Fed Officials Calm Inflation Fears Down, RBNZ Decides on Policy

Wall Street indices gained yesterday, with the positive appetite rolling into the Asian session today, as some Fed officials maintained the view that the surge in inflation is likely to prove to be temporary and that it’s not the time for discussing policy normalization yet. Tonight, during the Asian session Wednesday, NZD-traders may pay extra attention to the RBNZ policy decision, where we expect policymakers to sound somewhat more optimistic than previously.

EQUITIES GAIN AND USD SLIDES ON FED DOVISH COMMENTS

The US dollar traded lower against all the other G10 currencies on Monday and during the Asian session Tuesday. It lost the most ground versus NZD, NOK, EUR, and AUD in that order, while it underperformed the least against JPY and SEK.

The weakening of the US dollar and the yen, combined with the strengthening of the risk-linked Kiwi and Aussie, suggests that markets traded in a risk-on fashion yesterday and today in Asia. Indeed, looking at the equity world, we see that, although EU markets traded mixed, with some of them staying closed due to a holiday, Wall Street traded in the green, with the upbeat appetite rolling into the Asian session today.

Recently it’s been all about inflation. Remember that Fed officials have held the view that any inflation spikes this year are likely to prove to be temporary, and that it’s too early to start discussing monetary policy normalization. However, according to the latest CPI data, alongside the headline rate, the core one surged as well, raising questions as to whether the spike is due to transitory factors. What’s more, the minutes from the latest FOMC gathering revealed that a number of policymakers thought that if the recovery continues, it may be appropriate to “begin discussing a plan for adjusting the pace of asset purchases”. All this brought forth expectations about when the Fed may consider to start its policy-normalization process, and thereby, it weighted on equity markets. At the same time, the US dollar strengthened.

That said, yesterday, those expectations were pushed back again, as several Fed officials, including Governor Lael Brainard, Atlanta President Raphael Bostic, and St. Louis President James Bullard, insisted that the surge in inflation and any further increase of it is likely to prove to be temporary. “I think there will come a time when we can talk more about changing the parameters of monetary policy, I don’t think we should do it when we’re still in the pandemic,” Bullard also said.

Therefore, with some officials sticking to their dovish stance, even after the surge in inflation, we believe that equities have room to trend north, at least for a while more, while the US dollar may stay on the back foot. Having said that, investors may become more careful again as we get close to the release of the yoy core PCE rate for April, the Fed’s favorite inflation metric, which is due out on Friday. A more-than-expected surge in this metric may revive speculation over the need of withdrawing some monetary policy support, and thereby result in a pullback in risky assets, and a rebound in the dollar and other safe havens.

USD/CHF — TECHNICAL OUTLOOK

USD/CHF continues to trade below a short-term tentative downside resistance line taken from the high of May 5th. However, at the same time, the pair remains above its support area between the 0.8953 and 0.8957 levels, marked by the lows of May 21st and 24th respectively. Although the short-term trend is still to the downside, in order to get comfortable with lower areas, a break below the above-mentioned support area is needed. Hence our somewhat bearish approach for now.

If, eventually that break happens, this will confirm a forthcoming lower low, possibly sending the rate to the 0.8933 hurdle, marked by the low of February 19th, where the pair may stall for a bit. However, if the selling continues, USD/CHF could end up sliding to the 0.8871 zone, marked by the lowest point of February.

Alternatively, if the pair manages to break the aforementioned downside line and then climbs above the 0.9002 barrier, marked by yesterday’s high, that could temporarily spook the bears from the field, potentially inviting more bulls. USD/CHF might then drift to the high of May 19th, at 0.9047, a break of which may lead to a move to the 0.9094 level, marked by the high of May 12th.

WILL THE RBNZ SOUND MORE OPTIMISTIC?

Tonight, during the Asian session Wednesday, apart from any developments surrounding the broader investor morale, NZD-traders are also likely to pay extra attention to RBNZ interest rate decision. At its latest gathering, this Bank kept its policy settings untouched, with policymakers maintaining the position that they are prepared to lower the OCR further if required, and adding that a prolonged period of time is most likely to pass before their objectives are met.

Since then, New Zealand’s CPI ticked up to +1.5% yoy from +1.4%, but, although this is a move in the desired direction, it is still below the midpoint of the Bank’s 1–3% range. However, the employment report for Q1 came in better than expected, which may have lessened the likelihood for further interest-rate reductions. Thus, even if policymakers keep the door open for such an action, we believe that they may sound a bit more optimistic than previously, giving the impression that this is not something that will happen in the months to come if the economy continues to improve. A more optimistic language may help the Kiwi recover some more of its recently lost ground.

NZD/CAD — TECHNICAL OUTLOOK

Yesterday, NZD/CAD was finally able to break the short-term tentative downside resistance line taken from the high of April 21st. Now, the pair is stalling slightly below one of its key resistance barriers, at 0.8712, marked by the high of May 20th. In order to aim higher, we would prefer to wait for a pop above that barrier first. Hence our somewhat positive approach for now.

If the rate climbs above that 0.8712 hurdle, this will confirm a forthcoming higher high, potentially opening the door for a further move north. NZD/CAD could travel to the 0.8746 obstacle, or to the 0.8784 zone, marked by the high of May 14th. If the buying doesn’t stop there, the pair might end up pushing to the 0.8820 level, which marks the high of May 11th.

On the other hand, if the pair falls back below the aforementioned downside line and then drops below the 0.8667 area, marked by yesterday’s intraday swing low, that could attract more sellers into the game. NZD/CAD may then drift to the 0.8635 zone, which is the current lowest point of May. But if that zone fails to provide support and breaks, such a move would confirm a forthcoming lower low, potentially setting the stage for a move to the 0.8588 hurdle, or the 0.8576 level, marked by the lowest point of August 2020.

AS FOR TODAY’S EVENTS

During the European session, we get Germany’s ZEW survey for May. The current assessment index is forecast to have risen to 95.5 from 94.1, while the business expectations one is anticipated to have inched up to 101.4 from 99.5. This is likely to take the business climate index up to 98.2 from 96.8, thereby confirming that Eurozone’s growth engine continues to recover from the coronavirus-related damages at a decent pace. European shares and the euro may climb higher, but we doubt that this could raise speculation that the ECB will start withdrawing monetary policy anytime soon. After all, last Tuesday, President Lagarde confirmed that clearly, saying that it is “essential that monetary and fiscal support are not withdrawn too soon”.

With regards to the energy market, we have the API (American Petroleum Institute) report on crude oil inventories for last week, but as it is always the case, no forecast is currently available.

As for the speakers, we will get to hear from Chicago Fed President Charles Evans, Fed Board Governor Randal Quarles, and BoE MPC member Silvana Tenreyro.

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