Kiwis do fly

I do take pleasure in being a kiwi on many levels, one of which is the refreshing habit kiwis have of telling it like it is. Life really is much simpler when people say what they mean in this kiwi’s mind. Clearly, the Reserve Bank of New Zealand (RBNZ) feel the same as they took the monetary meat cleaver to quantitative easing in the just-announced Monetary Policy Decision.

RBNZ announces end of QE

The minutes are efficiently released with the decision, and the RBNZ has taken the “least regrets” decision to cease their quantitative easing programme from next week. No multi-month hand-holding and fluffy language or first date hints. From next week they stop. Now that’s what I call a taper. To be sure, the RBNZ is still dovish. The MPC expect spikes in inflation in the coming months to be transitory, aka the Fed. Inflation will run below target in the medium term, so we can expect interest rates to remain lower for longer.


Those details were lost on the markets, though, as traders looked at the headlines and promptly sent the kiwi higher, proving that the flightless bird has wings. NZD/USD jumped 0.85% to 0.7005, and AUD/NZD falling 0.70% to 1.0650. Whether the market looks below the bonnet of the statement and sustains those gains is another story, of course. Federal Reserve Chairman Jerome Powell begins his two-day congressional testimony tonight, and much will depend on how transitionally transitional he is on inflation after yesterday’s blockbuster US CPI data.


Before we come to that, it is worth noting that French and German CPI’s yesterday both came in on expectations, with no signs of overheating in Europe. But let’s be honest, only the Germans, Austrians and Dutch have been worried about that in Europe at any time in the last 20 years. The sharp divergence between the US and French/German CPI prints saw EUR/USD unceremoniously bashed overnight.


Circling back to the US and inflation, Core Inflation exploded higher (as did the headline), to 4.50% overnight, the highest since 1991 apparently. Spiralling used car prices accounted for a goodly proportion of the increase, and once rental car companies stop buying them, they should mollify. However, rents and other measures also increased, with oil prices impacting the headline number. Fast-moving small business surveys and GDP Nowcasts also suggest that pricing pressures remain in the US, making it harder to maintain the Fed’s transitory versus sticky inflation mantra.


Reading two well-respected sets of economists I follow overnight and this morning on the US inflation data, the tomato tomatoes, transitory or sticky inflation outlook is as stark as ever. Like a bi-partisan bill in Congress, they are as far apart as ever. Never has it been harder to ask how many economists it takes to change a lightbulb. The answer is many or none. The lights are now all LEDs with long lives, so they have to go away and adjust their models. But hang you say, that’s not a real answer. Exactly.


Mr Powell should give us some insight into his and the Fed’s thinking this evening. And depending on what he says, the US bond market malaise, only gently interrupted overnight, may or may not continue. Similarly, the overnight US dollar gains post-inflation data may, or may not continue. Another juicy inflation reading for July could make August’s Jackson Hole symposium and the September FOMC key inflexion points for financial markets for 2021. The Fed doesn’t have the RBNZ luxury of deciding to tell the markets they’re tapering from next week. It would be good for vol though.


Nowhere is probably going to be more nervous that the Fed finally blinks than Asia. With much of the region from Australia to Japan down the Covid-19 rabbit hole, emerging Asia, in particular, is in no position to tighten monetary policy to maintain those soft US dollar pegs if the US monetary policy direction starts diverging from the still ultra-soft one across Asia. The China RRR cut on Friday muddies those waters more, although I suspect China is quite happy to see some yuan weakness.


The data releases came thick and fast for the Asia Pacific this morning but didn’t set the world on fire. Australia’s Westpac Consumer Confidence rose slightly despite the soon-to-be-extended Sydney lockdown. South Korean employment held steady at 3.70%, while Japan’s Reuters Tankan Index rose slightly to 25% for July, with exports rising but domestic demand fading. Similarly, Singapore’s Q2 Advanced GDP fell by 2.0%, indicating its recovery is slowing. Fitch overnight downgraded the Philippines credit rating outlook to negative, and the Bank of Indonesia Governor revised the country’s GDP outlook lower for 2021 this week.


All-in-all, Asia has a few challenges now. A potentially slowing recovery across the region as higher prices, components shortages and logistical challenges bite. ASEAN continues to face a Covid-19 nightmare which is now a real danger to growth forecasts. Malaysia can also throw in a messy political situation that is impressive, even by its Game of Thrones standards.


The last thing ASEAN and Asia, in general, need right now is the prospect of tightening monetary policy in the US, when policy settings in Asia can and must remain ultra-easy. Hopefully, the region dodges a Fed bullet tonight, but if Mr Powell talks taper, we could be in for an extended period of Asian currency and equity weakness.


Inflation data from India this afternoon may give more inflationary/stagflationary food for thought as it emerges from its Covid-19 tragedy. UK inflation today will probably print benignly around 2.20% YoY, with the PPI and RPI data holding more interest, particularly with the government pushing on for full reopening from next week. Sterling could get an inflationary jolt higher. Finally, spare a thought for the Turkish Central Bank Governor, who announces the latest TCMB Rate Decision this evening. Undoubtedly the most thankless job in central banking.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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