Head of FX Strategy
Summary: The US dollar is mixed ahead of a raft of second-tier data points later today and the FOMC minutes tonight, with focus on the scale of disagreement among Fed members on the tightening path from here. A long Thanksgiving weekend is set to follow. Elsewhere, the kiwi has found another leg up on the RBNZ hiking by 75 basis points, the most ever, overnight, while sterling dodged a bullet as the UK Supreme Court ruled against Scottish independence referendum proceeding.
FX Trading focus: RBNZ surprises (some) with 75 basis point hike. USD scratching around for direction.
The market was about evenly split on whether the RBNZ would rock the boat with a largest.-ever rate hike overnight, which is what it delivered, taking the rate +75 bps to 4.25% and guiding rather hawkish, which helped to rise the peak rate expectation into next spring some 30 basis points toward 5.50%. This drove a bit more NZD strength, but as the currency has been on such a strong run lately, the shock value was minimal in market pricing. I suspect that while there may be a bit more to wring out of the situation here, we are very likely at peak hawkishness from the RBNZ in relative terms to other central banks. The RBNZ was one of the first G10 central banks to cease and desist with QE and begin hiking rates and the impact on NZ economic growth will mount aggressively in coming months. AUDNZD, for example, has also been helped lower not just by RBNZ hawkishness, but by the Aussie’s greater sensitive to the frustration over China’s now-you-see-it, now-you-don’t reopening process.
The US dollar continues to scratch around for direction, dipping yesterday on the ideal combination for USD bears, falling long US Treasury yields and strong risk sentiment. As discussed in my Monday update, the heavy hitting data doesn’t arrive until next week with the Friday jobs and earnings data the chief focus, followed by December 13 November US CPI release. These CPI releases have the market tied in knots – it is beginning to look a bit one-dimensional, and the market may need to broaden its focus on the implications of an incoming recession soon, but more incoming data needed to point that recession is perhaps necessary first. I don’t have my hopes up for any revelations from tonight’s FOMC Minutes release, although interesting to see if there are obvious signs of disagreement on how to guide for the slowdown in tightening, as well as whether “a few”, “some”, or even “several” Fed members make a fuss about financial conditions easing aggressively. As most of that easing has taken place after the FOMC meeting itself, it is doubtful.
Chart: GBPUSD
Since the epic USD slide on the November 10 release of the softer-than-expected US October CPI data, the US dollar has done very little, while sterling has generally edged higher versus its most important peers on a further thaw in negative sentiment, even if the longer term outlook for the UK has been made that much more bleak by the latest budget announcement. Sterling and the US dollar will remain sensitive to new significant shifts in sentiment and in opposite directions. If we continue to see a melt-up inspired by mounting certainty that the Fed isn’t about to surprise the market any time soon and incoming data allows the market to indulge in soft-landing hopes for now (insufficiently strong data to raise inflation fears), GBPUSD may be able to drift back to 1.2000 and possibly even to the 200-day moving average above 1.2200 or even the major pivot highs into 1.2250+ from early August (!). On the flip-side, oncoming recession concerns are likely to only rise from here, which in past market cycles will eventually lead to a deterioration in financial conditions (currently close to the easiest they have been since the before the Fed started hiking in 75 basis point increments back in June) and weaker risk sentiment. The weather could also turn colder and remind investors of Europe’s energy predicament, a constant concern in the background. But it will take a lot of cable selling to suggest weakness – effectively, we would need to take out most of the move down to 1.1500 to reverse the November 10 move in USD weakness.
Sterling has enjoyed the risk-on backdrop, with GBPUSD probing well above 1.1900 this morning, with an added modest boost on the preliminary UK November PMI’s looking relatively benign (Services unchanged at 48.8 vs. the story breaking that the UK Supreme Court ruled against a new Scottish independence referendum proceeding until the UK government had given permission for one to be held. I have been surprised at sterling’s strength even beyond the initial reset of the situation provided by the removal of Truss-Kwarteng and supposedly soothing stability on offer from Sunak-Hunt. Perhaps positioning is the key – the last short sterling holdouts haven’t been entirely flushed and the those that have already been flushed (or took profits) are in no rush to get involved just yet. It will likely take some time and a catalyst for a fresh weak sterling cycle to develop down the road.
Table: FX Board of G10 and CNH trend evolution and strength.
After this RBNZ meeting overnight, have to wonder if kiwi is soon or already has reached its peak potential. Elsewhere, interesting to note the CNH relative weakness against the market, tracking USD direction as it so often does after the brief period of underperformance about a month ago.
Table: FX Board Trend Scoreboard for individual pairs.
Not hanging my hat on any new developments here. AUDNZD has achieved a remarkable -6.1 reading in its negative trend strength reading.
Upcoming Economic Calendar Highlights
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
