By Mike Jones
The NZD has drifted lower over the past 24 hours, amid a relatively lacklustre start to the week in currency markets. After starting the week around 0.7330, NZD/USD is now closer to 0.7290.
With traders reluctant to take large positions ahead of tomorrow’s FOMC meeting, currency markets were relatively quiet overnight.
A mild squaring up of speculative investors’ sizeable USD short position dominated proceedings, resulting in a slight firming in the USD. While the stronger USD saw most major currencies edge lower, the NZD tended to fall by more than most. A noticeable narrowing in NZ-US 3-year swap spreads (from 317bps to 310bps) weighed on the NZD/USD, as did NZD/AUD selling from an array of macro accounts.
NZD/AUD slipped from 0.7980 to a 3-month low of around 0.7930 overnight. Our short-term NZD/AUD “fair-value” model has been suggesting downside risks to NZD/AUD for some time. In fact, “fair-value” has fallen nearly two cents over the past month.
Most of this reflects a sharp fall in NZ-AU 3-year swap spreads (to -85bps currently), as NZ interest rate markets have hacked back the extent of RBNZ tightening expected this year to just 2½ hikes. The model currently suggests a “fair-value” range of 0.7700-0.7900, which, at face value, implies the slide in NZD/AUD is not done yet.
Looking ahead, USD weakness has been the key theme in currency markets of late, a trend which is has tended to float all boats (the NZD included).
The outcome of tomorrow morning’s (6:15am NZT) FOMC policy meeting will go a long way towards determining whether or not this continues. While no change in the Federal Funds rate is anticipated, market chatter is abuzz with rumours further stimulus measures could be announced. In the lead up to the Fed decision, we doubt we’ll see NZD/USD break out of its recent 0.7200-0.7340 range.
Majors
A feeling of the calm before the storm pervaded financial markets overnight. With most investors fixated on tomorrow morning’s FOMC meeting, and minimal direction from either economic data or stocks, most of the major currencies spent the night largely treading water.
That said, the USD managed a modest rally off Friday’s post-payrolls lows, as investors trimmed short positions ahead of the Fed’s policy meeting. CFTC data shows the speculative community doubled its net short USD position to 155,000 contracts in the week to August 3, the largest since the December 2009.
A rumoured bout of EUR selling at last night’s London fix supported the USD’s gains. Despite some good looking German trade balance figures (€14.1b in June vs. €12.0b expected), real money selling pushed EUR/USD to 1.3240. Stop-loss orders were tripped around this level, and the single currency drifted off further to 1.3220.
The JPY also struggled to hold onto Friday’s gains amid more jitters about possible government intervention. Japanese Finance Minister Noda cautioned “excessive, disorderly foreign exchange moves would have adverse effects on the stability of the economy,” and “we will give our utmost attention to forex moves.” USD/JPY climbed 0.5% to end the night around 85.80, unwinding nearly all of Friday’s steep post-payrolls decline. Investors now await the outcome of today’s Bank of Japan policy meeting for near-term clues on JPY direction. Given the default tightening the strong USD/JPY implies, the BoJ is under pressure to ease monetary conditions further.
We doubt additional easing measures will be announced today, but the BoJ’s language will no doubt be scrutinised for any sign it is uncomfortable with the JPY’s recent rise. For today, we suspect more consolidation is in the offing for the majors as investors eagerly await tomorrow’s FOMC meeting.
Against a steadily deteriorating US economic backdrop (with Friday’s employment data the most recent example), speculation has grown the Fed could announce further easing measures to prop up the struggling US economy. In particular, the Fed may begin reinvesting proceeds from its maturing bonds back into the market, rather than letting its bond holdings gradually taper off. Irrespective of the outcome, gauging markets’ likely reaction is difficult.
We suspect a Fed decision to increase asset purchases would be seen as “pro-growth”, which could see a knee-jerk reaction to buy the USD.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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