By Mike Jones
NZD
Currency markets were given a rough shake up this morning by a surprisingly dovish set of FOMC minutes. A post-minutes slide in the USD saw the NZD/USD jump from 0.8090 to around 0.8140.
Over the past couple of weeks investors had begun to price out the risk of further easing from the Fed. However, this morning’s FOMC minutes threw the door back open again (see Majors for details).
In response, the USD has been sold across the board, led by a brutal sell off in USD/JPY. The broadly softer USD allowed the NZD/USD to recoup all of its losses over the past day or so.
We’ve been toeing the line for a while that further easing action from the Fed, ECB, and Bank of England should support the NZD/USD through a higher interest rate differential.
From the current 230bps, we wouldn’t be surprised to see NZ-US 3-year swap differentials move back up to their recent highs around 245-250bps as markets again speculate on further Fed easing.
This would likely be enough to see the NZD/USD push back up to resistance around 0.8245 in coming sessions.
For today, there is no data of note due for release in NZ or Australia. All eyes will be on the Chinese HSBC Flash PMI for August (due 2:30pm NZT).
Recent Chinese data has disappointed expectations of a mid-year bottoming in activity. For today’s PMI, anecdotes of production cut-backs at Chinese steel mills have some looking for a weak number (49.3 in July).
If it is weak (perhaps a 48 handle), expect the NZD/USD and AUD/USD to give up some of this morning’s gains.
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Majors
US bond yields and the USD have tumbled this morning after the July FOMC minutes proved more dovish than anyone expected. The DXY index has shed around 0.5%.
There was no cryptic language or beating around the bush from the Fed – “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”
In other words, unless we see a clear pick-up in US economic indicators, the Fed looks set to ease again, possibly as soon as September. Bear in mind that, with most of the 10 voting members of the FOMC regarded as doves, “many members” may actually amount to a consensus.
Note also that an easing need not necessarily be via more asset purchases (QEIII). Indeed, the minutes show the Fed discussing a range of easing vehicles, including lowering the interest paid on bank reserves and extending its forecast of zero interest rates beyond the current “late 2014”.
Nevertheless, the Fed’s clear intention to ease had a swift and brutal impact on the USD. USD/JPY gapped from 79.20 to around 78.40 as US bond yields tumbled. The EUR/USD and AUD/USD were both propelled just over ½ cent higher to 1.2520 and 1.0500, respectively, in the wake of the weakening USD.
Of course, the US data released since the July FOMC meeting has been a little better. July retail sales increased by a stronger-than-expected 0.8%m/m and payrolls figures showed 163k jobs were added in July.
However, this probably doesn’t yet amount to the “substantial and sustainable strengthening” the Fed is after. Given this, the strength of upcoming US data will now likely take on additional importance in dictating the near-term fortunes of the USD.
Most notable in this regard will be the next payrolls read on 8th September and the ISM manufacturing report on the 5th (the next FOMC meeting is on the 14th).
In the interim, we suspect the ramping up of the Fed’s easing bias will keep the USD and US bond yields heavy. We noted yesterday that the EUR/USD break above 1.2445 resistance brought into view a test of 1.2600. The Fed’s actions this morning simply add to the momentum under the EUR.
Other News: Greek PM Samaras asks for more time to implement austerity measures. Chinese central bank Governor Zhou hints at possible easing action saying "everything is possible". US existing home sale for July print fairly close to expectations (+2.3%m/m vs. +3.2% expected).
Event Calendar: 23 August: CH HSBC Flash PMI; EU PMIs; US jobless claims; US new home sales; 24 August: NZ trade balance; AU RBA’s Stevens testifies; JN BOJ’s Shirakawa speaks; UK GDP; US durable goods orders.
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1 Comments
We’ve been toeing the line for a while that further easing action from the Fed, ECB, and Bank of England should support the NZD/USD through a higher interest rate differential.
Same here - but I could care less about the ECB & BoE actions. The Fed drives the UST and NZD/USD.
It's a shame that an advisor to the Treasury and many LAs cannot see it the same.
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