With President Trump back in the headlines, markets have been brought back to life after some dull trading sessions earlier this week. The USD is stronger, US equities have reached fresh highs and US Treasury yields are higher. The NZD is little changed from yesterday’s local close, following the chunky loss seen in the aftermath of the RBNZ’s Monetary Policy Statement.
As Trump met with airline executives he said that “We’re going to be announcing something I would say over the two or three weeks that will be phenomenal in terms of tax.” That helped trigger a rise in the USD after a period of tracking sideways. It has also helped drive a steady increase in the S&P500 index, currently up 0.6%.
The NZD was in the midst of recovering from yesterday’s heavy local session and got up to about 0.7225, before Trump’s comments sent it back down to the 0.7180 mark. This, of course, is well down from the circa 0.73 level prevailing before yesterday’s RBNZ Statement.
As widely expected, the RBNZ removed its easing bias and adopted a neutral bias. The Bank’s projected OCR track signals that the next move is more likely to be one of tightening, but that is seen to be a distant prospect – something to consider around late-2019 on the Bank’s conditional forecasts.
The lack of signal about a possible earlier tightening seemed to spook some traders, even though the Bank was never going to deliver on that expectation. Of some consolation, the Bank seemed unsure of its forecasts and highlighted the uncertainties that currently exist, which were “numerous” in the Bank’s own words. This implies a wider than usual error band around the Bank’s forecasts, and keeping hopes alive that as inflation increases further, the Bank will become increasingly uncomfortable in maintaining such a flat OCR outlook.
So it was a steady decline in the NZD yesterday, with further falls encouraged by Assistant Governor McDermott later in the day, who continued to talk down the currency and said that “we do want to be sure before we do anything that you are going to get to 2 percent”.
As we know, such jawboning of the NZD only proves temporary and we are now back to watching the USD to see if further NZD depreciation will follow. For some time we’ve had a USD 0.70 target for the end of the current quarter, but in the current positive risk appetite environment, improving global growth indicators, solid NZ commodity prices, and a model that tells us 0.74 is fair value, we’ve been loath to highlight that forecast. A suggested circa 0.70-0.74 trading range over coming weeks, even months, seems a fair compromise.
RBA Governor Lowe’s speech last night was fairly upbeat on the Australian economy and in a refreshing contrast to other central bankers or government officials, who seem intent on talking down their currencies, in Q&A he commented that “it is difficult to say the AUD is too high”. This provided a boost to the AUD, but Trump’s comments have seen that reverse. NZD/AUD is down to 0.9420, largely a result of the MPS, and still well within the 0.93-0.97 range it has spent much of the nine months.
Of the other major currencies, the yen has suffered the most in the context of the stronger USD theme, reflected its link to (higher) US treasury yields and improved risk appetite. USD/JPY is back up through the 113 handle.
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