The RBNZ cut the cash rate by 25 basis points to 2.5% last week. The New Zealand dollar rebounded since mid September lowered the chances of RNBZ achieving its inflation target. They mentioned the current rate is likely to be enough to get inflation back to target while maintaining an easing bias. This is the fourth interest rate cut since June this year.
The New Zealand dollar jumped 1.29% against the US dollar from $0.6640 to $0.6750after the bank’s decision, as the bank failed to indicate possibilities of further easing.
Even amidst recent threats to exports, New Zealand has seen strong gains in tourism and immigration, which have strengthened its service sector. The dairy products auction earlier this month showed dairy prices had recovered some lost grounds from consecutive decline in past 3 auctions. Analysts warned that the dairy prices are still volatile and any recovery is likely to be slow.
RBNZ’s Wheeler highlighted several risks to the economy including high net immigration, a possible drought associated with El Nino and further falls in export prices.
The main focus for this week will be on the FED, their FOMC statement and press conference on Wednesday. It is a highly anticipated rate hike by FED, first in almost a decade. The last rate hike was in June 2006. If the FED failed to meet the market expectation and decide to hold off the rate hike to 2016, it is possible to see a sell-off in the US dollar until end of this year. If the rate hike happen as expected, market is likely to look out for guidance and hint towards their tightening policy in the statement.
Apart from the FOMC meeting, next week sees the release of some important US data, most notably, the November core CPI, last week’s jobless claims and the December Philly Fed Manufacturing Index.
It's painful to ride alongside an overwhelming consensus but it worked in 2015. US dollar longs were everyone's favourite trade at the start of the year and they've delivered.
The US dollar so far trails only the Swiss franc as the top performer this year (and it's close).
Going into 2016, Goldman Sachs, Deutsche Bank, Barclays, BNP Paribas Credit Suisse all recommend EUR/USD shorts this year. The median estimate for 2016 is 1.05.
Barclays, Morgan Stanley, BNP Paribas, Credit Suisse and Danske all recommend AUD/USD shorts for 2016.
UBS, BNP Paribas, Goldman Sachs and RBC all recommend USD/JPY longs for 2016.
I'll reiteratewhat I wroteat the end of last year:
"By this point, you've likely heard a dozen reasons to buy the US dollar. It's tough to follow the crowd and chase a trade that's already rallied but if you want to make a Resolution in your trading in the year ahead, don't fret so much about following the crowd - make friends with the trend because it's almost always where the best trades lie."
Enough about the ECB, it's time to bring the yanks back into play and the wonderful NFP's
The yanks don't like being left out of a party but it was all about Europe yesterday so today they are our hosts
Let's be clear on one thing. This one report won't be a game changer for the Fed and whatever path they are on. Unless we see the most amazing collapse and signals that the jobs market is disappearing into a fiery pit of doom, this will just be more icing on the cake if it's good, and will be brushed off if it's mildly bad
The dollar faced some natural pressure yesterday in the fallout from the ECB (there I go talking about them again) but it also found a bid while Yellen was talking
We've also seen limited reaction to data points and more importantly, any positive news or Fed comments that have sent it higher haven't lasted. For all that's gone on we're still in the same old range as we wait for the Fed
For me that's the biggest signal that while we'll get a reaction to the NFP, it may not be a lasting one nor one that sends the price off to pastures new
You don't have to be a TA genius to see what the range is right now
USDJPY H4 chart
122.25 to 1.2360/75 marks the edges of the range since Nov and we've had plenty of news over that time but thus we remain enclosed in it
Further out and up and we need to focus on the levels that played a part in the run up to the 125's. 124.00 will have the normal big figure influences on it and 124.15/20 has also played a role as both resistance and support. 124.45/50 looks strong also and then we're up to 125.00 and the years high
USDJPY daily chart
Looking down, 122.25 down to 122.00 looks to be a level that could bring some pain if it breaks. If it does then we could face a swift trip down to 121.50/60, with maybe some stickiness around 121.70. 121.30 may hold support next an ahead of 121.00 then we have another strong old resistance area at 120.60/70 that goes back further than shown on the chart above
There's the ballpark we're likely to play in today and so for me the trade is going to be playing the edges where any volatility takes us. I'll be keen to see the how the upside plays out on a good number as there will be some in the market who will be waiting for a good number to cement Fed bets. I'll be suspicious about whether they'll keep any intraday moves lasting though
If we do get a shocker but not a game changer, then this might be one of the last opportunities to get in on a decent dip in the run up to the FOMC, if you favour a hike
The IMF will add the yuan to its basket of reserve currencies, an international stamp of approval of the strides China has made integrating into a global economic system dominated for decades by the U.S., Europe and Japan.
The International Monetary Fund’s executive board, which represents the fund’s 188 member nations, decided the yuan meets the standard of being “freely usable” and will join the dollar, euro, pound and yen in its Special Drawing Rights basket, the organization said Monday in a statement. Approval was expected after IMF Managing Director Christine LagardeannouncedNov. 13 that her staff recommended inclusion, a position she supported.
It’s the first change in the SDR’s currency composition since 1999, when the euro replaced the deutsche mark and French franc. It’s also a milestone in a decades-long ascent toward international credibility for the yuan, which was created after World War II and for years could be used only domestically in the Communist-controlled nation. The IMF reviews the composition of the basket every five years and rejected the yuan during the last review, in 2010, saying it didn’t meet the necessary criteria.
“The renminbi’s inclusion in the SDR is a clear indication of the reforms that have been implemented and will continue to be implemented and is a clear, stronger representation of the global economy,” Lagarde said Monday during a press briefing at the IMF’s headquarters in Washington. Renminbi is the currency’s official name and means “the people’s currency” in Mandarin; yuan is the unit.
The addition will take effect Oct. 1, 2016, with the yuan having a 10.92 percent weighting in the basket, the IMF said. Weightings will be 41.73 percent for the dollar, 30.93 percent for the euro, 8.33 percent for the yen and 8.09 percent for the British pound. The dollar currently accounts for 41.9 percent of the basket, while the euro accounts for 37.4 percent, the pound 11.3 percent and the yen 9.4 percent.
The yuan weakened in offshore trading Tuesday amid speculation China’s central bank will rein in intervention now that the IMF vote on reserve-currency status is out of the way. The long-term goal is for very few interventions, People’s Bank of China Deputy Governor Yi Gang said at a briefing, adding that bigger two-way fluctuations are normal.
In a preliminary report in July, IMF staff estimated the yuan would have a weight of about 14 percent to 16 percent. The weighting will affect the interest countries pay when they borrow from the IMF. It may also affect the scale of inflows the Chinese currency receives in the coming months.
Monetary System
The decision establishes the yuan as a fixture in the very international monetary system Chinese leaders criticized following the global financial crisis. In a landmark 2009speech, PBOC Governor Zhou Xiaochuan argued a global system so reliant on a single currency -- the U.S. dollar -- was inherently prone to shocks. That conviction set off a global push by China’s leaders, including now-President Xi Jinping, to have the yuan included in the SDR, which countries can use to supplement their currency reserves.
The IMF staff recommendation was based on increasing international use and trading of the yuan, policy reforms that allow yuan to be used smoothly in SDR operations, and steps by China to step up data disclosure, the fund said. A more detailed staff report will be released later Monday or Tuesday, IMF officials said.
“It’s a big win for Beijing as they look to bolster their image and to get the respect they think they deserve,” said Timothy Adams, president of the Institute of International Finance and a former U.S. Treasury undersecretary.
The IMF endorsement is a bright spot in what has been a tumultuous year for the world’s second-biggest economy, which has been buffeted by slowing growth, a tumbling stock market and a shift by authorities toward a more market-oriented exchange rate.
The IMF’s decision is a “win-win” for both China and the world and acknowledges China’s achievements in economic development and reform, the PBOC said in a statement on its website. The U.S. supported the fund’s staff recommendation to add the yuan, the Treasury Department said in an e-mailed statement without elaborating.
Approval is unlikely to have much impact on short-term demand for the yuan, given the SDR’s minor share of global reserves, according to economists at banks including HSBC Holdings Plc and ING Groep NV.
Adams said that rising demand may be “evolutionary” and “a process that will likely be pronounced.”
The decision should boost efforts by Xi to open up China’s financial markets. China implemented a series of reforms to win IMF support, such as opening its onshore bond and currency markets to foreign central banks and reporting its reserves to the IMF.
G-20 Host
The question is whether China, which will host meetings of the Group of 20 economies next year, will try to leverage the IMF’s support to pursue broader changes to the global monetary system. In his 2009 speech, Zhou suggested the IMF expand the use of the SDR to tap its potential as a "super-sovereign reserve currency."
The IMF’s move may also spur political blowback in the U.S., where Republican lawmakers have blocked efforts to expand the voting shares of China and other emerging-market economies at the fund. Senator Bob Casey, a Pennsylvania Democrat, said in an e-mailed statement that the decision “validates China’s history of cheating on its currency,” a history that’s hurt jobs and wages in his state.
The Washington-based fund created the SDR in 1969 to boost global liquidity. Under the Bretton Woods system of fixed exchange rates, countries pegged their currencies to the U.S. dollar. But for nations to increase their dollar reserves, the U.S. would have to run persistent current-account deficits, threatening the value of the greenback.
The SDR addressed this dilemma by serving as a supplementary reserve asset to augment countries’ gold and dollar holdings. While the SDR isn’t technically a currency, it gives IMF member countries who hold it the right to obtain any of the currencies in the basket to meet balance-of-payments needs.
The mix of revisions skews lower. Note the softness in year-over-year GDP. The September reading was also the softest since 2009 and that's the most up-to-date reading. USD/CAD jumped higher on the headlines.
More details:
Exports rose at 9.4% annualized pace
Oil and gas led the Sept contraction of 5.5% m/m "mainly as a result of a large decrease in non-conventional oil extraction"
Support activities for oil and gas extraction fell 13% in Sept
Manufacturing output decreased 0.6% in September
Wholesale trade contracted 0.3% in September (down 1.1% in the quarter)
Retail trade expanded 0.3% in September (up 0.8% in the quarter)
Construction was unchanged in September
This doesn't look good for Q4 growth. The rebound in Q3 was led by oil and gas but that rebound evaporated at the end of the quarter and oil prices remain in the doldrums. Trade hasn't picked up any of the slack.
Retail, finance and real estate are the only parts of the economy that are firing. that's not a recipe for a sustained recovery.
Bloomberg with the story quoting from an article in today'sSchweiz am Sonntag
The president of Grisons mountain railways, Sylvia Schmid, said:
"We've grown convinced that there needs to be a cap of 1.15 francs per euro"
Not a major lobby given that tourism contributes less than 3% to Swiss GDP but the idea may catch on
The article also reports comments from a banking executive saying the industry is worried that the SNB will further lower depo rate from -0.75% currently, which could mean the charge gets passed to savers
The article also cites an unidentified former SNB governing board member as saying he's afraid that president Jordan could be pushed out of office
EURCHF Friday saw some SNB more interventionto weaken the franc ahead of the ECB meeting next Thursday suggesting they fear/know some bearish euro measures coming. USDCHF and EURCHF were pushed through 1.0320 and 1.0925 in a rush.
Last week I reportedcomments from Jordansaying that negative interest rates"have proved very useful" and stating that the SNB balance sheet shows they have been active in the market as I have often pointed out on these pages
Thomas Jordan - Are his days as SNB president numbered?
We do not plan to enter any new positions until we assess the outcome of the Fed’s unscheduled meeting during the NY session. Start your week off on the right foot by reading my currency update below.
Currency Update:
USD: The market currently prices a 72% probability for a Fed rate hike on December 16. The Fed have clearly signalled they are ready to commence the tightening cycle in December and the only information that is likely to prevent them from doing so is a move lower in underlying inflation between now and the December meeting, or some major uncertainty in financial markets. The employment situation has met the Fed’s criteria to lift rates, however they must also be confident that inflation is trending back towards 2%. Core PCE is at 1.3% and Core CPI is at 1.9%. The employment release for October, released November 6, came in much better than expected across all three major components which increased expectations for a December move. The FOMC statement and related minutes for the October meeting were hawkish and showed that the majority of Fed members see conditions likely warrant a rate rise at the next meeting.
EUR: The ECB have told markets they intend to re-examine QE at the December 3 meeting in light of subdued inflation. This suggests they will increase the size of QE and cut the deposit rate, with the market already pricing in a 10 basis point cut. An exclusive Reuters interview with four anonymous governing council members suggests that the ECB is likely to cut the deposit rate by at least 10 basis points in December.
GBP: Sterling remains a strong currency in the long term, however the recent Quarterly Inflation Report prompted the market to push back the timing of the first rate hike due the the BOE admitting that inflation is likely to remain subdued for longer then previously anticipated. CPI inflation is now expected to remain below 1% until the second half of 2016. Wage growth however has been excellent near 3% for several months, which is supportive for GBP.
AUD: The Australian dollar is a neutral currency while the RBA remain on hold. The central bank is unlikely to cut interest rates until they see Q4 inflation data, which is not released until January 27. The RBA will remain on hold in February if inflation is not of concern. The employment situation has been excellent with the October figure showing a gain of nearly 60,000 jobs and the unemployment rate moving down to 5.9%.
NZD: The RBNZ is likely to cut rates again in the medium term, with the market pricing a nearly 50% chance of a cut on December 9. Dairy prices have declined the the past two months, and third quarter data for both employment and inflation were much worse than expected.
CAD: The Canadian dollar is relatively neutral at present both fundamentally and sentiment-wise. There remains a possibility that the BOC will cut rates in 2016, however in the medium term, CAD direction will be a function of supply and demand of WTI.
JPY: The Japanese economy has failed to show any meaningful signs on recovery since the massive QQE program was implemented. The BOJ are watching CPI excluding food & energy to gauge underlying inflation trend. If underlying inflation does not pick up then the BOJ may have to increase the size of its QQE program yet again. Japan showed a technical recession with Q2 and Q3 GDP in contraction.
CHF: The franc is fundamentally a weak currency given the SNB’s negative interest rates, however it can suddenly rally on safe-haven flows. The SNB regularly recite that the franc is overvalued and they are prepared to intervene to weaken the currency. The franc’s direction is difficult to predict due to regular intervention by the SNB. With the ECB planning further QE and a rate cut, we will likely see an adjustment of monetary policy from the SNB on December 10, to compensate for whatever action the ECB may have announced one week prior, in an attempt to raise the EURCHF exchange rate.
USDJPY H4 chart
USDJPY daily chart
Thomas Jordan - Are his days as SNB president numbered?
23rd, 2015 by
