The US dollar continued to outperform most of the other major currencies, as investors continued to add to their bets over a rate hike by the Fed in the middle of next year, due to Jerome Powell being reappointed as the Fed Chief by US President Joe Biden. The Kiwi was the main loser among the majors, sliding after the RBNZ hiked by only 25bps, disappointing those expecting a double cut. The Turkish lira collapsed after President Erdogan supported the Turkish central bank’s strategy to cut massively amid double-digit inflation.
Lockdown Measures in Europe and Powell’s Nomination Keep Sentiment Subdued
The US dollar continued trading north against most of the other major currencies on Tuesday and during the Asian session Wednesday. It underperformed slightly against CAD, JPY, and EUR, while it eked out the most gains versus NZD.
The strengthening of the US dollar and the Japanese yen suggest that market sentiment remained subdued yesterday and today in Asia. Under normal circumstances, we would say that the weakening of the Kiwi supports that as well. However, we know that the slide in the Kiwi was the result of the RBNZ decision and we will discuss this in a while. Back to the broader sentiment, turning our gaze to the equity world, we see that most European indices continued to slide, while in the US, although the Dow Jones and the S&P 500 gained somewhat, the Nasdaq ended once again in the red. Today, in Asia, the picture was mixed. Japan’s Nikkei 225 fell, China’s Shanghai Composite and Hong Kong’s Hang Seng stayed near their opening levels, and South Korea’s KOSPI gained.
In our view, European investors remained nervous following the announcement of fresh lockdown measures around the bloc, despite the flash PMIs for November coming in better than expected. Yes, the Euro area economy may have not been hit as severely as many may have believed by the latest supply shortages, but the announcement of new lockdowns raises concerns that economic activity in December may slow again. The fact that, in the US, the tech-heavy Nasdaq continued to slide implies that Fed Powell’s nomination continued to be a driver, as investors have continued to increase bets that US interest rates could start rising in the middle of next year.
That said, although we expect the US dollar to remain strong, we believe that US equities will rebound soon and head towards fresh highs. The reason we believe that is because the US economy is performing very well and more data pointing to that could encourage more stock buying, despite increasing expectations over faster hikes. After all, we believe that most equity investors may have already digested the idea of higher rates soon.
S&P 500 — Technical Outlook
The S&P 500 cash index traded somewhat higher yesterday, after it hit support at the crossroads of the 4655 barrier, and the upside support line drawn from the low of October 6th. Despite the prior slide in the aftermath of hitting a record of 4744 on Monday, given that the index remains above the upside support line, we still see a positive near-term outlook.
We believe that investors will jump back into the action soon and perhaps target once again the record high of 4744. If they are not willing to stop there this time around, we could see theme climbing towards the rounder figure of 4800.
On the downside, we would like to see a dip below 4630 before we start examining a short-term reversal. This could result in declines towards the low of November 1st, at 4592, the break of which could carry extensions towards the low of October 28th, at 4552.
Kiwi Slides Despite RBNZ’s Hike, Turkish Lira Collapses on Erdogan’s Remarks
Now, back to the FX world, the Kiwi was the main loser among the majors, despite the RBNZ hiking rates for a second month in a row. Remember, that we’ve been expecting such a reaction. Market pricing was aggressive heading into the meeting, with participants assigning a 40% chance for a 50bps hike. However, due to problems in other major economies, including China, which is New Zealand’s biggest trading partner, we saw the case for only one quarter-point hike, and this is what the Bank delivered. “At the moment, with everything we have in our hands, we see steady steps of 25 basis points back to levels where the OCR is marginally above the neutral rate as the most balanced approach we can take,” Governor Adrian Orr said after the decision, which may have disappointed those expecting a more aggressive future rate path as well.
With all that in mind, despite the RBNZ expected to continue raising interest rates faster than other Banks, the fact that the path may not be as fast as expected gives ample room for investors to scale back their expectations, and combined with increasing bets over a Fed hike next summer, it could keep the downtrend in NZD/USD intact. However, we believe that the Kiwi could rebound soon against some currencies the central banks of which have warned that they are unlikely to touch the hike button next year. Such Banks are the ECB, the RBA, the BoJ, and the SNB.
Now moving to the EM arena, the Turkish lira plummeted another 14% yesterday and today in Asia, hitting a fresh record high, well above its prior one. Lira’s fall accelerated after Turkish President Recep Tayyip Erdogan defended the massive and continuous interest rate cuts amid double-digit inflation. He said that this is part of an “economic war of independence”, rejecting calls from investors and analysts to adopt a different strategy. Inflation is now near 20% in Turkey, and against any orthodox monetary policy practice, the Turkish central bank has cut interest rates by 400bps since September, with the latest one being a 100bps, delivered last week. This, combined with investors’ fear over the lack of independence of the Turkey’s central bank, could result in more capital outflows and keep the Turkish currency under pressure.
NZD/USD — Technical Outlook
NZD/USD slid overnight after the RBNZ disappointed those expecting a “double cut”, and at the time of writing the rate is hovering slightly below the 0.6910 barrier, which is marked by the low of October 8th. The pair has been printing lower lows and lower highs below a downside line since November 9th, and thus, we will consider the short-term picture to be negative.
If the bears are willing to stay in the driver’s seat, we would expect them to aim for the 0.6875 or 0.6858 barriers, marked by the lows of October 6th and September 30th, respectively. If neither hurdle is able to hold, then a break lower could pave the way towards the low of August 23rd, at 0.6825.
The outlook could turn positive upon a break above 0.7050, which is the peak of November 18th. The rate will not only be above the aforementioned downside line, but also back above the upside one taken from the low of September 30th. The next territory to consider may be as a resistance may be the 0.7080 barrier, marked by the high of November 15th, the break of which could see scope for advances towards the 0.7110 level, marked by the inside swing low of November 9th, or even the 0.7140 territory, marked by an intraday swing high formed the same day.
As for the Rest of Today’s Events
Today, the FOMC releases the minutes of its latest policy gathering, but bearing in mind that we already heard views of several policymakers after the gathering, we will treat the minutes as outdated. We prefer to focus more on upcoming data and remarks to see whether the chances of a hike mid-2022 remain elevated. In that respect, we will pay attention to the personal income and spending data for October, which come out alongside the core PCE index for the month ahead of the minutes. Despite not being a major market mover, as we have other inflation gauges, like the CPIs, being already released, the PCE index is the Fed’s favorite inflation metric.
As for the speakers, we will get to hear from ECB members Weidmann, Panetta, McCaul and Schnabel. BoE’s Tenreyro will also speak.