Head of FX Strategy
Summary: The traditional safe haven currencies remain weak, but the US dollar weakening move has gone sideways as sharply higher US yields and political uncertainty holding back any thoughts of near term stimulus are a tough hurdle at the moment for USD bears to overcome. Overnight, the NZD jumped on the more optimistic RBNZ and a sharp adjustment away from expectation for negative rates.
Today’s FX Trading focus:
USD status please?
Yesterday, I thoroughly outlined my thoughts on the US dollar and the near-term challenges in determining direction versus the likely eventual decline that awaits the greenback. The big dollar has firmed sharply since the release of the Pfizer Covid-19 vaccine candidate success story versus the usual safe-haven suspects JPY and CHF as US long yields are smashing suddenly to new cycle highs. But elsewhere, the dollar is lower, particularly against EM. The near-term headwinds for USD bears are first, the rapidly attenuating prospects for a US stimulus beyond the barebones level (partially offset by the assumption of a very dovish Fed, however) and second, those sharply higher US yields – with EM especially sensitive to US rates. Still, yields have risen elsewhere as well – even in Europe, where the Germany 30-year is making a bid to rise to a yield of o% after trading south of -20 basis points last week.
The only thing I will add today on the US dollar is a question: what happens the longer Trump refuses to concede the election? And what form does unrest take? I don’t have any answers, only questions and a very uneasy feeling about the situation, and hard to believe that this story would prove in any way positive for the US dollar.
NZD surges as RBNZ moves away from NIRP guidance
The RBNZ meeting overnight triggered a sharp adjustment away from expectations for a negative rate policy, which had formerly been predicted as early as February of next year. The bank did announce the expected funding-for-lending programme to support credit into the economy, but also remarked that the NZ economy was more resilient than it had earlier anticipated and projected a lower unemployment rate than previously, suggesting that an eventual negative policy rate may never be needed, even if that tool was explicitly kept on the table. At the press conference, Governor Orr said that the committee wanted to keep all options open and that “we’ll be revisiting that decision” at the next policy meeting in February. Short NZ rates adjusted sharply higher, putting the projected Feb rate back at zero – meaning that it could go higher yet if the rate is kept at the current 0.25%. That time frame until the February meeting also allows for further evidence of the hope – or lack thereof – that a Covid-19 vaccine roll-out programme is well under way.
Chart: AUDNZD
With this hawkish adjustment at last night’s RBNZ meeting, AUDNZD is now pressing down on the locally important 1.0600 area and could be ready to explore lower levels still, though a global reflationary boom would likely eventually make the Aussie look a bit cheap in this exchange rate, where I would begin to get contrarian below 1.0500. NZDUSD is also worth a glance as the first currency within the G10 after SEK to rush to a new 18-month plus high versus the US dollar.
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