New Zealand Dollar, Japanese Yen, NZD/JPY, FOMC, Jerome Powell – TALKING POINTS
- New Zealand Dollar may rise with risk-oriented assets following the FOMC rate decision
- Powell emphasized Fed support for financial markets, applauded Congress’ fiscal efforts
- NZD/JPY may bounce from key inflection range, but can it puncture stubborn resistance?
FOMC, Powell Recap
The biggest event risk in Wall Street trade was the FOMC rate decision and subsequent press briefing by Fed Chairman Jerome Powell. Given the risk-on reaction in markets, it appears the Fed told investors exactly what they were hoping to hear – and more. The Chairman said that the central bank will be extending dollar repo and swap lines to March 31 and will be holding rates near zero due to the “considerable risks” of the virus.
He emphasized that officials are not even thinking about raising rates and assured investors that they should not expect signals on stimulus removal for some time. This assurance of liquidity and flow of credit is “essential” for a recovery, particularly in taming volatility in financial markets. Concerns about a credit crunch as well as the second-and third-order impact from such an event are a bitter memory for 2008-meltdown survivors.
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This is especially true when so-called “Black Swan” events – like the coronavirus – expose financial vulnerabilities that increase the likelihood of an asymmetric shock to the financial system. The fragile leveraged loan and corporate debt market continues to be a point of concern in terms of liquidity, though the Fed’s unprecedented efforts have helped quell fears in that area – at least for now.
Mr. Powell applauded Congress’ efforts towards implementing another fiscal package and stressed the importance of non-monetary measures to address areas that the central bank cannot. This theme of greater reliance on fiscal measures is also a major consideration in the sub-zero interest rate environment of Europe. The latest EU leaders summit and passage of a multi-billion Euro aid package underscores that point.
Digression aside, the Chairman warned that the Q2 GDP contraction will likely be the biggest on record, and that going forward the path ahead for the economy is “extraordinarily uncertain”. He emphasized a familiar point that the virus and medical metrics relating to it are arguably the central driver of the economy now, but added that the slowdown in growth may be short-lived.
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To address concerns of financial stability, he said that monetary authorities can adjust forward guidance and asset buying if necessary. To top it off – in the spirit of former ECB President Mario Draghi – Mr. Powell said the Fed will do whatever they can and for as long as it takes to maintain financial stability and restore economic vitality.
Wall Street Trade
Consequently, stocks ended in the green with the Dow Jones, S&P 500 and Nasdaq indices closing 0.61, 1.24 and 1.35 percent higher, respectively. In the S&P 500 benchmark, financials and energy led with the highest gains. Not entirely by coincidence, crude oil and the petroleum-linked Norwegian Krone were also up for the day.
The Fed’s supportive message hammered the haven-linked US Dollar and put a premium on higher-beta assets like NOK and helped push equity markets higher. Credit spreads across the risk spectrum in the United States and Europe narrowed, with six out eight CDS indices showing a below-average spread over a three-month average.
Thursday’s Asia-Pacific Trading Session
A relatively sparse data docket means investors may focus more on broader macro-fundamental themes following the FOMC rate decision and subsequent commentary. The risk-on dynamic in Wall Street trade may push the New Zealand Dollar higher with commodity-linked and emerging market assets at the expense of comparatively less-risky currencies like the Japanese Yen and US Dollar.
NZD/JPY’s hesitancy to break below a frequently-brushed inflection range between 70.030 and 69.897 could mean a retest of stubborn resistance at 71.249. The pair encountered friction at this level in February, March, June and most recently in July where it subsequently led to the invalidation of the May uptrend. Conversely, puncturing 69.897 with follow-through could lead to a cascade of sellers wanting to capitalize on its retreat.
NZD/JPY – Daily Chart
NZD/JPY chart created using TradingView
— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitriTwitter