NZDUSD trading at 0.7320 after trading in a 1% range; USD makes a slight recovery as TWI up 0.4%; China foreign reserves dip below $3tln for the first time in six years

By Jason Wong

The theme of the past 24 hours is the USD attempting to make some recovery on a day where Trump is out of the spotlight. The USD major currency TWI is up 0.4%. The Fed's Harker signalled that the March meeting remains live for a possible rate increase, echoing the Fed's William's comments on Friday. Meanwhile one of the most dovish FOMC members, Kashkari published a typically dovish essay that highlighted how the Fed wasn't meeting its inflation mandate and that accommodative policy remained appropriate. He added that a strong USD will likely continue to put downward pressure on inflation.

GBP has been the only major currency to hold its ground against the USD. The BoE's Forbes said that if the UK economy remained solid and inflation continued to pick up then “this could soon suggest an increase in bank rate”. GBP has traded in a wide range, with those comments from Forbes simply helping GBP recover from earlier, inexplicable losses in the trading session. From a low around 1.2350, it has now reached 1.25.

The main price action in the NZD was a 50 pip move higher, following NZ 2-year inflation expectations rising by a chunky 24bps to 1.92%. That move was unwound last night, and some, before the combination of a USD turnaround and a pleasing GDT dairy auction saw the NZD recover a little. It trades this morning at 0.7320, having traded in an almost 1-cent range, around 0.7280 at its lows this morning and circa 0.7375 a little before the local close yesterday. Dairy futures were pointing to a soft auction result, but average prices rose by 1.3%, with WMP up 1%.

Yesterday, Governor Wheeler announced that he would not be seeking a second term as Governor when his current term expires in late September. With the proximity of the next general election, Deputy Governor Spencer will be acting Governor for six months until the next government appoints a new Governor. The announcement and interim solution came as no real surprise and there was little market reaction. At the margin, the arrangement is helpful for the market’s view of a possible first tightening in November, with Spencer at the helm at that point rather than a newbie.

The RBA’s policy announcement came and went with little surprise, with the Bank maintaining a neutral stance and leaving the substance of its policy outlook statement in the final paragraph unchanged. OIS pricing shows that the market expects little chance of the RBA adjusting policy this year. The AUD is trading not far off the pre-announcement level, around 0.7635. NZD/AUD went up through 0.9630 after the NZ inflation expectations data but has since settled around 0.9580.

In the euro area, there hasn't been a continuation of the politically-driven price action seen earlier in the week. French, Italian and Spanish bond yields have settled down, with spreads to Germany little changed. EUR is trading around the 1.07 mark. The currency was hit after much weaker Germany industrial production data, but the move wasn't sustained as the number of trading days appears to be behind the weakness.

China's foreign reserves dipped below the USD 3 trillion mark for the first time in six years. However, that move was close to expectations, with the PBoC still running down reserves as it supports the yuan in an environment of ongoing capital outflow pressure, despite a tightening of controls.

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