FX Update: Fed’s Powell testimony, Trump impeachment hearings

Trump’s speech yesterday before the New York Economic Club was short on policy details and very long on self-promotion and grievances against the Democrats. On US-China trade negotiations, Trump merely indicated that a trade deal is possible but that tariffs would be raised if no deal was struck.

The RBNZ shocked us and the consensus by failing to cut rates another 25 basis points, keeping the rate at 1.00% and spiking short NZ rates higher – to the tune of 15 basis points for the 2-year rate. The RNBZ wants to see the effects of the rate cuts in the bag before signaling more easing. Governor Orr said there was no intention to surprise the market and teased that the RBNZ will release a framework for alternative monetary policy approaches early next year. The market took this as a signal perhaps that the RBNZ would prefer to stay away from ZIRP. The market has perhaps overreacted relative to Orr’s intention, but this move has scared away the bears for the moment.

Later today, the first of Trump’s impeachment hearings is set to take place, as the top US envoy to Ukraine, William Taylor and Deputy Assistant Secretary of State George Kent are set to testify, starting at 1000 Washington time, or 1500 GMT. The partisan coverage in the news media is so rife that it is impossible to get a sense of how serious the charges are against President Trump in the general public’s eye even if the objective facts point to an impeachable offense if the charges are proven true. The issue will prove a slow-burn one as hearing progress today and Friday and in coming weeks as popular polls are tracked as well as the odds of a shift in the Senate Republican support of Trump, as only the Senate can remove a president, even an impeached one. This becomes a market moving event if Senate support for Trump wobbles.

A bit later in Washington, US Fed Chair Powell will put in an appearance before the Joint economic committee. Recent US economic data has been sufficiently resilient to keep the message at wait-and-see on the economy and market expectations for a December rate cut are moving toward nil, as the market is taking this after all as a “mid-cycle adjustment”. But the balance sheet discussion and congressional questioning into the Fed’s stance on its balance sheet could prove far more interesting, especially on any stronger indication from Powell that most Fed members expect a very limited time horizon of reserve building with the $60 billion a month of Treasury purchases, that will only continue until reserves are at a specific level. This might prove more hawkish than the market expects.

Chart: NZDUSD
Pity the kiwi trader as NZDUSD recently saw a very nice upside-down head and shoulders formation and a neckline break attempt that failed badly, but then bears have since been caught out here by the RBNZ suddenly waxing cautious on the need for further easing, which spike NZ short yields back higher and boosted the kiwi sharply higher. The 0.6425-50 area remains relevant to the upside if this rally holds and the USD strength fades again. Bears need to see this spike back higher quickly erased.