NZDUSD traded a tight 30 point range and currently sits at 0.6970, NZDAUD up 0.4% to 0.9240; USD recovers some losses from the FOMC minutes which stated that the Fed may look to reduce the size of its balance sheet as securities mature later in the year

By Jason Wong

As we went to print yesterday the market was still digesting the FOMC minutes and the end result was a tumble in US equities (about 1%), lower UST yields and a weaker USD.  That seemed like an over-reaction to the suggestion in the minutes that the Fed might begin to stop reinvesting the securities on its balance sheet as they mature from later this year.  The more definitive timing was the only real news.  In the last 24 hours we have seen some reversal of that move, with US equities clawing back about a quarter of that loss, the US 10-year rate back up to its pre-FOMC minutes level of 2.35% and a slight recovery in the USD.

The Fed’s Williams, often seen as a clone of Chair Yellen as they used to work closely together, in talking about the time it’ll take to reduce the size of the Fed’s balance sheet, said that it’ll be “something like 5 years”. He reiterated Dudley’s view last week that any balance sheet adjustment would likely be met with a slower pace of rate hikes. 

With a lack of data releases, the focus overnight was the ECB, with a number of key speakers on the circuit and the release of the minutes from its last meeting.  Divisions were highlighted within the committee about when and how aggressively to rein in easy money.   The minutes showed that “…on balance, removing the downward bias on interest rates in the present formulation of the Governing Council’s forward guidance was seen as premature”.

ECB President Draghi was at the dovish end of the spectrum, praising the impact of negative interest rates, and said he saw no reason to depart from the bank’s current guidance. That guidance states that rates won’t rise until “well past the horizon of [the ECB’s] net asset purchases.” Bundesbank President Weidmann differed, saying that he would favour reining in the monetary stimulus given the improved economic outlook.

The lack of news, other than the ECB mumblings, has resulted in a lack of currency gyrations. The market is keeping its powder dry for tonight’s US non-farm payrolls release and will be looking out for news snippets as the Trump-Xi summit begins.

For a change, the NZD is near the top of the leaderboard, although the modest across-the-board appreciation is not statistically significant.  NZD/USD has traded within a tight 30pip range and currently sits at 0.6970.

The AUD is on the soft side, which sees NZD/AUD up 0.4% to 0.9240.  There has been a lot of attention recently on the Australian housing market, debt levels, and APRA’s fresh macro prudential measures to protect the banking system.  The AUD has been fairly bullet-proof over the last month or two over a period where the NZD has underperformed.  So it wouldn’t surprise us if NZD/AUD pushed on higher over the next month or two to make up some of that lost ground.

The EUR fell 50pips as Draghi spoke, before making up some of that fall and trades this morning around 1.0645.  This sees NZD/EUR around 0.6550.  There’s little to say on GBP or JPY other than the NZD has increased a little on both crosses to be 0.5590 and 77.3 respectively.

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