by Mike Jones
Bernanke has come and gone and the NZD/USD is still flitting around 0.7900.
Of course, the fact the currency is little changed from yesterday morning does mask a fair bit of intra-day volatility. Indeed, the currency was tossed around in a 0.7840-0.7940 range overnight as investors reacted to the Fed chairman’s every word.
Most of Bernanke’s address was directed toward stressing QE tapering is not yet locked and loaded, and remains highly conditional on the strength of the US economy.
As a result, markets have backed off pricing September as the most likely tapering start date.
US interest rates have slipped as a result. Notably, this has bolstered the relative yield advantage of the NZD/USD. NZ-US 2-year swap rate differentials have risen to 275bps, the highest since September 2011.
All told, Bernanke’s testimony leaves us more comfortable with our view that the NZD/USD is more likely to stabilise in a sideways, to slightly higher range, than to keep falling.
Short-term ‘fair-value’ according to our valuation model is still seen in a 0.7850-0.8250 range. As long as Chinese growth concerns remain at bay, we suspect the NZD/USD will spend most of the next few weeks inside this range.
Upcoming event risk for the NZD is fairly thin on the ground. This afternoon’s ANZ-RM consumer confidence index should hold up relatively well despite higher petrol prices.
Across the Tasman, the release of the RBA’s FX transactions data might generate some interest, but won’t trouble the AUD. Offshore, the G20 meeting kicks off tonight but looks set to be usual gab fest with little relevance for markets.
As we noted yesterday, the key level to watch for in the NZD/USD is 0.7900. A daily close above here would pave the way for a move back above 0.8000. Initial support is eyed at 0.7855, with deeper support at 0.7810.
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Majors
It’s been a choppy night in FX markets. Fed chairman Bernanke’s testimony whipped markets into a frenzy.
However, squinting your eyes through the volatility reveals little net change in most of the major currencies. If anything, the USD has finished up marginally weaker.
The GBP, meanwhile, has been a notable outperformer following the less dovish Bank of England minutes.
Investors appear to have settled on a slightly more dovish interpretation of Bernanke’s musings. As a result, global equities have received a boost (S&P500 up 0.3%), US bond yields have continued to ease (10-year at 2.48% from 2.55% prior to the testimony), risk appetite is a touch stronger (VIX index from 14.3 to 13.8) and the USD is a smidge weaker.
Bernanke used much of the Testimony to reinforce QE tapering is not yet a done deal, and the timing of such is still highly data dependent. This is not a new message, but it is one that is starting to get through to markets.
The Fed’s ‘tapering is not tightening’ mantra was also rammed home again, with Bernanke stressing tapering should not be interpreted as a willingness to lift interest rates (which still looks like a story for mid-2015).
After initially sliding from 99.90 to 99.10, USD/JPY has recovered some of its poise late in the session. Meanwhile, the EUR/USD has flown around in a 1.3085-1.3175 range, with rumours of a Spanish sovereign downgrade helping to cap any gains.
In contrast, GBP/USD has outperformed, climbing more than a cent to 1.5210 in the wake of the latest Bank of England minutes. The minutes revealed a surprise 9-0 unanimous decision to leave asset purchases unchanged. Investors had expected at least three MPC members to vote for more easing (as has been the case in the previous five meetings).
Looking ahead, the G20 meeting in Moscow kicks off tonight. The Fed’s plan to taper QE will be a major talking point, and will likely to be welcomed by G20 members given its ‘success’ in halting, or at least slowing, the downtrend in the USD.
Overall, the G20 appears unlikely to produce any excitement for markets. The previous line that countries “will not target exchange rates for competitive purposes” will probably be trotted out again.
Other news:
*US housing starts and building permits undershoot expectations, at 836k (960k expected) and 911k (1000k expected), respectively.
*UK ILO unemployment rate remains at 7.8%, as expected.
*Bank of Canada leaves rates at 1% as expected but downgrades its economic outlook, weighing on CAD sentiment.
Event Calendar:
18 July: G20 begins; NZ ANZ consumer confidence; UK retail sales; US Fed’s Bernanke begins Testimony to Congress;
19 July: NZ net migration; NZ credit card billings; UK public sector borrowing.
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