A Fed decision to taper in December may not be unambiguously positive for the US$ and US bond yields

by Mike Jones

NZ Dollar

From highs of almost 0.8400 on Wednesday, the NZD/USD is back flirting with important support levels around 0.8200 this morning. Unlike Thursday’s taper speculation-driven losses, the ½ cent overnight sell-off in the kiwi was more about following the AUD lower.

A speech from RBA Governor Stevens last night continued the RBA’s series of jawboning assaults on the AUD. Stevens suggested currency intervention to lower the AUD was likely to be ineffective and costly at present given the easy monetary policies in the US, Europe and Japan.

But the speech also served up a thinly veiled warning to markets that the RBA’s reticence to intervene in the recent past does not mean it will eschew such action in the future – “foreign exchange intervention can, judiciously used in the right circumstances, be effective and useful.”

The upshot for currencies is that the AUD has slipped to the bottom of the overnight performance rankings, with the AUD/USD shedding almost ¾ cent (currently 0.9240). The usual ‘guilty by association’ trading pattern has seen the NZD/USD dragged back below 0.8200 in the Aussie’s wake, with the NZD/AUD rising back up to 0.8880.

We might expect RBNZ Deputy Governor McDermott to toe a similar line to his trans-Tasman counterpart today when he speaks on “influences on the exchange rate”. It’s no secret the RBNZ would prefer a lower NZD.

However, we doubt the Bank is thinking seriously about intervention. After all, unlike the AUD, fundamentals are skewed heavily in favour of NZD strength. NZ commodity export prices are now within spitting distance (1.5%) of all-time highs, the NZ economy is accelerating, and interest rate differentials are widening. Indeed, NZ-US 3-year swap differentials last night hit 3-year highs around +335bps.

The only other thing to keep an eye on today is net migration figures due at 10:45am. Migration is now trending clearly higher, adding to the tailwinds fanning the housing market.

For the NZD/USD, a daily close below the 0.8180 200-day moving average is the bearish signal needed to bring a deeper pullback towards 0.8000 into view. A failure to break lower would be consistent with a bounce back to 0.8300.

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Majors

Overnight currency performance has been a bit of a mixed bag. While European currencies (GBP, EUR, CHF) are all trading a little firmer against the USD, the NZD, AUD, and JPY have weakened. These offsetting influences have left the USD broadly unchanged on the day.

Yesterday’s FOMC Minutes offered something for everyone.  The Committee noted it could slow the pace of asset purchases “at one of the next few meetings,” while simultaneously considering ways to offset tapering such as cutting the interest rate it pays to banks on their reserves.

This underscores our view that a Fed decision to taper in December may not be unambiguously positive for the USD and US bond yields if another policy measure is introduced to try and separate tapering from tightening (such as lowering the unemployment threshold).

We know the Fed is extremely worried about tightening financial conditions. So the fact 30-year US bond yields are now skirting 2-year highs will be reinforcing the Fed’s need to somehow keep tightening expectations contained if it is to shortly taper asset purchases. 

Last night’s encouraging US jobless claims (323k vs. 335k expected) and Markit PMI (54.3 vs. 52.3) data helped buoy the USD against the likes of the AUD, NZD, and JPY. USD/JPY is almost a figure higher around 100.90. In contrast, European currencies managed to outperform the greenback. The EUR/USD and GBP/USD are 0.2% and 0.3% higher around 1.3470 and 1.6160 respectively.

The single currency briefly fell to a low of 1.3400 after November ‘Flash’ PMI data showed French activity contracting at a faster pace (47.8 from 49.1, 49.5 expected). Germany did better at 52.5 (from 51.7, 52.0 expected), but the European composite PMI still lost ground. Nonetheless, the EUR was able to more than recover its losses after ECB chief Draghi dismissed the threat of deflation and pushed back on chatter about a move to negative deposit rates.

There is very little on the slate for tonight, other than the November German IFO. Further improvement is expected (107.7 from 107.4 in October) which, if realised, should help reinforce EUR/USD support around 1.3400.

Other news:

*UK CBI industrial trends survey rises to 11 in November (from -4) – the strongest since March 1995.

*China November ‘Flash’ manufacturing PMI slips from 50.9 to 50.4 (50.8 expected).     

All its research is available here.