By Mike Jones
NZD
The NZD/USD has succumbed to a burst higher in the USD early this morning, sliding 1.3% to around 0.8070.
Global financial markets are reeling from Fed chairman Bernanke’s confirmation this morning that an end to QE is in sight.
Bernanke signalled (with the help of his lieutenant Dudley) that the FOMC will begin to taper down QE purchases later this year, if the US economy continues its trend recovery.
Smoothing through a bit of volatility (which saw the NZD/USD briefly propelled to 0.8200), the market response has generally been to take US bond yields and the USD higher.
US equity markets, meanwhile, have spat the dummy, declining 0.7-1.4%. This scuttling of investors’ risk appetite has amplified the selling pressure on the ‘high-beta’ AUD, CAD, and NZD.
As a result, the ‘commodity currencies’ fill out the bottom three places in the overnight currency performance rankings (with the NZD at the bottom).
For today, we expect the NZD/USD to remain heavy as the market digests last night’s more hawkish Fed rhetoric.
Exporter hedging demand may provide a boot to the currency, but bounces should be limited to around 0.8120.
A convincing break below key support at 0.8060 would pave the way for a deeper correction towards 0.7920. As we noted on Monday, both momentum and technical are now conspiring against the NZD.
The Chinese HSBC Flash PMI for May will be the most influential data release of the Asian session. It will provide a timely gauge on whether Chinese activity is picking up after a soft start to Q2.
The consensus looks for an unchanged 50.4 print. Anything less will amplify the headwinds facing the NZD and AUD.
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Majors
Equity and currency markets were whipsawed this morning by a slew of Fed speak. But a stronger USD has ultimately won the day following confirmation that a tapering down of the Fed’s asset buying policies is likely later this year. The USD index is 0.6% higher.
Traders were initially wrong-footed into selling the USD after Bernanke warned against a “premature tightening” of policy. But the losses didn’t last for long.
In the Q&A following his testimony was the key line “If we see continued improvement and we have confidence that that's going to be sustained, then we could, in the next few meetings…take a step down in our pace of purchases”. This supported earlier comments from Dudley that a tapering of asset purchases was possible if the labour market continues to improve.
In response, the US yield curve has steepened noticeably, with 10-year bond yields rising 10bps to 2.02% - close to the top of their recent range. Curve steepening has provided a boost to the USD, which is higher across the board.
The EUR/USD has been squeezed down to 1.2840, the GBP/USD has shed around a cent (helped by some weak UK retail data), and USD/JPY has climbed from 102.40 to fresh highs above 103.50.
The FOMC minutes, a few hours after the Testimony, provided little fresh information, although the suggestion that tapering could begin as early as June was again more hawkish than the market was expecting.
Looking ahead, the timing of any potential ‘tapering’ is very much data dependent. Indeed, Bernanke has very much placed the onus on the US economy (and the labour market in particular) to keep recovering if QE is to be wound back later in the year. This means the relative strength of upcoming US (labour market) data will be even more important for USD sentiment.
While a June taper may be too early given the recent data soft patch, September is possible. This is particularly so because the Fed will by then have a reasonable idea how Congressional negotiations over the 2014 US Budget are going, and the associated risks from the debt ceiling.
Near-term, the risks have moved more clearly in favour of continued USD strength, particularly if 10-year Treasury yields manage to break above the 2.08% level that has capped them for the past 12 months.
However, the fact the speculative community are already extremely long USDs should prevent a sharp move to the topside.
Tonight, investors will be looking towards the Flash PMIs for Europe and China for a timely update on the strength of global manufacturing.
The European versions are expected to show manufacturing activity scraping off its lows (47.0 expected for headline EU PMI, up from 46.7 in April). Such a result may help slow the pace of EUR/USD decline. Initial support is eyed around 1.2800.
Other news:
*Bank of Japan keeps asset purchase and money base targets unchanged, but Governor Kuroda says the BoJ stands ready to adjust the pace, frequency and type of JGB purchases to prevent yields spiking higher .
*May BoE minutes reveal an unchanged distribution of votes in favour of no change in QE (6-3 in favour of no change), with Governor King again voting for an increase.
*Swiss National Bank President Jordan says he would not rule out adjusting the EUR/CHF floor or implementing negative interest rates to try and weaken the CHF.
*UK retail sales (ex-auto) decline 1.4%m/m, far weaker than the +0.1% increase expected by the consensus.
Event calendar:
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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