With a US fiscal stimulus deal imminent and a UK-EU trade deal also getting closer, risk sentiment is positive, with these factors outweighing further disappointment in US economic data. The USD remains under downward pressure, taking other majors to fresh heights, including the NZD.
After we went to press yesterday the FOMC statement came and went with little sustained market reaction. There was no change to policy settings, with the pace of QE continuing (at least $80b per month for Treasuries), and only a minor tweak to the Statement – the pace of QE now continuing until “substantial further progress” has been made towards the Fed’s employment and inflation goals. This was a nod to outcome based forward guidance, but hardly noteworthy.
US initial jobless claims continued their disappointing run, printing at 885k for the week and some analysts suggest it could breach the 1 million mark over coming weeks, as economic activity falls while COVID19 spreads. The Philly Fed index fell to its lowest since May, with big falls in new orders and employment. Housing starts and permits data confirmed that the housing market remains one of a few key bright spots of the economy. The market remains unperturbed by the widespread economic contraction, as it encourages more fiscal spending to fill the hole and the rollout of the vaccine means that any economic weakness will only be temporary.
Despite the weaker US data, risk sentiment has improved as the market took heart from the positive vibe on US fiscal deal negotiations. Republican Senate leader McConnell said that a fiscal stimulus package is “close at hand”. This was consistent with the messaging from the Democratic camp, with Schumer saying that that negotiators were putting the final touches on the virus relief deal. However, a deal may not necessarily be agreed before the end of Friday, with more negotiations likely through the weekend. So a short stopgap funding bill might be required to avert a government shutdown.
The S&P500 is currently up 0.4% and with more debt issuance ahead to fund the fiscal deal the US 10-year rate is up a little to 0.94% – with a fall to 0.89% after the soft run of data only lasting for an hour or so, before selling pressure drove rates back up.
Risk sentiment has been further supported as an EU-UK trade deal inches ever closer, despite the “official” word that no-deal is more likely. Media continue to report that the issues around level playing field have largely been resolved and fishing is the final hurdle. With the UK lawnmower manufacturing industry larger than fishing (about 0.1% of GDP), a deal is not going to fall over on fishing. The EU Parliament has said that a deal needs to be agreed by the end of Sunday to allow a special session to ratify by late December, but the reality is that a later provisional deal could still be agreed and until the clock strikes midnight on 31 December, the game is not over. The UK’s Gove said that talks may go on until after Christmas.
The Bank of England’s latest policy announcement was a non-event as expected, as it kept policy settings unchanged. Like us, the Bank assumes an EU-UK trade deal will come into effect 1 January.
In currency markets, the soft USD trend continues to extend, with the DXY index below 90 for the first time since early 2018. The low for that year of 88.25 is now within spitting distance, after which there is little support until the 2014 low just below 80 comes in sight, the same year the NZD last visited 0.80. Most of the key majors have touched fresh multi-year highs – JPY being a notable exception – with the weak USD the root cause.
GBP has breached 1.36, EUR is above 1.2260 and five days after blasting up through 0.75, the AUD is now up through 0.76. The NZD reached a fresh high overnight of 0.7171, now well above prior resistance around 0.71. We have previously noted that the next resistance zone is around the 0.74-0.75 mark. Both the AUD and NZD saw some support after stronger than expected economic data releases yesterday, with the Australian unemployment rate falling to 6.8% and a strong NZ GDP report.
The NZD got some support after Finance Minister Robertson was happy to admit that the recent appreciation of the NZD was a function of the strength of the economy, adding “I’m not going to express any great discomfort with where we are”. We agree with Robertson’s sentiment, with the NZD still trading below our long-term PPP estimate of 0.73, and with a long-term model that accounts for NZ’s strong terms of trade easily justifying a currency above 0.80.
The fresh overnight high in the NZD was more a reflection of USD weakness than NZD strength, with NZD crosses against GBP, AUD and EUR all lower relative to the NZ close.
NZ GDP rose by 14% q/q in Q3, with upward historical revisions meaning that the level of activity has already surpassed the pre-COVID level, well ahead of schedule. Importantly, GDP is tracking well ahead of RBNZ and Treasury projections, meaning even less debt issuance required, and less QE required to keep yields in check. The market is attune to the reduced need for policy stimulus, seeing domestic rates higher across the curve and spreads versus US and Australia widen. Curve steepening was evident as RBNZ policy underpins the short end of the curve, with the 20-year NZGB yield up 8bps, compared to 5-10-year bonds up 5bps. Swap rates were up 3-5bps for the 2-10 year part of the curve.
It’s another full day of economic releases ahead, including NZ business and consumer confidence data and the BoJ giving a policy update – no change there expected. Globally, there are a number of releases with the pick of the bunch being Germany’s IFO survey of businesses.