Head-scratching over rise in the NZD after downward revisions to prior GDP growth rates; perhaps investors heartened by Yellen

By Raiko Shareef

This is our last Markets Wrap for this year. We thank you for your continued readership, and wish you a safe and enjoyable holiday season.

NZ Dollar

Having dropped below 0.7700 in the wake of the Fed yesterday, NZD/USD has recovered to sit 0.4% stronger for the day at 0.7740.

There is no clear fundamental reason for NZD’s outperformance, with a similarly curious rebound in AUD. We suspect some reluctance to push through technical supports (~0.7760 in NZD, ~0.8080 in AUD).

We are sceptical that NZ’s Q3 GDP report had much to do with it, despite an ostensibly strong result.

The headline quarterly gain of 1.0% m/m was significantly better than the +0.7% the market had expected (but close to our own 0.9% pick).

But a series of downward revisions to historical data meant that annual growth was slower than anticipated in Q3, as well as before that.

Certainly there was nothing in the data yesterday to have RBNZ Governor Wheeler itching to pull the rate hike lever.

An unusually busy Friday in NZ today, with net migration and business confidence data worth watching. However, we do not think the market will get excited by either.

We pick a 0.7680 – 0.7890 range for NZD/USD.

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

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

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

Majors

Risk appetite has continued to improve, with a promise from the Fed to be “patient” in normalising interest rates stoking equities. The USD rose strongly in the immediate aftermath, but has since pared its gains.

There still seems to be some confusion in the market about what the Fed communicated yesterday. See the Fixed Interest section for a blow-by-blow account. Our take is that the Fed has effectively said that it could begin raising rates as early as April 2015, much sooner than the market has been pricing. We still pick June as the most likely month for the first hike.

This does not seem consistent with the idea that a “dovish” Fed has inspired equities to rally, as some commentators are suggesting. One doesn’t normally expect the share market to respond favourably to the prospect of interest rate hikes within the next six months.

Instead, we suspect that investors were heartened by (1) the confidence that Fed Chair Yellen expressed about the US economy, and (2) the reassurance that the coming hiking cycle will not be like the last, where there was a series of 17 consecutive 25 bp hikes. The Fed seems more likely to raise rates in bursts, and then pause for assessment.

That, and a near-5% rally in crude oil prices, helped to steady equity investor nerves after a rather bleak fortnight. The Euro Stoxx 50 closed 3.3% higher, while the S&P 500 is currently up 1.6%, after finishing 2.0% higher post-FOMC yesterday. The VIX is down at 17.7, having gone above 25.0 earlier in the week.

The bounce in oil has proven short-lived, though, with WTI now down 1.0% for the day. Saudi Arabia’s oil minister rebuffed any ideas that the Kingdom and its fellow OPEC members had begun considering production cuts to stem the rout.

The USD has had a mixed performance overnight, after posting strong gains immediately after the FOMC. It lost ground against the GBP, thanks to a bumper UK retail sales report (+1.7% m/m vs +0.3% expected).

On the other hand, it strengthened against the CHF after the Swiss National Bank surprised markets by introducing a negative deposit rate. Our NAB colleague Gavin Friend has been warning of this for some time, noting that the CHF TWI’s recent gains had tightened monetary conditions. The SNB’s move looks to be in anticipation of the ECB easing policy early in the new year, which would have put pressure on the 1.20 floor on EUR/CHF that it has vowed to defend.

Following the Fed yesterday, the market effectively switches to holiday mode, which should extend well into January. This should see liquidity very low, exacerbating already-whippy price action. Tonight, we will look for the Richmond Fed’s Lacker on the wires, the first Fed speaker out of the gates post-FOMC.

Other news: 
* Philly Fed Index +24.5 vs +26.0 exp.
* German IFO survey improved marginally, as expected.
* US core CPI +1.7% y/y vs +1.8% exp.

All its research is available here.