By Mike Jones
NZD
Gyrating USD sentiment flung the NZD/USD around a 0.8120-0.8210 range overnight.
But the net result is the currency is opening the Asian session fairly close to where it was this time yesterday around 0.8160.
Yesterday’s swathe of local economic data may have got a few economists excited, but the NZD barely batted an eyelid. Offshore sentiment towards US bond yields and the US dollar remain in the driving seat as far as the NZD/USD and AUD/USD are concerned.
Overnight, appetite for the USD was dented somewhat by suggestions from a few Fed officials that a winding down of QE is not as close as some might think (see Majors). This helped limit the NZD/USD’s losses to around 0.8125.
However, the real show stopper for the USD will be tonight’s testimony from Fed chairman Bernanke. Expect currency markets and the NZD/USD to remain in consolidation mode ahead of the 2am (NZT) testimony.
Our view is that the fragility of the US recovery, not to mention rock-bottom inflation, means it’s too early to expect an end to Fed QE, and a a sustained appreciation in the greenback.
It’s worth noting, the grind higher in NZ swap rates in recent days has seen the interest rate differential of the NZD widen. NZ-US 3-year swap differentials have increased nearly 10bps this week to 255bps. On their own, differentials at these levels are consistent with a NZD/USD closer to 0.8400.
There is no local data due for release today, with just second-tier data due out in Australia, Japan, and China.
The Bank of Japan meeting later this afternoon is not expected to produce any fireworks. Near-term support for the NZD/USD will be found on any dips towards Friday’s 0.8060 lows. Topside resistance is eyed around 0.8240.
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Majors
It’s been a whippy night in currency markets, as changing Fed policy expectations tossed around USD sentiment. Still, recent ranges remain intact for the most part, with investors reluctant to place firm bets ahead of Fed chairman Bernanke’s testimony tonight.
The USD started the night on the front foot, but fundamental support crumbled as the night wore on. Longer-dated US bond yields eased after comments from Fed officials Bullard (neutral) and Dudley (a dove) cast doubt on the idea the Fed is close to ‘tapering’ asset purchases.
Dudley even said he hadn’t decided whether the next policy move should be an increase or a decrease in bond buying.
With the USD in retreat, the EUR/USD was pitched back above 1.2900, from 1.2840. USD/JPY slipped from 102.90 to 102.40, and the AUD/USD bounced back above 0.9800.
In contrast, the GBP/USD held around its 1.5140 overnight lows following some surprisingly weak UK inflation data (2.4%y/y vs. 2.6% expected). We still expect inflation to remain above the BoE’s target until 2015, limiting the Bank’s headroom to ease policy. We suspect the BoE will only resort to more QE should the UK economy start to contract again.
Looking ahead, tonight’s testimony from Bernanke will be an important test of USD sentiment. It will certainly overshadow the FOMC minutes due to be released a few hours later (testimony at 2am, minutes at 6am, NZT).
The Bank of Japan also makes its latest policy announcement today. We doubt additional policy measures will be announced at this meeting, so the BoJ should be a non-event. However, watch for any comments and response to the recent surge in JGB yields.
The USD reaction to Bernanke largely depends on whether or not he will offer any firm guidance on the Fed’s QE exit strategy. A commitment to stay the QE course and no mention of tapering would be consistent with weakness in the USD.
Alternatively, hints a tapering of asset purchases could begin as early as later this year would rejuvenate the USD rally. Under this scenario, the EUR/USD would likely re-test the recent lows around 1.2800, with USD/JPY pushing up to the 103 highs.
Other news:
*RBA minutes provide no hints a follow-up rate cut is likely in June. With the fall in the AUD since May doing some of the RBA’s easing work for it, we don’t expect additional cuts in the short-term. Still, our NAB colleagues expect sluggish AU growth to force the RBA’s hand later in the year.
Event calendar:
22 May: JN trade balance; AU consumer confidence; JN BoJ Kuroda press conference after policy meeting; UK public borrowing; US Bernanke testimony; US FOMC minutes;
23 May: CH HSBC Flash manufacturing PMI; EU Flash PMIs; UK GDP; US Fed’s Bullard speaks; US new home sales;
24 May: NZ trade balance; US durable goods orders; EU German IFO.
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