Fed is still ‘full steam ahead’ with respect to its quantitative easing (QE) programme

By Mike Jones


It’s been onwards and upwards for the NZD over the past 24 hours. The NZD/USD has just squeaked above 0.8400 – a full cent higher than this time yesterday.

Yesterday’s RBNZ policy statement reinforced the tailwinds under the NZD. The OCR was left at 2.5% as expected.

But the Bank’s increasingly hawkish undertones, particularly regards the frothy NZ housing market, made the contrast to the easing bias of FOMC (reinforced only a few minutes earlier) even more stark.

A similar comparison can be made to the RBA (our NAB colleagues expect a further 75bps of RBA rate cuts).

The NZD/USD and NZD/AUD both strapped on gains of around ½ cent in the wake of the RBNZ statement.

Overnight, the NZD continued to outperform as a range of speculative and leveraged players re-entered NZD long positions.

It’s worth noting, our momentum model would enter a NZD/USD long position at 0.8460 – the top of the recent range.

This suggests that a break above 0.8460 would see demand from momentum accounts start speeding along the uptrend.

As noted in previous days, we continue to hold a short-term upside bias for the NZD/USD. However, bear in mind the next 24 hours are stacked with event risk. Most notable in this respect is tonight’s US employment data (see Majors).

But there is also European, US, and Chinese manufacturing PMIs to watch out for (the Chinese PMI will be released at 2pm NZT).

NZ migration figures at 10:45am are unlikely to trouble the currency, but keep an eye on a speech from the RBNZ Governor beginning around 1pm. 

Broadly speaking, we expect the PMIs to paint a picture of gradual recovery in the global manufacturing sector. This was the general message from the more timely ‘Flash’ measures. Further signs of recovering global growth would act to support the NZD through enhanced risk appetite and higher commodity prices.


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This week’s broad USD weakness theme remains intact. That said, overnight FX moves were mostly about profit-taking and position squaring as investors brace for month-end and tonight’s US employment data.

Yesterday’s FOMC pronouncement contained few surprises. It confirmed the Fed is still ‘full steam ahead’ with respect to its quantitative easing (QE) programme. 

The Statement’s wording was almost a carbon copy of the December FOMC statement. Monthly purchases of US$40b of Agency mortgage-backed securities and US$45b of Treasuries will continue indefinitely, and the proceeds of maturing issues will continue to be reinvested.

All up, the Statement reaffirms our conviction that the current pace of QE is likely to be maintained through to late 2013 at the earliest and that this will provide ongoing support to ‘risk’ markets.

We also contend that this will keep the USD soft with the pace of Fed balance sheet expansion standing in stark contrast to the ECB, BoE and – for the time being at least – the Bank of Japan.

For now at least, the market appears to agree with our assessment. The USD remained on the back-foot against the GBP, EUR, AUD, and NZD overnight (USD/JPY provided some contrast, bouncing back to 91.40 highs).

This despite a lacklustre night in equity markets (the major US equity indices are down a small amount), and an encouraging batch of US data.

US personal income leapt a spectacular 2.6%, thanks to dividend/bonus payments paid out in late 2012, and the Chicago PMI soared above analyst expectations (55.6 vs. 50.5 expected).

For tonight’s US non-farm payrolls figures, the market consensus expects a solid 165k jobs gain, and an unchanged 7.8% unemployment rate. A result along these lines (or better) may just remind investors that the labour market remains on an improving trend, allowing sentiment towards the USD to briefly recover.

However, given the Fed’s commitment to its QE goals, we’d expect grinding USD weakness to resume before long. We’re looking for the EUR/USD rally to continue with a push into the 1.3600-1.3800 window the immediate target.

Other News:

*German unemployment falls from 6.9% to 6.8% (6.9% expected).

*German retail sales collapse 1.7%m/m in December vs. -0.1% expected.

*US jobless claims 368k vs. 350k expected.

*Canadian Nov GDP 0.3%q/q (0.2% expected).

Event Calendar:

1 February: NZ migration; NZ RBNZ Governor speech; CH manufacturing PMI; EU European PMIs; US non-farm payrolls; US ISM manufacturing.

All its research is available here.

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I think the USA will continue to weaken against other key export country exchange rates ie China, Australia, South America,  NZ as it tries to rebalance making the US become a more export driven and competitive economy. More business will return to the shores of the USA particularly if the US Dollar depreciates by another 20-30%. A combination on QE from the United States with some increases in oil /dollar correlation.  China will have two options to let the Yuan increase which it will not like as it hurts exports or try to publish bad news out of China to reduce the strength of the Yuan appreciation against the dollar. When you look at it we are heading for a currency crisis that will not only hurt NZ exports but will hurt many countries that are export driven and want a weak currency.