NY SESSION: USD advances after FOMC minutes

Central banks were the primary drivers of FX markets today with weakness in the NZD and GBP while the USD soared. The buck is stronger against all of the G10 currencies after FOMC minutes showed a debate on the pace of QE, the NZD fell after the RBNZ Governor said the currency was overvalued and GBP is underperforming as BOE minutes showed increasing support for additional easing.

RBNZ Governor Wheeler spoke on the New Zealand dollar last night and said that “the Bank stands ready to intervene in the currency when circumstances are right”. The kiwi tumbled since the comments despite Wheeler indicated that there are “no quick fixes available”, ruling out several options. NZD/USD fell below the 55-day SMA and the daily MACD indicator suggests the potential for a further decline. The 100-day SMA and trendline support converge around the 0.8280/90 area as the next key downside pivot.

Bank of England minutes showed support for further easing with a 6-3 vote on asset purchases. Three members including Governor King voted for a £25B expansion of QE – King was outvoted for the fourth time as Governor. GBP was weaker across the board and GBP/USD fell to its lowest level since July 2010. The pair has broken below significant weekly trendline support that dates back to early 2009 and is currently testing a key horizontal support zone just above the 1.52 figure.

In the US, FOMC minutes showed that several on FOMC said Fed should be prepared to vary pace of QE. A number of officials said that tapering QE may become necessary while several others warned of reducing or ending QE too soon. Nearly all FOMC participants saw inflation staying within the goal. Overall, the debate within the Fed regarding the pace of easing appears to be intensifying however it the doves are maintaining control. The minutes are from the January meeting which means that the members did not have much time to monitor the effect of increased asset purchases which started at the beginning of the year. Furthermore, with the risk that sequestration hinders the labor market recovery, we think that it an adjustment to purchases may not be imminent.  

January housing market data in the US showed a deeper than expected decline in starts by -8.5% m/m to 890K (cons. 920K) while building permits rose by more than forecast with a gain of +1.8% to 925K (cons. 920K). Producer prices rose by 0.2% m/m and 1.4% y/y on the January headline readings while the core PPI rose by 0.2% m/m and 1.8% y/y. US equities are lower on speculation that the Fed may reduce its stimulus.

Data watch

On the data front for the upcoming Asia/Pacific session are Japan’s weekly securities investment flows and January supermarket sales while readings of business sentiment are due out of China.