There were no changes in policy from the RBNZ, with the OCR unchanged at 0.25%, funding operations and the Large Scale Asset Purchase Program, up to NZD100 bn, also unmoved. The statement was dovish, however, with the central bank keen to dispel expectations for tighter monetary policy. If investors sign up to this behind-the-curve policy strategy—as they have to a significant degree—much steeper yields will ensue.
Ahead of the meeting, interest was focused on the central bank’s views on the back-up in yields recently and the fact that the NZD is among the best-performing G10 currencies year-to-date, clocking a rally of about 4% in nominal trade-weighted terms since the Nov. 11 meeting. The title of the statement—'Prolonged Monetary Stimulus Necessary'—removes any uncertainty that the RBNZ wants to convey a cautious message. The extent to which this stance contributes to NZD weakness depends on whether investors are willing to look through stronger-than-expected economic growth and inflation in the coming months, i.e. taking central bankers for their word. The initial reaction is a quick unwinding of short-lived NZD weakness. A loose central bank and a strong economic recovery are driving FX strength.
As with the Fed’s recent communications, one-off factors are deemed to be boosting inflation, including:
"higher oil prices, supply disruptions due to trade constraints, the recent suite of supportive fiscal stimulus, and a spending catch-up following the easing of social restrictions.”
Moreover, the economic outlook is deemed as highly uncertain. Ramming home its dovish message, the RBNZ notes that employment should be at or above its maximum sustainable level before removing accommodative monetary policy.
GBP
GBP/USD outperformance early in the Asia session could reflect reports that Chancellor of the Exchequer Rishi Sunak is preparing to extend the stamp duty holiday by three months until the end of June in an attempt to keep the property market firing as Britain emerges from lockdown.
Markets
Investors will generally read what they want to read in any Fed messaging from the top, and folks that write about this stuff will likely have a slightly different spin. But with US stocks charging back from overnight lows to finish higher into the close and a welcome reprieve on the recent bond sell-off with US 10-year yields unchanged at 1.36%, it suggests a job well done by Fed Chair Jerome Powell and importantly, for now, the Fed credibility remains intact.
In my view, his success was striking a balanced tone. Too dovish, and the Chair risked exacerbating near-term inflation concerns, and too hawkish of a lean and the street will increasingly price a withdrawal in liquidity. So overall, the balancing act seemed mostly designed to keeping risk asset steering on an even keel.
However, the dynamic in risky assets versus rates haven't magically disappeared as stocks will continue to be just as sensitive to the downside to the higher yields as the previous tech 'winners' in the reflation equity rally will continue to fall under scrutiny when bond yields start rising again.
And despite some great news on vaccine and stimulus, it's becoming increasingly apparent that the Yield reaction to the reflation theme will likely be the central narrative of 2021.
My Conclusion: In January, the Fed needed to put the Taper Genie back in the bottle; now, they need to convince the short end crew to back off on aggressively repricing the FED Fund curve by stuffing forward guidance and a perceived AIT wedge—between reflation assets and rates—by depressing the latter to support the former.
Oil Markets
With excessively stretched positioning and highly susceptible to any negative news, WTI dropped towards the $61 level after the API stockpiles jumped +1.026 million barrels versus the previous draw of 5.8 million barrels during the period ended on Feb. 19.
Although the commodity prices dropped following the bearish stockpile data, bulls probably won't be charging back to the pen 'en masses' as the smoldering embers around the middle east powder keg threaten to ignite once again as the US-Iran conflict continues to simmer but at a higher heat level today.
Several banks have raised their house forecasts in response to the recent. Commodity strength with Long-term fundamentals suggesting post-US stimulus prices within the range between $60-$80/bbl as they did in 2019 and 2020.
The street is balloting up forecasts in reaction to the demand recovery and the draining of inventories. OPEC+ has singularly crafted an artificial deficit via the OPEC+ agreement that will help to accelerate the draw-down of global stocks, but upside in oil is likely to be capped by the ~9mb/d of spare capacity in OPEC+ at the moment
OPEC+ is keeping an unusually high level of spare production capacity away from the supply chain. Still, there will likely be more visibility on their intention at the end of next week with the next round of monthly OPEC+ meetings. Outside of a rise in geopolitical risk, upside momentum could be limited in the coming days as oil traders wrestle with the OPEC+ next move.
Forex
The USD is posting modest gains this morning after part one of Chair Powell's testimony. While yesterday the US move had more to do with equities falling and waning risk appetite, today risk is up, rates are flat, and the dollar is still holding small gains. FX continues to trade to the beat of its own drummer, although I'm struggling to find out who that drummer is.
But I suspect traders will start shifting back to the central bank narrative, and that could be interesting as most central banks have been on autopilot since their emergency responses to COVID-19.
CB meetings and messaging have been mostly meaningless for many months. Now, each central bank could be forced to recalibrate policy in a world where the Fed has announced it will let the US-run hot; global housing is on a ripper, but, commodity-and-supply-chain-driven inflation is adding short-term complexity.
Reserve Bank of New Zealand
It was a big day for NZD rates, with the RBNZ MPS decision at midday Sydney and Governor Orr's first address since November. The challenge lies in balancing the remarkable domestic strength since November with the sizeable progress the RBNZ still needs to make hay towards their target.
I expect the market to focus more on the trajectory of the data flow than the level. On the dovish side, the RBNZ could affirm or commit to rates being on hold through 2021. There is only 3bp of hikes priced in November 2021, so there isn't much room for a dovish reaction on the Kiwi.
The Ringgit
The Malaysian ringgit remains mired in a very tight range as higher US yields offset the higher oil prices. But there is now some evidence that the BNM is adding US dollar reserves similarly to other central banks in the region.
Malaysian foreign reserves have climbed to 109.7 billion, the highest level since April 2018. From 103.6 billion at the start of the last year suggesting BNM could be showing their hand at the window buying US dollars to slow down the ringgit appreciation.
Central banks in Asia are forced to recalibrate policy with the FED allowing the US economy to run hot, potentially weakening the US dollar. More robust local currencies are a mostly unwelcome consequence of the FED dovish policy.
The PBoC and the Yuan
In China, the PBoC and State Administration of Foreign Exchange have jointly taken steps to slow down capital inflows and encourage outflows by adjusting the so-called Macro Prudential Assessment framework to manage onshore companies' capabilities to lend to and borrow from overseas.
Both measures haven't been aggressive enough to stop the RMB from extending its rally, suggesting that the central bank is not necessarily uncomfortable with a stronger currency. Still, Chinese yuan traders are having a second thought about testing the 6.45 level, thinking the Team National will be there to greet them at the window.
With China’s dual circulation' strategy, there's less pressure on the currency to stay competitive against the US dollar. However, officials' critical message in China is that the pace of appreciation needs to slow down. Perhaps other central banks in the region are receiving the PBoC memo also.