by Mike Jones
NZ Dollar
The NZD stands out as not only being the strongest performing currency over the past 24 hours, but also one of only a few to actually move in the languid pre-FOMC trading conditions. The NZD/USD climbed around 0.9% overnight, to 0.8240.
It’s difficult to pinpoint the exact catalyst for the kiwi’s gains. But solid demand from technical accounts and another robust GDT dairy price auction probably go some of the way.
The 0.8165/85 zone in the NZD/USD is becoming an important one for technical traders. Resistance has been found here in the past, and 0.8185 also happens to be the 200-day moving average.
The fact the currency managed to bust its way through these levels last night seems to have buoyed NZD demand amongst technical and momentum players. Indicative of such, our momentum model entered a long NZD/USD position at 0.8163.
Dairy prices ticked up 0.3% at last night’s GDT auction. While only a small gain, this represents another positive outcome given that prices are already very high (+50%y/y) and dairy supply appears to be increasing. The upside risk on Fonterra’s already high payout forecasts is growing.
Absent a major surprise, we doubt today’s Q2 Balance of Payments figures will be all that market moving. We expect the year-to-June 2013 deficit to be around $10.2b, equivalent to 4.8% of GDP. This is in line with the market’s median view.
More important will be tomorrow morning’s local GDP report (10:45am NZT) and FOMC meeting (6am). Overall, we suspect the risks surrounding the USD and NZD/USD from the FOMC meeting are fairly balanced, or perhaps tilted slightly towards the downside for the USD. See Majors for a full preview.
For today, a tight range is expected as markets hunker down. Support for the NZD/USD should kick in around 0.8185 with bounces likely to be limited to 0.8270 on the day.
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Majors
Currency markets are drifting as investors hold their breath ahead of tomorrow’s watershed FOMC meeting. While the USD has continued to dribble lower overnight, the GBP, EUR, and JPY have all stuck to fairly tight ranges.
Economic data was largely ignored. Investors decided the small downside surprise in August US inflation figures (1.5%y/y vs. 1.6% expected) was unlikely to throw the Fed off its tapering plans.
Meanwhile, the NAHB housing market index consolidated at high levels (58 vs. 59 expected). 10-year US bond yields continue to shuffle sideways in the 2.80-2.95% range.
In Europe, an upbeat German ZEW survey failed to make a meaningful impression on markets. The headline index rose from 42 to 49.6 – the highest since April 2010. European equities all fell very slightly, and the EUR/USD tracked sideways in a 1.3330-1.3370 range.
Tomorrow morning’s (6am NZT) FOMC meeting promises to be a market mover whatever the nature of the announcement. The knee-jerk reaction will be all about whether the Fed does indeed follow through with QE tapering. We and the market expect US$10b to be lopped off the QE program (taking it to US$75b/month), with the reduction concentrated in Treasury purchases. Such an outcome would likely be supportive of US bond yields and the USD, at least initially.
But the more durable impact will likely be determined by a combination of a) Bernanke’s rhetoric and tone accompanying the decision, and b) the Fed’s 2016 projections for the economy and the Fed Funds rate. Note that the 2016 forecasts have not yet been seen by the market. Yesterday’s article from WSJ ‘Fed watcher’ Hilsenrath has further sharpened attention on these.
To us, the risks are that on a) recent mediocre labour data will see Bernanke adopt a cautious tone (possibly even lowering the unemployment threshold that signals the end of QE). For b), Fed projections for the Fed Funds rate in 2016 may come in below the market implied rate of 2.25% (from the Eurodollar strip).
Under both of these scenarios, the USD and 10-year yields could actually end up lower in the wake of the FOMC announcement. An announcement that sees the USD significantly higher would probably require a taper of US$20b or more, no lowering of the unemployment threshold, and a 2016 Fed Funds forecast at or above 2.25%.
Other News:
*RBA Board minutes suggest the RBA has further watered down its easing bias, and another 25bps cut no longer looks likely for 2013. The door was left open to further easing, but a cut does not appear imminent.
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