NZDUSD: Central Bank Divergence

Despite the lack of market moving economic releases being revealed this morning, it is still a buzzy morning in North American trade. The reason why spirits are high is due to the Federal Reserve making their monetary policy decision later this afternoon followed closely by the Reserve Bank of New Zealand throwing their opinion in to the fray as well. Combined with major earnings reports from Apple last night and Facebook later today, investors have plenty to ponder as we hurtle toward the end of the first month of 2015.

The actions of the central banks later this afternoon have the potential to be the most vital of the events occurring today, so concentrating on them is of utmost importance. Some have speculated that the recent actions of the European Central Bank, Swiss National Bank, the Dutch National Bank, and the Monetary Authority of Singapore, among others, has changed the landscape of how all future central bank actions will be carried out. In retrospect, it would seem foolish to completely ignore the major actions of a few central banks due to their ability to influence commerce outside of their own borders. It could be argued that the Fed’s various Quantitative Easing programs helped lift not only the US stock market, but the stock markets of Europe as well. Could ECB QE have the same tangential effect on US stocks?

Whether or not ECB QE will have that effect is too early to tell as the program isn’t scheduled to begin until March, however, if past experience is any teacher, we could be led to assume so. If that were the case, the Fed is in an envious position as employment in the US is advancing strongly and someone else is doing the dirty work for them. Of course, the Fed has TWO mandates which include price stability along with maximum employment, so simply resting on their laurels isn’t an option here. Or is it? If we are to believe that Fed Chairwoman Janet Yellen is a Ben Bernanke disciple, then the recent fall in inflation could be categorized as largely transitory due to the incredible fall of oil prices.

Bernanke was involved in a similar situation back in September 2011, but in the opposite sense. Overall inflation was almost double the Fed’s target by running at 3.9%, but Bernanke introduced Operation Twist at that time anyway, of which he was highly criticized. In the end, it worked out for the Fed as they viewed rising oil prices transitory, hyperinflation wasn’t a result, and we luckily don’t live in the dystopian future that some had predicted. Yellen has a chance to follow in her predecessor’s footsteps in a Bizarro sort of way. That means the Fed may not back off of their perceived plan to raise interest rates sometime toward the middle of the year.

The RBNZ, on the other hand, has a bit of a different situation on their hands.  As my colleague Chris Tedder explained in his RBNZ preview earlier, expectations are leaning more dovish on that side of the world. That being the case, if the Fed doesn’t dwell on the situation in Europe, but the RBNZ acts as expected, the path of least resistance for the NZD/USD may be to the downside. Perhaps helping to usher that along is a declining trend line that has been prevalent over the last couple weeks. With the NZD/USD recently bumping up against that trend line, the potential divergence in central bank speak, and an ABCD pattern that completed in the same region, a prescription for a further fall may have already been written.