Fed hike later this year will set trend
The RBNZ have confirmed their expectation of a mid-2010 rate hike. However it is the US Fed’s initial tightening that will probably determine currency trends. The Federal Open Market Committee meet this week (result Wednesday morning NZ time). It is too soon to tighten yet but that could change quickly. At the start of the previous cycle in 2004 the Fed went from “accommodation can be maintained for a considerable period” to a rate hike within 6 months. A key trigger in the process was US employment growth over March-May. During this spell the USD rallied around 10% and the NZD/USD experienced a drop from around 70c to 60c.
At present, leading indicators suggest US job growth is imminent. If jobs do emerge, the Fed will quickly drop the current “warrant exceptionally low levels of the federal funds rate for an extended period” and soon after raise the overnight rate from its near-zero level. A USD rally (and share market fall) will occur and the NZD/USD would depreciate.
But recall, the USD was falling and US share prices were rising before 2004 was out. It was in the lead-up to the Jun-04 Fed tightening and during the early stages that the USD was favoured and the NZD was under pressure.
It may be too early for the Fed to signal a change this week but a re-run of 2004 is likely at some stage soon.
