by Mike Jones
NZ Dollar
A weak AUD/USD and broad-based gains in the greenback have spelled double trouble for the NZD/USD over the past 24 hours. The currency is around 0.8% below levels this time yesterday, pretty close to key support at 0.8240.
The AUD/USD shed almost 1% over the past 24 hours, to claim the dubious honour of weakest performing G10 currency. Yesterday’s fighting words from RBA Governor Stevens started the rot.
Steven’s assertion the AUD is likely to be “materially lower” at some point certainly amounted to a sharpening of the RBA’s exchange rate rhetoric. Renewed speculation (including from RBA ‘watcher’ Alan Mitchell) that the RBA could walk the talk with full blown currency intervention added to the selling pressure on the currency overnight. From 0.9575 prior to the Stevens comments, the AUD/USD slumped to an overnight low of 0.9475. The NZD/USD slipped ½ cent or so lower in sympathy.
Both the AUD/USD and NZD/USD also felt the pinch of a broad-based rally in the greenback overnight, as investors lighten USD short positions ahead of tomorrow morning’s (7am NZT) US FOMC meeting.
We doubt the meeting will produce much in the way of fireworks (there is no press conference or forecast updates to excite the boffins). But there is always the potential for volatility as every word of the statement is picked over.
Closer to home, Thursday’s RBNZ OCR review is the highlight of the domestic event calendar. While the recent fall in the NZD will have come as some relief, the TWI is still 2% above the Bank’s September (74.7) assumption. This, along with the relative success of his Australian counterpart, may well embolden Governor Wheeler to have another crack at jawboning the currency lower. Note that we’ll also get the latest RBNZ balance sheet data today (3pm). This will tell us whether the Bank used its ‘passive intervention’ capabilities to sell into September’s bounce in the TWI.
For today, there is little on the local data calendar likely to influence the NZD. Expect some attention on China and the fact yesterday’s PBOC liquidity injection seems to have failed to ease money market tensions.
NZD/USD support in the 0.8230/40 window has proved to be robust over the past two months, and we suspect it will hold ahead of the FOMC.
Exporter hedging requirements may provide an additional prop for the NZD/USD on the day.
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Majors
Broad-based strength in the greenback was the overriding theme in FX markets overnight. All the major currencies lost ground against the USD. The European currencies (NOK, DKK, and EUR) have tended to outperform, with the AUD and NZD languishing at the bottom end of the performance rankings.
The USD’s gains have mostly been a function of positioning and profit-taking ahead of month-end and tomorrow’s FOMC meeting. According to CFTC data (and Reuters calculations), the speculative community went outright short the USD last week for the first time since February. Some of these short positions were undoubtedly bought back overnight as investors factored in the risk of a less dovish Fed.
For the AUD/USD and NZD/USD, the stronger USD simply kept the recent downtrend intact. A further ½ cent was also sliced off the GBP/USD, on top of yesterday afternoon’s ¾ cent selloff (currently 1.6045). USD/JPY ground up from 97.60 to around 98.20.
It was a particularly volatile session for the EUR. ECB governing council member Nowotny took a dim view of recent chatter suggesting the ECB might need to cut rates to circumvent EUR strength. He said the ECB would basically have to live with the strong currency and the Bank has no tools to address it. The EUR briefly soared from 1.3755 to 1.3810, before succumbing to the stronger dollar and sliding all the way back to 1.3750.
Looking ahead, markets are now in a holding pattern ahead of the Fed decision tomorrow morning (7am NZT).
No one is expecting any change in policy, but we might see a few words reshuffled to reflect the less upbeat US economic outlook. Tapering of Fed asset purchases still looks like a story for next year to us. The market now broadly shares this view, with the consensus seemingly dialled in for March.
Given this, and still bearish USD positioning, the biggest risk currency markets face is probably that a less dovish than expected statement revives the USD. Such an outcome could see the DXY index extend its gains to 80.00 (currently 79.60), squeezing the EUR/USD back below 1.3700.
Other news:
*October US consumer confidence drops to a 6-month low (71.2 vs. 75.0 expected) as the government shutdown weighs. Most expect the blip to be temporary.
*US retail sales match expectations for a 0.4% (ex-auto) gain in September.
*China PBoC conducts the first liquidity injection in a fortnight (7-day reverse repos), but money market rates remain elevated.
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