Overnight Headlines

*USD falling below support towards 89.20

*US equities gave up earlier gains and closed marginally lower

*Gold through $1,900 as dollar and bond yields slip

*Hawkish RBNZ propels NZD higher after hinting at September 2022 hike

US equities closed lower on the day after opening up in the green. Growth stocks continued to outperform as bond yields remained soft. Futures are pointing to a better open as Asian markets are firm while European bourses are set to open mixed.

USD is sinking and heading towards major support at 89.20 as USD/CNH moves through the key 6.40 level. More Fed members were on the wires reaffirming the dovish stance with the Fed vice chair, Clarida, saying that the US central bank would be able to curb an outbreak of inflation and engineer a soft landing without throwing the country’s economic recovery off track.

Market Thoughts – Dollar going lower

With the Fed effectively sidelined in the near term, the USD is set to remain soft with low yields and the steady global recovery making non-dollar investments attractive for investors seeking to diversify away from the greenback for better returns. The downtrend in the dollar index should target this year’s lows at 89.20 ahead of long-term support around the early 2018 lows. Gold is moving higher as real yields stay in deeply negative territory.

As we have said previously, the Fed will need to see a few very good job reports before moving forward with tapering. Indeed, Clarida did mention yesterday that this may happen “in upcoming meetings”, but this will be tied to the pricing of rate hikes, and we are not near that scenario yet.

Chart of the Day – NZD out of its range

The overnight RBNZ meeting proved to be a hawkish surprise with the bank pointing to a potential rate hike in September 2022 according to its updated projections, amid a notable improvement in the economic outlook. Although policy settings were left unchanged as expected, the kiwi surged higher and is up over 1.2% versus the dollar.

The kiwi had been lagging the other commod-$ currencies recently but this hawkish tilt by the RBNZ has pushed NZD/USD to the top of its recent range just above 0.73. Momentum indicators have turned bullish and we’ve seen what happens with currencies amid central bank policy divergence when the Bank of Canada turned more hawkish and boosted the CAD. NZD/USD is now trading near the January 6 highs at 0.7315 so if it overcomes this level, then bulls will definitely target the year-to-date highs at 0.7464.