NZDUSD - Upside Risk from Policy and Fed
Mis à jour
Will have to say that risk for this pair is skewed upwards from a sentiment perspective.
Market consensus is that Powell will not mention anything regarding the tariffs the White House plans to announce towards the end of the week, however due to the risk of an impeding trade war, markets will likely overact to any mention of Macro areas towards trade in the Fed report. This is because the Fed's mandate is inflation and employment, not fiscal policy; thus any hint of 'uncertainty' within areas of expected 'trade balance' etc will lead market players to believe one of two things:
1) The Fed is factoring a near term impact of economic growth from tariffs thus acknowledges a likelihood of negative impact to growth from trade policies. This effectively will verify that the market has underpriced the probability of the tariffs having a greater impact to the economy.
2) A shift away from previously stated 4 hikes within 2018 which has already largely been priced into the markets.
Since this is Jerome Powell's first time leading the Fed meeting - markets will be trying to gauge where he will position the Fed and whether he will be 'pro' or 'anti' establishment. May act as a multiplier of knee jerk reactions post release but expecting the kiwi to start ranging until the Fed release. If Powell behaves in line with market expectations (no mention of trade, tariffs etc and rises rate as expected) come release date, then do expect the Kiwi to drop below the strong structural support of ~0.71990 area. Move in this case will be limited as markets await the details of White House tariff announcement Friday.
Since risk is skewed upwards, this will imply greater upside volatility and therefore better long risk reward so could see a retest of upper resistance at .74280 level should there be no rate increase Wednesday. Will be dialing down position sizes for increased risk management as option premiums are on the rises and hedging cost may not warrant a hedge strategy.
Market consensus is that Powell will not mention anything regarding the tariffs the White House plans to announce towards the end of the week, however due to the risk of an impeding trade war, markets will likely overact to any mention of Macro areas towards trade in the Fed report. This is because the Fed's mandate is inflation and employment, not fiscal policy; thus any hint of 'uncertainty' within areas of expected 'trade balance' etc will lead market players to believe one of two things:
1) The Fed is factoring a near term impact of economic growth from tariffs thus acknowledges a likelihood of negative impact to growth from trade policies. This effectively will verify that the market has underpriced the probability of the tariffs having a greater impact to the economy.
2) A shift away from previously stated 4 hikes within 2018 which has already largely been priced into the markets.
Since this is Jerome Powell's first time leading the Fed meeting - markets will be trying to gauge where he will position the Fed and whether he will be 'pro' or 'anti' establishment. May act as a multiplier of knee jerk reactions post release but expecting the kiwi to start ranging until the Fed release. If Powell behaves in line with market expectations (no mention of trade, tariffs etc and rises rate as expected) come release date, then do expect the Kiwi to drop below the strong structural support of ~0.71990 area. Move in this case will be limited as markets await the details of White House tariff announcement Friday.
Since risk is skewed upwards, this will imply greater upside volatility and therefore better long risk reward so could see a retest of upper resistance at .74280 level should there be no rate increase Wednesday. Will be dialing down position sizes for increased risk management as option premiums are on the rises and hedging cost may not warrant a hedge strategy.
Note
Those in the business of catching a 'falling knife' can consider 0.710 ~ 0.711 area as the first support area followed by 0.704 and TP targets conversely for those shorting.
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