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 NZD was the main loser among the majors, sliding after the RBNZ hiked by only 25 bps, 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. However, the Dow Jones Industrial Average 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 new lockdown measures around the bloc, despite the flash PMIs for November coming in better than expected. Yes, the Euro area economy may not have been hit as severely as many believed by the latest supply shortages. Still, 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. We think 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 we drew the upside support line from the low of Oct. 6. 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 action soon and perhaps target a record high of 4744. If they are not willing to stop there this time around, we could see them 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 Nov. 1, at 4592, the break of which could carry extensions towards the low of Oct. 28, at 4552.
Kiwi Slides Despite RBNZ Hike, Turkish Lira Collapses on Erdogan’s Remarks
Now, back to the FX world, the Kiwi was the major loser, despite the RBNZ hiking rates for the 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 50 bps 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. Governor Adrian Orr said,
“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,"
The decision may have disappointed those expecting a more aggressive future rate path as well.
With all that in mind, despite the RBNZ being expected to continue raising interest rates faster than other Banks, the fact that the path may not be as quickly 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 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 USD/TRY 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 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. Against any orthodox monetary policy practice, the Turkish central bank has cut interest rates by 400bps since September, with the latest one being 100bps, delivered last week. This, combined with investors’ fear over the lack of independence of 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.” At the time of writing, the rate is hovering slightly below the 0.6910 barrier, marked by the low of Oct. 8. The pair has been printing lower lows and lower highs below a downside line since Nov. 9, 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 Oct. 6 and Sept. 30, respectively. If neither hurdle can hold, a break lower could pave the way towards the low of Aug. 23, at 0.6825. The outlook could turn positive upon a break above 0.7050, which is the peak of Nov. 18.
The rate will be above the downside as mentioned above and back above the upside one taken from the low of Sept. 30. The following territory to consider resistance may be the 0.7080 barrier, marked by the high of Nov. 15, the break of which could see scope for advances towards the 0.7110 level, characterized by the inside swing low of Nov. 9, or even the 0.7140 territory, marked by an intraday swing high formed the same day.
Elsewhere
Today, the FOMC releases the minutes of its latest policy gathering. Still, 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 in 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.