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WASHINGTON (Nov 27): Federal Reserve (Fed) officials appeared divided at their meeting earlier this month over how much farther they may need to cut interest rates, but as a group agreed to avoid giving much guidance from here on about how US monetary policy is likely to evolve.

There was uncertainty about the direction of the economy, Fed officials noted, according to the minutes of the Nov 6-7 meeting, uncertainty about just how much the current level of interest rates was doing to restrict the economy — a key issue in deciding how much further rates should fall — and a developing case to step carefully.

"Many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually," said the minutes, which were released on Tuesday.

The neutral interest rate is the level at which economic activity is neither stimulated nor restrained.

"Participants noted that monetary policy decisions were not on a pre-set course and were conditional on the evolution of the economy and the implications for the economic outlook ... They stressed that it would be important for the (Federal Open Market) Committee to make this clear as it adjusted its policy stance," the minutes stated, referring to the central bank's policy-setting committee.

The Fed cut its benchmark policy rate by a quarter of a percentage point to the 4.50%-4.75% range at the meeting three weeks ago, a session that followed Republican candidate Donald Trump's victory in the Nov 5 US presidential election.

Though the implication of the election outcome was not mentioned in the minutes, "many" participants noted the complications of making policy at a time when economic data was volatile due to storms, strikes and other factors, and geopolitical tensions were high.

Fed officials generally agree that inflation is all but controlled, and the risk of a sharp rise in unemployment has diminished.

Still "some participants noted that the Committee could pause its easing of the policy rate and hold it at a restrictive level" if inflation remained too high, and some said rate cuts could be accelerated "if the labour market turned down or economic activity faltered."

After the release of the minutes, financial markets added slightly to bets on a rate cut at the Fed's Dec 17-18 meeting, and kept intact prior bets on a slower pace of reductions next year, with just one cut priced in by the middle of the year.

Strong economy

"We continue to think that the FOMC will reduce the funds rate by a further 25 bp (basis points) in December," wrote Samuel Tombs, chief US economist for Pantheon Macroeconomics, but then scale back next year to navigate a potentially complicated set of policy developments once Trump takes office.

The president-elect this week, for example, said he planned on his first day in office to impose import tariffs of 25% on Mexico and Canada alongside demands for tougher border control.

"Our base case is that the Fed will have to ease cautiously, most likely at alternate meetings next year, trading off labour market and inflation risks," Tombs wrote. "Huge uncertainty over the scale, timing and likelihood of President Trump's economic proposals, however, creates considerable risk to both sides of our funds rate forecast."

The Fed's November meeting also followed a run of stronger-than-expected economic data — "remarkable" is how Fed Chair Jerome Powell referred to it — that stoked concern monetary policy may not be restricting the economy as much as thought.

Officials since that session have said ongoing economic strength meant the central bank's benchmark policy rate might already be close to the "neutral" level, an argument for fewer rate cuts approved at a slower pace in order to avoid easing policy too much and possibly rekindling inflation.

Others argue the economy was likely to slow and the job market continue to weaken, which would be a reason to continue easing financial conditions to encourage spending and investment.

Source: Theedgemarkets

The New Zealand dollar is in positive territory on Tuesday, after a four-day losing streak. In the European session, NZD/USD is trading at 0.5850, up 0.09% on the day. Earlier, the New Zealand dollar fell as low as 0.5797, its lowest level since Nov. 1.

RBNZ expected to slash rates by 50 basis points

The Reserve Bank of New Zealand makes its rate announcement on Wednesday and the markets have priced in a jumbo rate cut of a 50 basis point for a second straight meeting. This would bring the cash rate to 4.25%, its lowest level since November 2022.

The RBNZ has done a good job of lowering inflation, which fell to 2.2% in the second quarter. This is the first time in over three years that inflation is within the target band of between 1 and 3 percent. Still, elevated rates have taken a heavy toll on the economy, as GDP declined 0.2% in the second quarter and likely fell in Q3 as well, which would mark a recession. The central bank’s aggressive rate-cutting is aimed at providing the economy with a much-needed boost.

The New Zealand dollar stands to be the big loser from an oversized rate cut. The currency plunged around 1% after the 50-bp chop in October and we could see another sharp drop on Wednesday if the central bank cuts again by 50 bp.

Will Fed minutes provide clues ahead of December meeting?

The Federal Reserve releases the minutes of the November meeting later today. At the meeting, the Fed lowered rates by 25 basis points. Investors will be looking for insights about what the Fed may have planned for the Dec. 18 meeting. A few weeks ago, a second straight 25-bp cut appeared likely but with the US economy remaining strong, the Fed may opt to pause. Interest-rate future markets are currently pricing in a cut at 59% and a pause at 41%, according to the CME’s Fed Watch.

NZD/USD Technical

NZD/USD is testing resistance at 0.5857. Above, there is resistance at 0.5898;

There is support at 0.5793 and 0.5752.

Source: ACTIONFOREX

The Canadian dollar collapsed by more than 1.4% against the US dollar after Trump threatened to impose new 25% tariffs on goods from Mexico and Canada and to increase tariffs on China by 10% immediately after taking office.

Following the announcement, USDCAD jumped to 1.4170, a high since 23 April 2020. The context is interesting in this case, as a few days earlier, the price of oil went into negative territory for the first time in history. Previously, the highest price of the pair was recorded in early 2016, when oil fell below $30. So, these were periods of extremely low oil prices compared to current oil prices.

Over the past 20 years, USDCAD has only reached these levels during periods of turbulence, trading above 1.4100 for only a few dozen days cumulatively in the two episodes of 2016 and 2020. However, the phrase “period of turbulence” could well apply to the currency market for much of the Trump presidency, with sudden announcements and outbursts which are then dramatically reversed by periods of warming and de-escalation.

Historically, the Canadian dollar depreciated steadily against the US dollar between 1997 and 2003. This was also due to a period of extremely low energy prices caused by rising supply and the Asian crisis.

USDCAD has now reached levels above 1.4000, with oil prices much more comfortable. A further fall in ‘liquid gold’ prices could be the anchor that pulls the Canadian Loonie down. However, there is a positive side to this relationship: the Republican Party often supports the interests of companies involved in the production of conventional hydrocarbons.

Investors face a fork in the road here. The first path is to create the conditions for an increase in the price of oil. This could be done by increasing purchases into the Strategic Petroleum Reserve or by lobbying for the interests of US companies abroad through tariffs and sanctions.

The second way is to try to maximise overall profits by increasing production, the so-called “drill, baby, drill” that was so expected from Trump’s policy.

So far, we see more chances of the first scenario unfolding, which could be good news for the Canadian dollar in the long run. In the short term, however, the period of turbulence could continue, suggesting that the best time to open USDCAD shorts is yet to come.

On the daily timeframe, the pair is far from the overbought conditions that reversed the momentum earlier and could well slip into the 1.4500 area and higher before peaking.

Global Macro and Markets

Global Markets: Monday's dramatic rally in bond prices saw a mild reversion on Tuesday. 10Y yields were up 2bp to 4.30% while yields on the 2 year UST were down 1bp to 4.256%.  This still leaves yields well off the highs seen in previous weeks. And we continue to anticipate a market preference to do some more downside testing for yields in the coming weeks. Trade talks are clearly heating up with president-elect Trump tweeting that he will impose tariffs of 25% on all goods from Mexico and Canada and additional tariffs of 10% on goods from China (already subject to tariffs). This has shifted the risk of more action coming sooner than end of 4Q  - which we were previously expecting. EURUSD fell below 1.05 and the USD strengthened against most currencies especially the Mexican peso and IDR. The IDR might flirt with 16K levels today.  Equity markets were buoyed by some US consumer confidence data that rose to the highest in a year and markets appeared to look past the tariff talk. The S&P 500 and NASDAQ were both up about 0.6%, with gains led by consumer discretionary and software.

G7 Macro: FOMC minutes showed broad support for a careful approach to future rate cuts.  The Conference Board’s confidence gauge rose 2.1 points to 111.7 this month. The figure was in line with the median estimate.  November’s increase was mainly driven by more positive consumer assessments of the present situation, particularly the strong labour market. Today we get another data point that will impact the Fed’s thinking – the core personal consumer expenditure deflator. This favoured measure of inflation incorporates contributions from both the CPI report and the PPI report, and given the data we have had, it points to a 0.3% MoM outcome. We need the MoM rate to average 0.17% MoM over time to bring the annual rate down to 2%, so a 0.3% outcome is too hot for the Fed to be completely comfortable with the inflation story.

Australia: A mixed bag for Australian October, inflation, as the headline inflation rate remained at 2.1% for a second month (lower than expected) but the trimmed mean rate rose from 3.2% to 3.5%. All in all, there is nothing in this to shake our thoughts that the RBA will remain on the sidelines until next year.