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Currency Market Analysis

Aug 22, 2019 | Currency Market Analysis

Global Themes

Taking clues from the Fed minutes

Signs of more pending rate cuts lurk within the subtext

Central bank minutes can often be unwieldy documents to read. They also carry a certain time lag. In this case the Federal Reserve met three weeks ago. A lot has changed since then. Trump has since backflipped on his trade truce with China and the US yield curve has inverted. Put simply investors are willing to accept lower returns over a longer period, a telltale sign of risk aversion and the fear of a pending recession. So when we look at the minutes released this morning we need to remember that.

The details show most Fed officials viewed the July rate cut as a “mid cycle adjustment”, which on the surface suggests there may not be many more (if any) cuts to come. While a couple of voting policy makers would have preferred a 50 basis points cut there were more in the dissenting camp who sought to keep the Fed funds rate on hold. But then we stumbled across this piece, “most participants viewed a proposed quarter-point policy easing at this meeting as part of a recalibration of the stance of policy”. If it’s only part then clearly there is more to come. And if that’s the view prior to Trump’s additional tariffs and interest rate inversions then surely it’s going to be even more negative now. On this basis alone we’re expecting a dovish shift in forward guidance from Fed chair Jerome Powell when he talks tomorrow night, and that can be the trigger for a Dollar sell off and a reversal higher in NZD/USD.

Heads up to Yen buyers

BNZ sees the possibility of a further slide towards 64

If you are a Yen buyer and you thought it couldn’t get any worse then think again. That’s the view of Bank of New Zealand analysts, who yesterday suggested the rate could slide as low as 64 in the months ahead. Against a backdrop of falling global rates, and in an environment where hedge funds are favouring the Yen as their preferred safe haven currency, BNZ also suggest that the Bank of Japan has little scope to keep pace with other central banks’ easing cycles, given its already ultra loose policy, and that itself will be Yen supportive.

Recently 30 out of 38 economists surveyed by Bloomberg suggested the BoJ will ease further, but we think this might not happen until USD/JPY gets closer to 100. Goldman Sachs also recommend going long Yen around Powell’s Jackson Hole speech, suggesting a more resolute tone will spook markets hungry for further stimulus, triggering safe haven flows, whereas a more dovish slant would weaken the USD/JPY as well. Should we get the latter we think we can see a small window of euphoria where NZD/JPY might bounce to 70, but should global recession fears linger we side with BNZ’s medium term bearish outlook on this cross.

Service sector PMIs in focus

Litmus test for the Doomsdayers arrives today

It’s all about service sector purchasing managers’ indices (PMIs) today. Global manufacturing has already shifted into contraction, and so the focus now has shifted to whether or not the service sector is being effected by the slowdown contagion.

We get service sector PMIs out of Australia, France, Germany, the Eurozone (as a whole) and the US. If there’s a shift towards sub 50 prints (denoting activity contraction) NZD/USD and NZD/JPY could come under further pressure. Otherwise the latest ECB minutes are also due, and if they prefigure a stimulus bazooka coming, that may assist EUR buyers tonight.

By Alex Ross, NZ Corporate FX Dealer


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