Conflicted markets start Q4
By Peter Rosenstreich
It is the best of times, it is the worst of times? A bit of both, maybe.
On one hand, the US central bank seems on a stable course. President Trump says he will appoint Jerome Powell to succeed Janet Yellen as Chair, which should keep the Federal Reserve on its path to ‘normalize’ interest rates and its balance sheet. Short-term rates are very likely to rise next month. The US economy is firing on all cylinders. Employment is up, personal spending and economic sentiment are solid. 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 and mildly stimulate the USD and interest rates.
On the other hand, with tensions high in Asia and Trump’s uncanny ability to trigger controversy, traders are unwilling to build bullish positions further. Longer term, there is growing evidence that low inflation is due to structural changes. If so, this could push central banks to re-think their years of ultra-loose monetary policy. Over the last 10 years, investors and central bankers have been overly optimistic. Realising this could have profound effects, especially in FX markets.
Kiwi slides as inflation slides
By Arnaud Masset
The NZD/USD pair lost 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 slightly uptrending 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 from the combined effects of a weaker Kiwi and a more expansionary fiscal policy of the new government.
On the technical side, NZD/USD was unable to break the 0.6818 support (low from 11 May) to the downside. The market expects further downside in NZD/USD as non-commercial short speculative positions reached 11.5% of total open-interest. The next downside support stands at $0.6676 (low of May 2016), while on the upside a resistance lies at around $0.72 (high of 16 October).