28 Jun 2013
Flash: You can’t fight the Fed! - BNZ
Fxstreet.com (Barcelona) - BNZ Strategist Mike Jones notes that broadly speaking, he has taken on board the idea that the trend in the US economy and US dollar has turned.
He feels that historical precedent suggests this means the peak in the NZD/USD cycle is behind us, and April’s 0.8680 was the top. He knows that investors will debate whether the market has overreacted to last week’s signal from the Fed that the pace of asset purchases will be wound back (‘tapered’) later this year. He writes, “Various Fed officials and ‘insiders’ have already hinted this may be the case.”
He can certainly see potential for the occasional set-back in the USD uptrend as positioning gets extreme and US data goes through the odd soft patch. He feels that the US economy still has a few hurdles to overcome before it reaches ‘escape velocity’ and Q2 already looks shaky. However, his view has always been that once the market caught a whiff of the end of QE, the downtrend in US bond yields and the USD would come to an end.
Jones feels that that the time appears to be upon us and the latest update of his new short-term valuation model shows the Fed has taken a fair old gouge out of the kiwi’s fundamental ‘fair-value’. He writes, “Over the past month, the model’s estimated fair-value range has declined 4 cents, to 0.7750-0.8150. Narrowing ‘shadow-rate’ differentials have done most of the work. The US ‘shadow short rate’ has jumped from -6.3% in April to -3% currently, as the market looks ahead to the end of QE.”
He feels that historical precedent suggests this means the peak in the NZD/USD cycle is behind us, and April’s 0.8680 was the top. He knows that investors will debate whether the market has overreacted to last week’s signal from the Fed that the pace of asset purchases will be wound back (‘tapered’) later this year. He writes, “Various Fed officials and ‘insiders’ have already hinted this may be the case.”
He can certainly see potential for the occasional set-back in the USD uptrend as positioning gets extreme and US data goes through the odd soft patch. He feels that the US economy still has a few hurdles to overcome before it reaches ‘escape velocity’ and Q2 already looks shaky. However, his view has always been that once the market caught a whiff of the end of QE, the downtrend in US bond yields and the USD would come to an end.
Jones feels that that the time appears to be upon us and the latest update of his new short-term valuation model shows the Fed has taken a fair old gouge out of the kiwi’s fundamental ‘fair-value’. He writes, “Over the past month, the model’s estimated fair-value range has declined 4 cents, to 0.7750-0.8150. Narrowing ‘shadow-rate’ differentials have done most of the work. The US ‘shadow short rate’ has jumped from -6.3% in April to -3% currently, as the market looks ahead to the end of QE.”