Slow start with range bound USD
A quiet start to the week as investors cautiously watching President Trump every move in Asia. With tensions so high and Trump uncanny ability to trigger controversy, traders are unwilling to further build bullish positions. On Thursday, Trump announced that he intends to nominate Fed Governor Jerome Powell as the next Chair head. Optics form eh republican held senate are that confirmations hearing would take place as soon as possible. A Powell Chair, in our view would look very similar to Yellen’s. Policy continuity with a focus on “normalization” of its interest rate and balance sheet should be the dominate strategy. This should result in a move to raise short-term rates in December. Minutes from the 22nd November policy meeting should likely provide additional clarity as to the details of the debate occurring in the FOMC, specifically the reasons for weak inflation reading. Growing indication that lack of trajectory inflation is actually due to shifting structural changes would have a profound effect in the markets interpretation of other central banks suffering from soft inflation despite year of ultra-lose policy. Markets have been trading out inflation outlook, pricing in the mid and long term over the materialized data. In general, over the last 10 years, markets / economics / central bankers have been overly optimistic in expectations. The realizations that further forecast should be lower due to structural changes will have a profound effect especially in FX markets.
On the data-front, the US economy is clicking on all cylinders. Octobers NFP increased by a solid 261k, while below expectations, 3-month average trend remains above 200k new jobs. Personal spending and sentiment data remains solid while ISM manufacturing indicates health expansion in activity. Yet worryingly despite tightening labor market average hourly earnings fell 0.04% m/m, putting wage growth back to a pace of 2.4%. Decent reads but well below what could be expected given unemployment’s and even historical recoveries. Finally, House Republicans released a draft of their tax reform bill on Thursday (final version will be released this week) providing the first real look at what the final version might look like. A tax bill will likely provide stocks with a boost but minor stimulate for USD and yields. With strong momentum in growth going into 4Q, traders want to see inflation for re-pricing the Fed benign rate path.
NZD loses ground as inflation expectations slide
NZD/USD paired losses on Monday morning as 2-year inflation expectations eased to 2.02% in the fourth quarter from 2.09% in the previous one. The Kiwi lost another 0.35% against the greenback and stabilised at around $0.6680. After falling as much as 5% over the last four weeks, the Kiwi has been trading with a slight uptrend bias for the last five days. Accordingly, New Zealand rates adjusted to the downside with the 10-year yield dropping to 2.759%, while the 2-year eased to 1.937%.
Although inflation expectations have dropped, the inflation outlook improved substantially as the combined effects of a weaker Kiwi and a more expansionary fiscal policy stance from the new government.
On the technical side, NZD/USD was unable to break the 0.6818 support (low from May 11th) to the downside. However, the market is expecting further downside in NZD/USD as non-commercial short speculative positions reached 11.5% of total open-interest. On the downside, the next support stands at $0.6676 (low from May 2016), while on the upside a resistance lies at around $0.72 (high from October 16th).
