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Mar 05, 2021 | Currency Market Analysis

Global Themes

No news is no longer good news

• Fed’s Powell stays mum on bond moves
• Oil surges as production cuts remain
• US jobs front and centre

Fed’s Powell stays mum on bond moves

No news is no longer good news for the New Zealand Dollar. Is that the sign of a trend change? We’re not willing to call one just yet, but the Kiwi took a dive overnight as Fed Chair Jerome Powell stayed rather tight lipped on recent moves in bond markets, suggesting that "it's unlikely that deeply ingrained low inflation expectations will fade fast". The market continues to disagree, and as if on cue the US 10-year yield leapt another 6 basis points up to 1.54%, which will be a cycle high close to date. It is also closing in on the 12 month high seen late last week at 1.61%.

Higher US yields are pushing the US Dollar higher. After tonight Federal Reserve members go into a blackout period, where they are not permitted to talk to the media ahead of their key March 17 meeting. Last night Powell said he would be “concerned by disorderly conditions” in markets. We haven’t seen that just yet, but last night the S&P 500 broke a technical uptrend seen since March of last year, while heavy selling in tech stocks continued. Is the market about to poke the bear ahead of that Fed meeting? If so we could be in for more downside in Kiwi pairs in the next couple of weeks.

Oil surges as production cuts remain

Oil spiked to above $64/barrel last night, up more than 5%, after OPEC+ decided to keep most production cuts in place. Russia and Kazakhstan will be allowed to modestly increase oil output in April, but the world’s largest producer, Saudi Arabia, won’t be scaling back on its voluntary cut until May. That is sure to keep supply tight and keeps the bullish trend in oil prices in play.

The extension of that is higher inflation expectations, and that is likely to exacerbate the sell off in bond markets. On the flip side copper is down 4.9%, suggestive that perhaps the market fears higher prices without the associated growth or is simply getting the jitters. Certainly, market volatility is starting to rise with the prospect of higher interest rates down the road. In that environment the Kiwi may underperform on the traditional carry trades, making NZD/JPY and NZD/EUR likely to see further downside in the near term should volatility spike even higher.

US jobs front and centre

With all the market action hinging on the US bond market February’s jobs report tonight looms even larger than normal. Expectations are for a gain of 197K jobs and the unemployment rate to remain stable at 6.3%. Any beat, albeit slight, on this forecast could exacerbate the sell off in bonds, pushing the Us 10-year back towards that 1.60% level. That may provide exporters with a shot at 3 month lows down towards the 0.71 handle.

Finally, today we get the Government’s announcement on the latest lockdown measures. An easing in levels is expected and is unlikely to have much impact on FX markets, unless the current restrictions are extended into next week. The main fireworks continue to be in those US Treasuries though, and the Fed’s Powell might have just sent a message to markets that he won’t be steamrolled into making knee jerk decisions to placate risk sentiment.

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