When forward guidance plays out as expected the market generally does nothing, the volatility comes when there is a surprise or disappointment. Judging by the reaction in the Kiwi today, I think it is fair to say the rate hike was either priced in already or traders were disappointed not to get the extra 50bps.
Following a coordinated release of reserves by several countries, including China and the US, the market is currently focused on oil. As oil producers may reconsider plans to increase output at next week's OPEC+ meeting, the oil price rose after analysts said the release was smaller than expected. The 35mln barrels of the proposed 50mln barrel SPR release are a loan, which will have to be repaid. The type of oil being released is also known as Sour, which is a heavy oil that is hard to refine. Total release from the USA would equal about 12 hours’ worth of global daily consumption, so it's not a big deal when some analysts predict a supply deficit of around 1.2 million barrels per day. The Brent crude oil contract is currently trading at the swing high price level from October 2018 and is looking likely to pop out of this current descending channel to test the recent swing highs.
In line with expectations, the Reserve Bank of New Zealand raised interest rates by 25bp to 0.75% for the second time this year. As a result of this decision, the Official Cash Rate (OCR) will rise to 0.75%. The RBNZ statement said that to maintain price stability and support maximum sustainable employment, the Committee agreed that monetary stimulus should be reduced.
The market had been thinking there could be a 50bps rate hike and judging by this morning’s reaction a lot of traders were disappointed only to get the 25bps. Currently, the NZD is the weakest of the currencies in the forex heatmap, with the CAD benefitting from the rising oil prices. Today is likely to remain mixed in terms of risk-on/off, but the Kiwi is trading below a significant trend line and a close today below that level and we could be testing swing lows soon.
As accommodative policies and COVID-19 health restrictions have been relaxed, central banks are preparing to remove emergency stimulus as global economic activity continues to rise. While support is added, global supply-chain disruptions create a compounded effect because this mix creates both cost pressures and production constraints as money chases fewer goods at a time when demand remains high. To determine when central banks should reduce monetary policy stimulus, they need to distinguish between transitory price increases and underlying sustained inflation pressures.
This morning, the CBI industrial trends for the UK and the German IFO business surveys for November will be watched for the latest indications of economic activity and price trends. A recent CBI survey indicated that prices are being forced upward significantly this year.
Traders will be watching the pound against the other major crosses as the BoE MPC members are quite active this week, with Tenreyro taking to the stage today. She is one of the most dovish MPC members. The GBPUSD continues to weaken as the BoE hasn’t yet convinced the markets that they will raise rates in December and the US dollar continues to trade at elevated levels.
In the US session, the PCE deflator, which is the Fed's preferred inflation indicator, is likely to follow the CPI data higher, with the annual rate for the headline inflation index expected to rise above 5%. Watch for signs of a slightly more hawkish tone in the minutes of the Fed's November policy meeting. The Fed's taper may be accelerated in the wake of recent strong data, possibly paving the way for a rate hike next year, which Powell did not explicitly rule out. I doubt that the monetary policy will change much faster than previously signalled as the RBNZ were obviously more cautious today. But if the FOMC minutes signal the committees intention to raise rates at the end of the taper I would imagine the short-term yields will continue to rise today along with the USDJPY.