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Finally some green for the Greenback! The dollar flashed its safe-haven badge as risk-off flows returned to the markets while the yen carried on with its ascent. NAFTA concerns came back to haunt the Loonie.

Before the end of what turned out to be another roller coaster trading session, a surprisingly downbeat RBNZ statement forced the Kiwi to lag behind its peers.

  • Canadian building permits rebounded by 4.8% vs. projected 2.1% gain
  • U.S. EIA crude oil inventories up by 1.8M barrels vs. 3.2M consensus
  • U.S. consumer credit sank from $31.0B to $18.4B vs. $19.9B forecast
  • Canadian PM Trudeau: No NAFTA deal might be better than a bad one
  • RBNZ kept rates on hold at 1.75% as expected
  • RBNZ lowered its GDP forecast from 1.2% to 0.8% in Q1
  • RBNZ: Labor market conditions are tight, growth and inflation subdued
  • RBNZ head Spencer not too concerned about Kiwi strength, sees weakness moving forward

Major Events/Reports

More trouble with NAFTA?

It seems that the current round of NAFTA talks aren’t going too well as Canadian Prime Minister Trudeau hinted that they are prepared to walk away without a deal than take a bad one.

In contrast, U.S. senators expressed optimism about progress in the negotiations. According to Senate Finance Committee Chairman Orrin Hatch, they are committed to working with President Trump to preserve the trade agreement which is vital for jobs and American economic growth.

Hatch added that Republican senators “discussed the mutual desire to confront the challenges China poses to American businesses and workers” while Senator John Cornyn assured that Trump won’t terminate NAFTA.

A couple more rounds of negotiations are scheduled, but the two sides remain divided on issues surrounding automotive content and dispute settlement mechanisms.

Remarks from Fed officials

After Fed official Kaplan’s speech earlier in the day, a few more members of the central bank stepped up to the podium to share their thoughts on the U.S. economy and policy.

First up was FOMC voting member Dudley who focused more on financial market behavior during his interview. He mentioned that the stock market rallies have no effect on their economic outlook but that a sustained drop might make an impact.

Next up was non-voting member Evans who admitted that he would support further hikes if inflation picks up. He added that he sees 3.5% unemployment by year-end but that current data should keep the central bank on hold until the middle of 2018.

Lastly FOMC voting member Williams also shared some thoughts on economic outlook and monetary policy. In his speech, he acknowledged that growth has been broad-based and gave the Fed a pat on the back for spurring strong employment.

However, he warned of the dangers of low inflation in this type of strong growth environment. Still, he noted that recent price trends keep him confident that overall inflation will pick up sooner or later. In the end, he concluded that the Fed should stick to the plan of having further gradual rate increases this year.

RBNZ rate decision

RBNZ head Spencer and his fellow policymakers announced their decision to keep interest rates on hold at 1.75% as expected. But what most market participants were expecting was the central bank’s downgrade on Q1 growth estimates from 1.2% to 0.8%.

In their official statement, policymakers noted that the impact of government policies on growth would be lower than initially expected. It also contained a somber view on inflation, citing that December CPI was weaker than expected and that tradeable goods inflation would remain subdued.

Furthermore, Governor Spencer mentioned that there are still plenty of uncertainties, such as market volatility. RBNZ officials also pushed their forecast for when inflation would hit their 2% target from Q2 this year to Q3 2020.

When it came to exchange rates, Spencer didn’t seem to worried about recent gains. In fact, the statement also cited that the TWI has fallen since mid-2017 and that any gains were mostly due to a weaker dollar. Its projections also reflected expectations for a weaker Kiwi down the line.

RBNZ Updated Economic Projections
RBNZ Updated Economic Projections

Major Market Mover(s):

USD & JPY

The dollar joined the yen in taking advantage of risk-off flows as equities and other higher-yielding assets failed to hold on to most of their intraday gains.

EUR/USD fell from 1.2351 to consolidate around 1.2280, GBP/USD is back down to 1.3875, USD/CHF popped up to a high of .9455, and USD/JPY rallied to a high of 109.70.

EUR/JPY is down to a low of 133.82, GBP/JPY fell from 152.22 to a low of 151.35, AUD/JPY tumbled from 85.90 to a low of 85.42, and CAD/JPY slumped to 86.87.

NZD

The Kiwi had its wings clipped when the RBNZ gave a less hawkish than expected statement and downgraded this quarter’s GDP forecast.

NZD/USD dropped from .7315 to a low of .7210, NZD/JPY is down to 78.77, EUR/NZD rallied back up to 1.7027, and GBP/NZD is up to 1.9270.

Watch Out For:

  • 12:30 am GMT: Australia NAB business confidence (previous reading of 7)
  • Tentative: Chinese trade balance (328B CNY surplus expected)
  • 5:00 am GMT: Japanese Economy Watchers Sentiment index (dip from 53.9 to 53.7 eyed)