by Mike Jones
NZ Dollar
The NZD/USD spent most of Friday’s offshore trading session consolidating above 0.8100. Globally, currency markets struggled a bit for direction.
Fuelled by the RBNZ’s more hawkish turn last week, the NZD/USD looks to be breaking out of the 0.7700-0.8110 trading range that has contained the currency since May.
As we noted last week, a daily close above the 0.8185 200-day moving average would confirm the break. This sort of bullish signal would be consistent with a NZD/USD move back into the mid-80s.
However, there are a couple of fairly big near-term tests for the NZD to negotiate first. We expect a 0.2% contraction in Thursday’s Q2 GDP, due Thursday. This is below both RBNZ official expectations (+0.4%q/q) and those of the market (+0.2%q/q).
A result on our expectations would probably drag the NZD/USD back below 0.8100. However, with the more forward looking NZ economic indicators still pointing towards 4% growth, the negative effects on the currency will probably be short-lived.
Early on Thursday morning, the US Federal Reserve will settle the ‘Septaper’ debate. We expect a US$10b reduction in the Fed’s asset purchase scheme, to US$75b/month. However, and as we have noted previously, we doubt this would be a death knell for the NZD/USD, unless it is accompanied by some very hawkish language.
For the NZD/AUD, while a weak NZ GDP result presents some downside risks, these will have to balanced against the possibility of a dovish set of RBA minutes on Tuesday.
Recent RBA communications have sounded decidedly neutral, but we expect an easing bias to shine through the minutes. For a market that prices less than one full RBA cut over the coming 12 months, this could weigh on the AUD/USD and provide a boost to NZD/AUD.
Outside of the above, Wednesday’s NZ Balance of Payments figures (current account deficit of 4.8% of GDP expected) and GDT dairy auction (another positive?) may be of passing interest to the NZD.
In contrast, we doubt today’s local consumer confidence and PSI numbers will trouble the currency. Currency markets will probably tread carefully in the lead up to the FOMC meeting, with the NZD/USD stuck inside a 0.8080-0.8185 range.
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Majors
Currency markets limped through to the end of last week in fairly listless fashion. Most of the majors chopped sideways in directionless markets. The GBP continued its strong run, notching up another ¾ cent gain against the USD (to close at 1.5876).
US bond yields lost a bit more ground on Friday (10-year 2.95% to 2.88%), once again tempering sentiment towards the USD. Not only did US data underwhelm, but various rumours/reports suggested Larry Summers is far from a shoe-in to be the next Fed President.
The Summers/Yellen debate is shaping up as potentially important for the USD given their perceived differences in bias (Summers hawkish, Yellen dovish). However, the WSJ reported on Friday that we’re unlikely to get an announcement from the White House on the official nomination this week.
Instead, the FOMC meeting on Thursday morning (6am NZT) will be the focus for markets. We expect the Fed will fire the starting gun on ‘tapering’, trimming its monthly QE purchases to US$75b from US$85b. Other than providing a brief knee-jerk boost to the USD, we doubt such an announcement, in itself, would be market moving.
A Friday Reuters poll shows 49/69 economists expect the Fed to announce tapering this week, with the median expectation being a US$10b reduction in QE.
The reaction from US bond yields and the USD will depend more on a) the Fed’s language accompanying the decision, and b) the Fed’s new forecasts. While we expect the Fed’s forecasts to remain fairly upbeat, Bernanke will probably retain an extremely cautious tone and reinforce his ‘tapering is not tightening’ message. Overall, and with USD long positioning still stretched, we suspect the risks are for a weaker USD this week.
As usual, price action ahead of the FOMC meeting is likely to be fairly tame. Investors might give US CPI and housing starts figures some passing attention in the lead-up to the Fed decision. We’ll also get the minutes from the latest BoE and RBA meetings this week, and the German elections are set to take place over the weekend (a win for Merkel still looks likely, with limited currency market implications).
Other News:
*US Sep Michigan Consumer Confidence undershot expectations, falling to the lowest level since April (76.8 vs. 82.0 expected).
*US August retail sales also missed expectations (0.2%m/m vs. 0.5% expected).
*US and Russia strike deal on Syria chemical weapons.
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