Federal Reserve explicit that October would see the end of tapering; NZD receiving strong bids and now NZDUSD is within spitting distance of 2011 high

by Raiko Shareef

NZ Dollar

The NZD is higher on the back of the US FOMC Minutes, up 0.4% against the USD to 0.8820.

While we consider the reaction slightly odd, given the lack of new information, lower US bond yields and still-depressed volatility means that carry remains the all-important consideration.

The NZD is the developed-world leader in yield, and for now, that’s enough to see it bid. We’re within spitting distance of the 2011-high of 0.8840.

After some trepidation about how much support RBNZ Deputy Governor' McDermott’s speech would give the NZD, it turned out to be rather innocuous.

He simply confirmed the Reserve Bank’s view on potential GDP growth for the near term as more like 2.8%, from 2.3% last year. This speed limit is no higher than we would have thought. And it’s exactly what the Bank has been talking about publicly anyway (for example, at the June MPS FEC testimony).

On the crosses, we note that JPY’s underperformance against the USD overnight has NZD/JPY back at three-month highs at 89.60. From here, a crack at the 2014-high of 89.93 seems within reason.

Another light day on the local data calendar. We’ll be looking at the BNZ-BusinessNZ PMI for signs of further slowing, which might take some of the edge off NZD.

The only resistance level within sight is 0.8840. We see initial support at 0.8740.

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

----------------------------------------------------------

Majors

The USD is weaker against all major currencies, with the blame unconvincingly being laid at the feet of the FOMC’s June Minutes. To us, they offered little new information, but the US Dollar Index (DXY) is 0.2% softer at 80.0.

One unexpected aspect in the Minutes was the explicitness in which the Fed discussed the end to asset purchase tapering. At the current pace of reducing purchases by $10bn per month, there will be a cumulative $15bn to close off over the October and December meetings. The FOMC decided to cut short market agonising about that messy last $5bn by implying that October would mark the end of tapering. At face value, this reads as slightly hawkish, but the Minutes made clear that Fed officials considered this “a technical issue with no substantive macroeconomic consequences”.

So the debate really rests on when the first Fed Funds Rate hike will be, as well as how high it will climb in this cycle. As expected, neither of these issues were definitively addressed. Keep in mind that these Minutes are already outdated, given the unexpectedly large improvement in labour market figures released last week.

One plausible explanation is that the market was positioned for a considerably more hawkish set of minutes, in light of several high profile analyst revisions to Fed Funds Rate projections. In the wake of last week’s employment report, analysts have generally brought forward their expectations of the first hike. The consensus remains for Q3 2014.

There was little else to inspire much market reaction overnight. Somewhat lost in the noise, ECB President Draghi delivered a speech that emphasised the importance of structural reform in Europe. Hardly exciting stuff, and doing nothing to prevent EUR from heading in the wrong direction, as far as the ECB is concerned. EUR/USD is 0.3% stronger for the day at 1.3650.

And for what it’s worth, the equity market sell-off did not extend for a third day, with initial earnings reports looking positive. The S&P 500 is up 0.5%, and the Euro Stoxx 50 recovered 0.6%. But it’s early days yet, and sentiment can quickly sour.

Today, the Australian labour market report will be the highlight for our day, especially with the market now considering the RBA to hold a mild easing bias. The unemployment rate is expected to deteriorate further from 5.8% to 5.9% (our NAB colleagues expect an even worse 6.0%). China’s monthly trade balance will also be watched during our session.

Later on, the Bank of England is not expected to make any change at its meeting, so we’ll have to wait until the Minutes are released later in the month to get any colour on how close BoE officials consider themselves to the first rate hike. In the US, the Fed’s George and Fischer are due to speak, on the “economy” and “financial sector reform” respectively. The former should play to her hawkish tendencies, while the latter’s bias is not yet fully known.

All its research is available here.