By Mike Jones
The NZD has been the strongest performing currency over the past 24 hours. From around 0.7700 this time yesterday, the NZD/USD ground up to a fresh 28-month high of almost 0.7800 overnight.
Overall, this morning’s FOMC policy announcement reinforced our view the USD looks set to remain weak in coming months.
As expected, the Fed delivered quantitative easing mark II (QE2), promising to buy an extra US$600b in long-term Treasury bonds (roughly US$75b per month) over the next 8 months.
With the Fed committing to “adjust the program as needed” to ensure the sustainability of the US recovery, markets are already speculating the Fed may yet have to dole out more stimulus. As a result, the wash up from the statement’s release has seen the USD track modestly lower, underpinning the NZD/USD above 0.7750.
Prior to the FOMC meeting, a stronger NZD/AUD kept the NZD/USD on the front foot. Yesterday’s 6.6% plunge in Australian building approvals tended to dampen expectations the RBA will deliver another rate hike in December. The extent of RBA tightening priced into the Australian interest rate curve dipped from 58bps to 34bps as a result, pitching NZD/AUD from 0.7720 to near 0.7790. Today’s Household Labour Force Survey is the centrepiece of this week’s NZ data schedule.
We expect the Q3 unemployment rate to dribble down to 6.6% (market 6.7%), from the 6.8% it spiked back up to in Q2. In the short-term, the NZD/USD is beginning to look overstretched according to our short-term valuation model. Based on NZ commodity prices, NZ-US 3-year swap spreads, and risk appetite the model currently estimates a NZD/USD “fair-value” range of 0.7450-0.7650. While this raises the risk of a modest pull-back, we wouldn’t be surprised to see positive momentum and negative USD sentiment carry the currency higher first.
The next resistance level in NZD/USD is eyed around 0.7830.
As expected, the US Federal Reserve fired the starting gun on QE2 this morning in an effort to prop up the ailing US economic recovery. The Fed will buy an extra US$600b in long-term Treasury bonds (US$75b per month, ending in Q2 2011), a touch more than market expectations which had been centred around US$500b. The Fed will also reinvest the proceeds from maturing bonds, bringing the Fed’s total Treasury purchases to US$850b-US$900b.
The Fed’s accompanying statement was, not surprisingly, filled with concern about stubbornly high US unemployment and worryingly low underlying inflation. Markets were whipped into a frenzy in the immediate aftermath of the statement, with EUR/USD see-sawing wildly either side of 1.4050. But, smoothing through the post-statement volatility, not a lot has changed. US stock indices and bond yields are close to unchanged, while the USD is modestly lower.
Importantly, the Fed promised to “adjust the program as needed” and “employ all policy tools necessary” to support the US economic recovery. We wouldn’t be surprised to see markets speculate on the need for even more QE from the Fed in coming months, should US data disappoint. So nothing to alter our view the USD is set to remain weak in coming months. Prior to the FOMC meeting, currency markets were understandably quiet. The USD index spent most of the night trading choppily in a sideways 76.60-76.90 range.
Sliding US bond yields continued to act as a drag on the USD, but this was offset to some extent by a generally upbeat batch of US data. The robust ADP employment survey (43k jobs vs. 20k expected) buoyed hopes Friday’s non-farm payrolls report could exceed expectations, while both the ISM non-manufacturing index and September factory orders similarly outstripped analysts’ expectations. The GBP was one of the night’s strongest performing currencies.
The UK services PMI proved to be the latest in a string of encouraging UK data suggesting a second round of QE from the Bank of England is unlikely anytime soon. It rose from 52.8 to 53.2, defying expectations for a fall. In response, GBP/USD climbed from 1.6040 to 9-month highs around 1.6140. Even with the FOMC meeting out of the way, there is still plenty of event risk to watch out for this week. Policy announcements from the BoE, ECB and Bank of Japan are due, while Friday’s US non-farm payrolls report (60k jobs gain expected) could also spark volatility.
* Mike Jones is part of the BNZ research team.