Are We Setting Up for Risk-Off Sell Off in FX?

Market Drivers November 13, 2019
RBNZ surprises by holding rates steady
All eyes on Powel
Nikkei -0.85% Dax -0.76%
UST 10Y 1.87%
Oil $56/bbl
Gold $1464/oz
BTCUSD $8802

Europe and Asia:
NZD RBNZ rates at 1.00 vs. 0.75%
GBP UK CPI 1.5% vs. 1.6%

North America 
USD Chair Powell Testimony 11:00

FX markets were in mild risk-off tone ahead of Fed Chair Powell testimony in front of Congress with USDJPY trading just below the 109.00 figure in morning London dealing.

Overnight the kiwi was the biggest mover as the RBNZ surprised the market by keeping rates steady at 1.00% vs. .75% expected with the central bank essentially communicating that monetary policy remained accommodative for now. Governor Orr did not suggest that this would be the end of the loosening cycle as the bank remains data-dependent but New Zealand monetary authorities clearly felt that for now, the policy was sufficient.

No doubt Mr. Orr and company were thinking ahead that they would rather have additional rate cuts available to the committee should growth slow further. Some market analysts were quick to assume that this would the end of the RBNZ easing but we think that quite premature. If the US and China are unable to come to terms and Trump escalates tariffs the RBNZ is almost certain to take rates lower under those conditions. The pair bounced to .6400 figure but so far has failed to hold it and it starts to drift lower the failed breakout could push back towards .6300 as the week progresses.

In North America today the focus with be on Jerome Powell as he faces Congress for his semi-annual testimony. It’s unlikely that the Chairman will break any fresh ground as he will no doubt try to keep to his steady-as-she-goes message but he will be pressed on yesterday’s President Trump’s comments about negative rates. If he avers and does not categorically deny that the Fed will never go to a negative rate route the pressure on the dollar may escalate as the day proceeds with USDJPY moving towards 108.00 on the news.

We doubt, however, that Mr. Powell will be so transparent and generally anticipate that his testimony will not have much impact, but that may, in turn, simply trigger some profit-taking flows in equities and keep the downward pressure on USDJPY.