Orr’s Hawkish Hold, FOMC’s Hawkish Minutes?

by Adam Button

We’ll have to wait a bit longer to get the first developed-country rate hike of this cycle after the RBNZ surprised by holding rates. An even bigger surprise was how the market reacted as a quick fall to a 9 month low in NZD/USD was swallowed up by buyers as the pair reversed to a session high.

A big reason for that was a strong performance from RBNZ Governor Orr, who said the RBNZ is confident that hikes are needed (more on NZD below). Up next were the minutes of this month’s FOMC meeting, which promised to unveil more light on the growing pide inside the Committee with respect to size/timing of the taper (more on FOMC below).

As the dust settles on the RBNZ, we will be watching to see if the kiwi can hold above nine month lows. If so, it will be impressive resilience after one of the worst 24 hour periods of news a currency has faced this year. In that span, the country was hit by a COVID case, a lockdown, six more COVID cases and a surprise central bank move.

Yet NZD was only down about 80 pips and it came in a tough moment for broader risk appetite. If that kind of brutal news flow can’t decisively send a currency to 9 month lows, then what can? We should also ask whether NZD will become beholden to each new daily COVID case.

Meanwhile, the US is facing its own trial after the retail sales control group fell 1.0% compared to a 0.3% decline expected. Notably, US cases hadn’t risen significantly in July so worse news is likely to come in August and special unemployment benefits for 8 million Americans will be cut off in early September.

That hardly sounds like a case for a rushing into a taper and there’s a growing case that will be the message from Powell at Jackson Hole.

The FOMC minutes on Wednesday risked sending mixed messages as usual. For sure there was some talk of tapering and that came through in the minutes, but headlines from the minutes often trip up the market. Will the minutes be considered too hawkish and outdated after those disastrous Umich Confidence numbers?

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