by Mike Jones
NZ Dollar
The NZD (along with the GBP) has continued to outperform over the past 24 hours, with the NZD/USD eventually settling back above 0.8250 (having been flung around in a wide 0.8230-0.8360 range).
More impressive local data, this time in the form of an accelerating manufacturing PMI and consumer confidence rising to 3½ year highs, certainly helped underpin the NZD yesterday. As usual, NZ economic optimism is showing up most clearly in NZD/AUD. The cross has spent the past couple of sessions closing in on 0.8900.
The fact that momentum has flipped back to positive (according to our momentum model) probably increases the chances of the NZD/AUD spending some time on a 0.8900 handle next week.
Offshore, the market certainly did it’s best to interpret Janet Yellen’s testimony as dovish. However, there hasn’t been any lasting damage done to the USD from the Fed’s preeminent dove. Next week’s Bernanke speech may well be more exciting for the market.
Stepping back from the day-to-day volatility, US dollar strength has been the main theme confronting currency markets over the past fortnight, as monetary policy expectations remain in the FX driving seat. Despite this, the NZD/USD has broadly held its ground. Hawkish RBNZ rhetoric and ongoing strength in commodity export prices have shored up key NZD/USD support around 0.8200.
Looking ahead, while upcoming NZ housing data, post LVR restrictions, may weigh on the NZD/USD, we suspect the actions of US policy makers will ensure that support levels continue to hold. To us, another push to the topside is the bigger risk in coming weeks and we are sticking with our 0.8400 year-end forecast. Please see yesterday’s BNZ Strategist for more details.
It’s shaping up as a quiet end to the week for currencies, with no data or events scheduled for the Asian time zone, and just industrial production and the Empire Manufacturing index due out of the US tonight. The overnight 0.8230/0.8310 range should contain the NZD/USD on the day.
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Majors
Market sentiment has brightened over the past 24 hours, as investors decided incoming Fed chair Yellen’s testimony meant ‘QE forever’.
Equities on both sides of the Atlantic have notched up solid gains, the VIX index (a proxy for risk aversion) slipped from 13% to 12.5%, and commodity prices are mostly higher (CRB index +0.2%). US bond yields, meanwhile, have continued to dribble lower. At 2.70%, 10-year yields are about 9bps below where they started the week.
Currency markets, though, remain unconvinced. For the most part, the major currencies have continued to shuffle about inside recent ranges (EM currencies, in contrast, have received a clear boost from the Yellen-inspired lift in sentiment). Yesterday’s knee-jerk sell-off in the USD on the early release of Yellen’s testimony failed to kick-on overnight.
The most notable movers have been GBP and JPY. USD/JPY climbed steadily yesterday, and spent the night flirting with 100.00 as Japanese officials start to ramp up intervention rhetoric again. As another potential JPY negative, the sharp slowing in Q3 Japanese GDP yesterday (to 1.9% annualised from 3.8% in Q2) supports the idea additional BoJ easing could be seen next year.
October UK retail sales actually undershot expectations (-0.7%m/m vs. 0.0% expected). However, the market was happy to dismiss the weakness as weather related and GBP/USD was propelled to almost 1.6100 as investors scrambled to cover short positions. As we noted yesterday, a re-test of the 1.6200 highs now looks probable.
The market was clearly keen to play up the dovish undertones in Yellen’s testimony, latching onto her comments the labour market is still “far short” of potential and that inflation will remain below target “for some time”.
But, to us, there was nothing particularly new or exciting from either the prepared testimony or the Q&A early this morning. Yellen gave no indication she will place more emphasis on the employment part of the Fed's mandate, as some have suggested. There were no hints on the timing of tapering or tightening. Overall, Yellen’s approach and views seemed relatively similar to the incumbent Fed chief Bernanke.
More exciting may be next Tuesday’s address to the National Economic Club by Bernanke. Some, including “Fed watcher” Jon Hilsenrath, have suggested Bernanke may discuss the Fed’s position on lowering its unemployment threshold. A signal that the threshold could shortly be lowered (Dec FOMC meeting?) would set the USD up for a fairly miserable week.
Other news:
*European Q3 GDP matches analyst expectations, ekeing out a 0.1%q/q increase (German GDP +0.3%q/q, France -0.1%).
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