Against a modestly stronger USD backdrop, the NZD has underperformed, while markets are fairly quiet ahead of the FOMC announcement tomorrow morning.
After yesterday’s swoon in US equities, much of the 1.4% fall in the S&P500 has been sustained, with the market flat overnight and the VIX trading around 19 compared to last week’s average of 16. Oil prices have had a good day, up around 2% as global inventories shrank further in February, reducing the supply glut, and this has boosted the energy sector.
In trade-war developments, yesterday the Washington Post reported that Trump was prepared to hit China with $60b in tariffs by Friday, doubling the amount that senior aides had presented to him. China has responded with a conciliatory tone, with Premier Li saying that China wants to avoid a trade war – the government plans to further open the manufacturing sector and that it won’t force foreign companies to transfer technology to domestic ones while doing so. Japan’s trade minister Seko said that it was “highly likely” that Japan would secure exemptions for specific goods with regards to US import tariffs.
The G20 meeting of finance ministers and central bankers has just ended with the communique highlighting the importance of trade as protectionism looms, adding in the comment “We are working to strengthen contribution of trade to our economies.”
The only economic release of note was UK core and headline CPI inflation coming in 0.1% below market expectations. This sees GBP down slightly for the day near 1.40 but against a backdrop of a stronger USD. GBP has actually been one of the better performing majors. Wage data tonight are more important, ahead of the BoE’s meeting at the end of the week, and GBP is probably still feeling a positive vibe after the reports of a transitional Brexit deal, as we reported yesterday.
The NZD has underperformed and trades this morning just under the 0.72 mark and lower on all the key crosses. Key support of 0.7175 has held, with the overnight low being 0.7186. The latest GDT dairy auction showed average prices falling 1.2%, in line with market expectations. The result was dragged down by a 8.6% fall in skim milk powder while, more important for NZ dairy farmers, whole milk powder rose 0.1%. We put the NZD’s underperformance as simply a reversal of the previous day’s move. This time yesterday, NZD was likely over-inflated by NZD /AUD buying pressure which saw the cross move up to 0.94 and it has since reverted back down to the 0.9350 mark. As we noted yesterday, 0.94 was at the upper limit of our fair value estimates so a pullback from that level makes sense.
EUR is also on the soft side, down to 1.2260, reflecting flows more than fundamentals, perhaps as traders close short-USD positions ahead of the FOMC.
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