in 2015. Much was made of a new reference to the Fed keeping its eye on “international developments” (among a wide range of information) when making its policy assessment.

Our view is that it is naïve for anyone to think that the Fed wasn’t mindful of international developments every time it makes a policy assessment.

There were notable positives. The FOMC upgraded its view of jobs growth from “solid” to “strong”, and introduced wording to stress how they view the drop in oil prices a net positive for the US economy. After a very muted (and confused) initial reaction, the USD found its legs through the session.

Indeed, it still seems the only game in town is to be long USD. While that theme is very much our core view, we are increasingly nervous about the pace of recent gains.

In particular, the AUD’s fall over the past 24 hours has been nothing short of stunning. It has shed the bounce following Wednesday’s better-than-expected inflation report (which took it above 0.8000), and now sits at 0.7740. Earlier this morning, it looked at risk of gaining a 0.69 handle. One can almost feel the weight of expectation around next week’s RBA meeting.

Tonight, the highlight will be US Q4 GDP, with the market picking a +3.0% q/q annualised rate, building on Q3’s stunning 5.0% gain. With the very one-sided trading in favour of the USD in the past few sessions, one would expect that a disappointing result would cause a fair amount of pain amongst investors.

Elsewhere, we look to a swathe of Japanese data including inflation today, as well as the Chicago PMI and the University of Michigan consumer confidence survey.

Other news:

*Germany headline inflation -0.3% y/y vs -0.1% exp.

*US initial jobless claims 265k vs 300k exp

*US pending home sales -3.7% m/m vs +0.5% exp.

All its research is available here.