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Commodity currencies underperform; NZD dips below 0.71. Large speculative positioning against USD, with story of further weakness remaining compelling. US markets closed. S&P 500 futures slightly higher

Commodity currencies underperform; NZD dips below 0.71. Large speculative positioning against USD, with story of further weakness remaining compelling. US markets closed. S&P 500 futures slightly higher

Markets have opened the week on a quiet note, with the US on holiday. In currency markets there has been a slight risk-off tone, seeing the commodity currencies underperform, while S&P500 and Treasury futures are little changed.

US markets are closed but S&P futures are currently up 0.1%, after having spent the entire Asian trading session in the red. The Euro Stoxx 600 index closed up 0.2%. Yesterday, Reuters reported that in one of President Trump’s final acts, the US government notified several of Huawei’s suppliers that it was revoking their licences to work with the Chinese company. While this injected a bit of “risk-off” tone during Asian trading, more interest will lie in whether President-elect Biden will continue with the strategy of trying to rein in the progress of Chinese technology companies.

China activity data were a mixed bag. GDP growth of 6.5% y/y for Q4 came in slightly above pre-pandemic growth rates – and making China the only major world economy to grow last year amidst the global pandemic. The data were slightly ahead of estimates. Of the monthly indicators, December industrial production also positively surprised, while retail sales and investment were on the softer side of expectations.

In currency markets commodity currencies have been out of favour, with the NZD, AUD, CAD and NOK the worst performing at the start of the week, extending last week’s losses after the strong run in the lead-up to and post-Christmas. The NZD fell to a three-week low of 0.7096 last night, but the move sub 0.71 proved temporary and it currently trades around 0.7110, down 0.3% from last week’s close. The AUD fell to a low of 0.7659 and has recovered to 0.7680. The biggest move on the NZD crosses has been a 0.5% fall against the yen, taking it down to 73.7, with JPY the best of the majors.

Janet Yellen appears before the Senate Finance Committee tonight as part of her nomination to be the next US Treasury Secretary. Yesterday, Dow Jones reported that if asked about the new administration’s dollar policy, her briefing says "The value of the U.S. dollar and other currencies should be determined by markets…” and that "The US doesn't seek a weaker currency to gain competitive advantage…we should oppose attempts by other countries to do so." We interpret the comments to mean that Yellen as Treasury Secretary would not stand in the way of any market-led dollar depreciation.

CFTC data show that speculative bets against the USD have built up to their highest level in nearly three years, while including a broader range of investors like asset managers, the negative bets are at their highest in a decade. While this creates the risk of a short-term correction higher in the USD, with some hint of that early in the New Year, we’d see this as only a temporary phenomenon, with the arguments in favour of a weaker USD this year still compelling.

The NZ rates market saw small falls for the swaps and government curves, driven by global forces, with 10 year NZGBs down 2bps to 1.00% and the swap rate down the same to 1.08%. The short end of the curve remains underpinned by expectations of no change in the cash rate for some time.

In the day ahead, NZ’s QSBO is expected to show a rebound in business confidence and other activity indicators, as the timelier ANZ pre-Xmas survey showed, alongside indicators of higher inflationary pressure. We anticipate card spending data for December to show a fairly flat result. 

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