by Mike Jones
NZ Dollar
ANZAC outperformance has been the main story of the night, with the NZD and AUD holding firm despite a general strengthening in the greenback. The NZD/USD spent the night (it’s fifth consecutive now) bouncing around inside the 0.8270-0.8330 range.
The USD drew some support this morning from the Fed’s confirmation (in the September FOMC minutes) that tapering is still likely this year, with purchases expected to be wound down fully by mid-2014.
Investors were a little reluctant to get too carried away with taking the USD higher though, as the risk of fiscal shenanigans derailing the US recovery continues to grow.
Moreover, for the NZD and AUD, cross buying against the EUR and GBP provided a offset against the stronger USD. NZD/EUR rose from 0.6110 to almost 0.6150 and NZD/GBP jumped ½ cent to 0.5200.
The NZD/GBP has been tracking sideways in a 0.4980-0.5280 range for about 4½ months now. But, as we noted on Monday, with the positive UK economic story increasingly priced in, and the BoE likely to continue with forward guidance, the near-term risk is that we see a topside break of this range.
Another day of 0.8270-0.8330 range-trading is in prospect for the NZD/USD today. That is, unless we see a significant surprise from today’s local economic data.
Investors are most interested in this afternoon’s Australian employment data for September (due 1:30pm NZT). The consensus expects a 15k increase in employment. We doubt a strong result would trigger another ramp up in RBA rate cut expectations though, given most of the strength will likely reflect part-time hiring for the Australian election.
In NZ, keep an eye out for the BNZ PMI at 10:00am. Some cooling from August’s red hot 57.5 reading seems likely.
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Majors
Day 9 of the US government partial shutdown and in broad terms currency markets continue to range trade. A stronger USD did knock the top off most of the majors overnight, with the GBP in particular underperforming. In contrast, the AUD and NZD have barely budged.
This morning’s FOMC minutes were USD supportive at the margin. Overall, they suggested that, despite the September tapering ‘balk’, the Fed mostly retains its previously outlined tapering schedule. Most Fed officials still expect to taper QE purchases “this year”, and end them completely in mid-2014.
Moreover, the decision not to taper in September was regarded as a “close call”. This may see market pricing continue to gravitate towards a December Fed taper.
However, the longer US politicians dither over the shutdown/debt ceiling, the bigger the risk tapering gets pushed back into 2014. We suspect this risk is why we haven’t seen a larger ‘buy USD’ reaction to the minutes.
Nonetheless, the threat of US government default still hasn’t rattled markets in a noticeable way. The VIX index of risk aversion has moved higher but, at 20, remains well below the 40 peaks of the 2011 debt ceiling episode.
Gold prices are not roaring higher and neither are CDS spreads on US government debt (although as we noted yesterday they have snuck up about 20bps).
Look hard enough and you can find some evidence of stress though. One month US Treasury bill yields remain 30bps higher than last week and an overnight auction of one-month Treasury bills went poorly. The bills were sold at a yield of 35bps, triple the 12bps paid by the Treasury last week.
Some are citing a possible USD liquidity squeeze as part of the reason for the USD’s overnight gains. This talk is probably overdone though. Three month and longer-dated Treasury yields haven’t really moved, suggesting the market is pricing some chance of a ‘technical’ and short-term US default only. Heavy GBP selling has been a driver of the higher USD though.
USD/JPY is also a little higher, as the currency continues to closely track US yields (10-year Treasury yields up 4bps overnight to 2.66%).
A trifecta of weaker UK economic data (trade balance, manufacturing production, and industrial production) saw the market unwind some of its UK optimism, slamming GBP/USD from 1.6100 to around 1.5950. EUR/GBP jumped from 0.8430 to 0.8480.
Tonight’s BoE meeting should be relatively uneventful. Interest rates and asset purchases are expected to be left on hold, meaning we will have to wait for the BoE minutes for any deeper insights into UK monetary policy.
Other news:
*US White House confirms Janet Yellen will be formally nominated as the next Federal Reserve chair.
Event calendar:
Oct 10: NZ BNZ PMI; AU employment; UK BoE policy decision; US jobless claims; US Fed’s Bullard & Williams speak;
Oct 11: NZ food price index; EU German CPI; US Michigan consumer confidence.
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