by Mike Jones
NZ Dollar
The NZD/USD continues to hold above key technical support in the 0.8190/0.8220 window. Overnight, the currency was pitched back above 0.8250 by the tailwinds from a weaker USD.
But the broader picture is still one of sideways consolidation ahead of tomorrow morning’s Senate hearing from incoming Fed chair Yellen.
Speculative and leveraged investors have shown a preference to be long US dollars over the past few weeks. But, perhaps wary of Yellen’s dovish leanings, traders wound back bullish bets on the greenback overnight.
Most of the major currencies were squeezed higher as a result, with the GBP taking the yellow jersey.
The NZD received an extra boost from: 1) a restating of the RBNZ’s hawkish bias in yesterday’s FSR, and 2) solid NZD demand from local exporters, who remain keen to pick-up NZD/USD dips back towards 0.8200.
According to our Currency Flow Monitor, net NZD/USD flows over the past three months have been in the 83rd percentile – indicative of strong net buy demand from our corporate client base.
For today, a swathe of local economic data will set direction for the NZD. We look for a decent 0.6%q/q increase in Q3 retail sales volumes, following the outsized 1.7% Q2 gain. This is below market expectations of 0.9%, so a result on our expectations would likely weigh on the NZD.
However, with the BNZ PMI (at 10:30am) and ANZ consumer confidence (at 1pm) expected to tell a story of ongoing NZ economic strength, we doubt any attempts at the NZD downside will get very far.
Support around 0.8190/0.8200 should continue to hold in the run-in to tomorrow morning’s Yellen testimony. Near-term resistance should kick in around 0.8290.
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Majors
Market sentiment lost a bit more of its fizz overnight, as a dour day in Asian equity markets filtered through to a lacklustre US/European session. Global equities are flat to lower, risk aversion has ticked higher, and benchmark bond yields have mostly lost ground.
In currency markets, the USD has given up a portion of its recent gains. The narrow DXY index slipped around 0.5%. USD/JPY once again failed to breach 100, and is now trading closer to 99.30. The greenback’s losses look to a reflection of a) profit taking and position squaring ahead of Janet Yellen’s testimony tomorrow, and 2) a surge in the GBP.
The EUR/USD, meanwhile, managed to shake off some early losses on the back of dovish ECB rhetoric, and has actually ended the night higher around 1.3460.
We noted earlier in the week the risk the Bank of England would revise lower its unemployment track this week. This was indeed a feature of the BoE’s Inflation Report overnight, along with lower inflation forecasts and higher UK GDP growth forecasts (0.9% expected for Q4). Based on the Bank’s updated forecasts, the 7% unemployment ‘threshold’ will be reached far earlier than previously, perhaps in Q4 of 2014 (c.f Q3 2016 in the August Report).
The GBP and UK interest rates lurched higher on the prospect of an earlier end to the BoE’s super easy monetary policy. This was despite the ongoing efforts of BoE Governor Carney to assure investors that rates could remain at 0.5% even after the 7% threshold was met.
In other words, the BoE’s ‘forward guidance’ continues to fall short of its objective to ease UK financial conditions. The GBP is finishing the night almost 1½ cents above where it began around 1.5890 (positive UK employment figures also lent support). A re-test of the 1.6200 highs now looks probable, depending on what Yellen has to say tomorrow morning.
USD long positioning has been scaled back ahead of Yellen, and we may see markets tread cautiously into the 4am (NZT) confirmation hearing in front of the Senate. Fed tapering now looks set to commence in either December or March. We’d suggest the USD will be more interested and vulnerable to any hint from Yellen that the Fed is about to longer its own unemployment threshold, and push rate hike expectations back into 2016/17.
Other news:
*UK ILO unemployment rate falls to 7.6% as expected in September, with employment +177k (vs. 113k expected).
*Eurozone September industrial production falls 0.5%m/m vs. -0.4% m/m expected.
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