Markets Await Fed Direction

Market Overview

The volatile week that was, wrapped up with US Stock prices closing at near or at record highs combined with mixed headlines around global vaccination program implementation. The US Dollar Index traded above 92.00 the first time since November 2020 before falling back. The major play of the week was US 10 year Bond Yields closing 0.10% higher at 1.629% becoming the motivation for the greenback to push higher. Concerns around loose Fed monetary policy continue to cause too much excitement among equity markets and if the Federal Reserve signals a more hawkish policy stance this could cause the US Dollar to travel higher. This week’s Fed announcement is Thursday the 18th when all will be revealed. Read more

FX Update

  • Worldwide coronavirus cases surpass 119.095 million with over 2.64 million official deaths
  • Biden’s 1.9T coronavirus stimulus relief fund has been approved by congress
  • It’s highly probable that a large chunk (over 15%) of the US Stimulus checks could go directly into the stocks
  • US 10 year treasury note continues to rise adding further pressure for the Fed to acknowledge inflation is on the horizon
  • Up to 300,000 jobs could be lost once the Australian Federal Government job-keeper wage subsidy ends this month, experts are also warning more than 10,000 businesses could close permanently
  • The Organisation for Economic Cooperation and Development has raised their 2020 world growth forecast from 4.2% to 5.6% and 3.7% in 2022 from 4.0% with notable risks of efficiencies of how the coronavirus vaccine rollouts will go
  • UK manufacturers are seething after added costs and one to two week delays post Britain’s departure from the European Union
  • New Zealand House prices ending February 2021 reach record highs. Up 22.8% nationally to 780,000 from 635,000. Of note Auckland up 24.3%, Hawkes Bay up 36.4% and Wellington region up 24.0%
  • The Bank of Canada held rates at 0.25% Thursday saying they would leave rates unchanged for some time although the economy was faring better than predicted as they come out of the covid pandemic

Our View: The outlook for the USD

The two charts below show a couple of significant trends that have developed in financial markets since August last year. The issue here is that these two trends cannot continue on together indefinitely. One of them is going to have to reverse, at least to a significant degree.

The top chart is US 10-year yields that have risen from a low of around 0.52% in August last year, to currently trade just over 1.50%. The bottom chart is the NZDUSD, used here as a proxy for showing the broad-based USD weakness seen since September. Rising US interest rates will eventually support the USD. It is extremely unlikely that US interest rates keep rising and the US dollar keeps falling. The question markets are asking themselves is at what point does one of these trends reverse? If US 10-year yields fall back to 1.0% or so, the USD could easily continue to decline in value. But if 10-year yields continue to rise, it’s likely the USD will face a sudden and sharp reversal of fortunes. Read more

Greenback strength dominates

Market Overview

• Worldwide coronavirus cases surpass 117.727 million with over 2.61 million official
deaths.
• Biden’s 1.9T coronavirus stimulus relief fund has been approved by congress.
• Japanese (final) GDP for the fourth quarter comes in at 2.8% slightly lower than the 3.0% predicted and lower than the third quarter’s 5.3%
• NZ Manufacturing activity over the fourth quarter slumped to -0.6% from the prior quarter 10.0%
• NZ ANZ Business Confidence index alarmingly dropped to 0.0 from 11.8 in February.  
• Japan’s government wants a 2-week extension of the Tokyo state of emergency.
• The CDC is reporting lower US cases of coronavirus along with fewer recent deaths.

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FX NEWS

  • Worldwide coronavirus cases surpass 116.18 million with over 2.57 million official deaths
  • Day 5 for Aucklanders in lockdown level 3 today, expected to last for 7 days through to Sunday morning 
  • Overnight equity indices fell, and the USD moved higher, the Federal Reserve reaffirming their stance overnight for a continued “easing” policy
  • NFP predicted to come in 225k compared to the 190k predicted
  • Japan’s government wants a 2 week extension of the Tokyo state of emergency
  • A magnitude 8 earthquake in the Kermadec island area off the coats of NZ has led authorities to issue a tsunami warning

NZD and AUD come off recent highs

Market Overview

  • Worldwide coronavirus cases surpass 114.96 million with over 2.549 million official Deaths.
  • Day 3 for Aucklanders in lockdown level 3 today, expected to last for 7 days through to Sunday morning.
  • Overnight equity indices rise, surge risk products higher. With the Federal Reserve reaffirming their stance on accommodative policy the bond markets are not so sure
  • RBA Boosts their bond buying by 3B.
  • Japanese Jobless rate for January comes in at 2.9% after 3.0% was expected.
  • RBNZ’s Hawkesby said the central bank is committed to prolonged stimulus and will cut the cash rate if needed- saying the economy in NZ is uneven and fragile.
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FX News

The Reserve Bank of New Zealand has left its Large Scale Asset Purchase Program, at NZD $100B Wednesday, while keeping the cash rate unchanged at 0.25%. The RBNZ said in their statement they will maintain its stimulatory policy until inflation is sustained at the 2.0% target point. The work required to accommodate negative rates is now done although the RBNZ is very unlikely to cut rates again in this cycle. Having said that the RBNZ is willing to add further stimulus if required but it looks increasingly like a long shot that it will be necessary. Increases to the cash rate look to be a long way away possibly late 2022 depending on inflation as mentioned. From now over the following months, the RBNZ spoke of uncertain times ahead, relative to how the global community reacts and recovers based on coronavirus vaccine rollouts. 

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