by Mike Jones
NZ Dollar
Much like that faced by our footballers today, it was a bit of an uphill battle for the kiwi overnight. The NZD/USD spent the night shuffling around in a 0.8310-0.8370 range, even as the AUD/USD flew through 0.9400.
This contrasting performance of the antipodeans has seen the NZD/AUD give up all of this week’s gains.
Yesterday’s November Board minutes showed the RBA taking another small step towards a neutral bias. The tone of the statement was more upbeat than October, citing “mounting evidence that monetary policy was supporting activity”. Lip service was duly paid to the high AUD, and the RBA retained a weak easing bias. However, it seems there is very little intent to act on this bias given the signs of improvement in the Aussie economy.
Fading hopes of another RBA rate cut saw the AUD outperform in a relatively quiet offshore trading session. As a result, the NZD/AUD retreated from yesterday’s 0.8900 highs, and trades closer to 0.8860 this morning. Near-term, the likelihood upcoming NZ housing data prints weak should keep the cross trading south of 0.9000.
Market participants largely ignored this morning’s GDT dairy auction. There wasn’t much in it. The 0.1% increase kept prices within the 4% range they have been in since mid-July. This was close to expectations, although we did think prices might edge down a touch rather than inch up. Prices are still 42.6% higher than a year ago.
Overnight, all the attention was on China and the PBOC’s confirmation FX intervention will shortly be wound down, as it moves towards a freely floating CNY.
Expect heightened attention on today’s CNY fix as a result. Still, the big event for markets is Fed chairman Bernanke’s address to the National Economic Club at 1pm (NZT). Some are speculating on whether this could be the forum for the Fed to flag a lowering of its unemployment ‘threshold’ for hiking rates.
This being the case, the NZD implications from the speech will either be: nothing if Bernanke trots out the usual Fed rhetoric, strongly positive if Bernanke confirms a likely lowering of the threshold.
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Majors
It’s been a fairly quiet and uneventful night in currency markets. The USD basically chopped sideways in an 80.50-80.80 range, with the AUD/USD the only mover of any note.
The EUR/USD managed to shrug off more ECB hints QE is a “possibility”, climbing almost ½ cent to 1.3540. Ongoing dovish rhetoric from the US Fed’s brains trust (Yellen was on the wires again overnight) is certainly fanning the move higher in the EUR. The market is braced for more of the same from chairman Bernanke today. Last night’s German ZEW index was mixed (current situation index fell, while expectations improved) and had little market impact.
Most of the attention has been on a surprise announcement from PBOC Governor Zhou that the PBOC will “basically” end domestic FX interventions, as it gradually moves towards a market-based floating exchange rate. The announcement was part of a string of market reforms and rebalancing initiatives introduced as part of the Communist Party third plenum.
No time frame for the liberalisation measures was given. However, USD/CNH (offshore renminbi) has lurched lower overnight in anticipation a lower USD/CNY fix and a wider trading band will be announced today. This may be a little optimistic given Zhou only said the measures will be introduced in a “timely manner”.
Nevertheless, the news is supportive of further CNY appreciation. We are targeting 6.00 for USD/CNY by end 2014, but the risks are probably tilted in favour of something even lower. Investors are a little unsure of what it all means for the major currencies. On the one hand, less Chinese FX intervention would slow the rate at which China accumulates foreign reserves (basically US Treasuries) weighing on the USD and bolstering EUR, AUD, NZD, and GBP.
On the other, EUR, AUD and other currencies will feel less of a tailwind from China’s reserves ‘recycling’ out of US dollars. The latter factor hasn’t been particularly prevalent of late so we suspect the former will win out in the short-term. Further efforts to rebalance the Chinese economy are a long-run positive for the NZD, as we argued in a recent note.
Today’s Bernanke address will be the key driver of USD sentiment. The market is already braced for something dovish, but any hints the Fed will shortly lower its unemployment threshold will be unambiguously negative for the USD and US bond yields.
Other news:
*OECD cuts global growth forecast for 2013 by 0.4% to 2.7% and for 2014 by 0.4% to 3.6%.
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