by Mike Jones
NZ Dollar
A weak fight back in the USD knocked the NZD/USD off yesterday’s 0.8430 post GDP/FOMC highs. However, at 0.8370, it remains almost 2½ cents above where it started the week. Further near-term gains look likely.
The New Zealand economy grew 0.2% in the second quarter of 2013. This may have been the weakest quarter of growth since the -0.4% of Q4, 2010 but it was still a remarkable number when you consider NZ was in the midst of one of its worst droughts on record. One might suggest that the economy has narrowly avoided capsizing at a critical moment.
The data further emboldened the NZD yesterday, having earlier topped up on Fed Chairman Bernanke’s policy drugs. NZD/USD hit a 4-month high of 0.8435 and NZD/AUD flew back above 0.8800. The daily close above the key 0.8820 resistance level on the cross means an assault on the August 0.8930 highs looks increasingly likely. Our Q4 forecast remains 0.9000.
We have revised up our NZD/USD forecasts. We’ve consistently stressed the upside risk attached to our previous NZD/USD forecasts.
Yesterday’s unambiguously dovish FOMC meeting, and its negative implications for the USD, essentially gives us cause to act on these upside risks. We now see the NZD/USD at 0.8350 by year-end, and the NZ TWI at 79.00. Keep an eye out for today’s strategy note for more details.
For the next few weeks, with NZD/USD momentum positive and a short-term NZD/USD ‘fair-value’ range of 0.8100-0.8700 (as estimated by our valuation model) we wouldn’t be surprised to see a test of 0.8600. We doubt we’ll see much action today though.
Profit taking and importer supply may see the NZD/USD continue to slip lower. However, losses should be limited to support at 0.8330. Short-term resistance is at 0.8430.
Today’s second tier economic data (migration and credit card spending) will be probably be ignored, as the nation tunes in to the America’s Cup racing in a few minutes…
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Majors
Markets spent most of the night in a kind of stunned silence, as investors continue to assess the implications of yesterday’s FOMC decision. A smattering of upbeat US data did throw the USD something of a lifeline, following the hiding it took yesterday. As a result, most of the major currencies have dribbled off their post-FOMC highs.
Not only did the US Philly Fed index rise to a 30-month high (22.3 vs. 10.3 expected), but August existing home sales hit another 6-year high, and jobless claims snuck in below forecasts. US bond yields scraped off their lows following the data, with the 10-year Treasury yield rising from 2.69% to 2.74%.
The tick back up in US yields emboldened the USD/JPY (back up to 99.50 from 98.50), which spearheaded a small fight back in the greenback. The GBP/USD and AUD/USD gave up around half of yesterday’s gains (at 1.6040 and 0.9430 respectively). In contrast, the EUR/USD has held firm, and remains around 1.3525.
While European stocks enjoyed the expected boost from the Fed’s dovish tilt yesterday, US stocks have struggled to extend the precious day’s gains. The S&P500 is currently down 0.2%. Commodity prices are mixed, with gains in previous metals prices being offset by energy price falls of 1.1-1.7% (CRB index +0.3%). Still, the VIX index has continued to fall (currently 13.3%), indicative of further brightening in investor’s risk appetite.
There are no prizes for guessing which way FX momentum shifted in the wake of yesterday’s FOMC meeting. The USD has fallen completely from favour and our momentum model is now heavily short. With momentum accounts adding to USD shorts, the greenback looks set to remain on the back foot in the near-term. We’re in the process of revising our USD forecasts lower and will release a fresh set of FX forecasts with the NAB Global FX Strategist on Monday.
Looking ahead, the Fed will remain in focus tonight with regional Presidents Kocherlakota (Minneapolis) and George (Kansas City) both due to speak. George was the only dissenter to yesterday’s decision.
Other News:
*UK retail sales proved a little disappointing in August, with headline sales falling by 0.9%, almost reversing July’s 1.1% increase. Excluding automotive fuel, sales volumes fell by 1.0% against market expectations for a flat outturn.
*Swiss National Bank kept its benchmark interest rate unchanged at 0% (with 1.20 EUR/CHF floor), as expected.
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2 Comments
Yesterday’s unambiguously dovish FOMC meeting, and its negative implications for the USD, essentially gives us cause to act on these upside risks. We now see the NZD/USD at 0.8350 by year-end, and the NZ TWI at 79.00. Keep an eye out for today’s strategy note for more details.
Some caution is in order:
The "market is in a state of shock" after the Fed's decision to postpone taper, noted Credit Agricole's David Keeble adding that "Fed credibility and its communication strategy are in tatters." This, as others have noted, will make it many times more difficult to manipulate yields lower in the future as the "Fed is moving to a new way of looking at asset purchases." Read more
One has to admire the accounting tactics...
In a world in which when the numbers don't comply with the propaganda, the only recourse is to change the rules, and if that fails, change the numbers themselves (see Fukushima radiation count, US GDP, Employment numbers, anything out of Europe, etc.) it was only a matter of time before that last sticking point of the grand made up narrative, the lack of economic improvement in the European despite evil, evil austerity (which somehow has resulted in record debt which is rising faster than expected virtually everywhere in Europe) resulting in unpalatable deficits, was magically "fixed." This was resolved moments ago when as the AP reports, "European Union finance officials have reached a preliminary agreement to change the way the bloc determines some deficit figures, which might lessen the pressure for austerity measures in crisis-hit economies." In other words, Europe's "recovery" will now be based on even more made up numbers. One wonders: since Europe is finally admitting that the numbers are fake, i.e., lying, are things finally getting truly serious again?
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