RBNZ Holds on Rates as Trump Joins the Dollar Rally with Tax Reforms

Earlier in the Day:

The U.S administration provided the Dollar with a boost ahead of the close on Wednesday, with further details on tax reforms driving the Dollar, which gained for the 3^rd consecutive day.

Trump’s tax reform speech follows on from Yellen’s more hawkish than expected view on monetary policy on Tuesday, with the markets largely brushing aside the views of other FOMC members, non-voting member Bullard having suggested that rates should be left unchanged for the foreseeable future, while Rosengren, also a non-voting member, supported a gradual and regular rise in rates, speaking ahead of the Asian open today.

Expectations are that tax reforms will be a boon for the U.S economy and ultimately require the FED to take a more aggressive path on monetary policy normalization, though with the U.S administration yet to have repealed the Healthcare Bill, how successful Trump will be on tax reforms remains to be seen.

There were no material stats released through the Asian session this morning, while the Kiwi Dollar came under further fire following the release of the RBNZ rate statement. While there were no surprises on the decision to hold rates steady, a shift in the RBNZ’s tone weighed on the Kiwi, with the Central Bank suggesting that rates will likely be on hold for the foreseeable future on the back of a weaker economic growth outlook, with slowing inflation also a concern. We weren’t expecting the caretaker Governor of the RBNZ to come out all guns blazing following last weekend’s election and the National Party’s failure to secure a majority, but the softer outlook on growth, which comes after 2^nd quarter growth fell short of the Bank’s forecast, follows disappointing August trade figures released on Tuesday.

Unsurprisingly, the RBNZ voiced a desire for further easing in the Kiwi Dollar in support of more favourable trade terms, with the markets now having to wait and see whether the National Party will be able to deliver on its tax relief campaign pledge.

The Kiwi fell from $0.72192 to $0.72104 on release of the rate statement before a further slide to $0.71826 at the time of writing, with current levels at risk should data continue to disappoint and formation of government become a more prolonged affair.

Elsewhere, the Yen continued to ease, down 0.23% at ¥113.10 against the Dollar, with the bounce in the Dollar and relative silence over North Korea pulling back demand for the havens, driving appetite for riskier assets off the back of the gains in European and U.S equities on Wednesday, only the Hang Seng bucking the trend amongst the majors this morning.

The Day Ahead:

It’s a busier day ahead for the markets, with prelim September inflation figures due out of Spain and Germany, the EUR bulls in desperate need of a pick-me-up following the post German Election stumble. While positive numbers will provide some support to the EUR, the direction through the day will remain hinged on sentiment towards Merkel’s ability to form government and the price she will have to pay, together with the markets responding further to Trump’s tax reforms.

The EUR’s down 1.72% for the week with more declines this morning, despite expectations of a shift in ECB monetary policy, with doubts now beginning grow on whether the EUR ship can steady.

Across the Channel, we’ve seen the Pound fall back to $1.33 levels, with a lack of macroeconomic data or BoE member commentary there to provide the necessary support as the markets have little else to focus on, other than Theresa May’s leadership and the Brexit team’s abilities to negotiate Britain’s safe passage out of the EU.

We’ve seen the Pound lose further ground in the early part of the day, down 0.13% at $1.3369 with BoE Governor Carney scheduled to speak this morning. While many a central bank will be looking to maintain a softer currency, Carney would likely welcome a boost to the Pound, which would ease pressure on the BoE to make an aggressive move in the coming months. We had heard from the BoE Governor last week, who had brought an end to the Pound’s resurgence, so it will be interesting to see what he has to say this morning, if anything at all.

Across the Pond, there will be another busy session, with stats out of the U.S including 3^rd estimate, 2^nd quarter GDP numbers, August’s goods trade balance and the weekly jobless claims figures. Forecasts are for the economy to grow at 3% in the quarter, in line with 2^nd estimates, which would be a positive for the Dollar, while we can also expect there to be a response to the weekly jobless claims, which are likely to be a negative for the Dollar.

It won’t just be down to the stats this afternoon however, with FOMC non-voting member George and Yellen’s number 2, FED Vice-Chair Fischer scheduled to speak this afternoon. For the markets to buy into Yellen’s view on policy, Fischer will need to have a similar position, with the FED Vice-Chair also having the benefit of Trump’s tax reforms speech to factor into his policy outlook later today.

At the time of the report, the Dollar Spot Index was up 0.22% at 93.562, with direction through to the close hinged on the stats and Fischer commentary on policy, the markets not yet ready to dive back into the EUR, which was down 0.19% at $1.1723.