NZD is the darling of the moment after the surprise news that the economy exitted the recession in Q2, posting a 0.1% expansion against estimates of a -0.2%. NZDUSD is up over 2.5% in the last two days after the prior day’s current account data also surprised to the upside, and it seems the recovery is ahead of schedule compared with Governor Bollard’s assessment just one day ago. Already fixed income markets are expecting 1.5% of hikes from the RBNZ in the next 12 months, and with USD weakness catalysing higher-yielding assets upwards, it looks as though there may be more to come from the NZD. Tonight’s FOMC meeting is undisputedly the major event on the economic calendar this week, and one of the major drivers of markets in the past few days has been the will-they/won’t-they debate about signalling an end to QE. After Monday’s nervous start to the week, the market seems to have largely pushed worries about withdrawal of stimulus measures to one side and cheerily resumed its buying of riskier assets, while pressuring the DXY down to its lowest levels since August last year. It never really made sense to us that the Fed would rattle an admittedly fragile economy with rhetoric about QE withdrawal, and it feels like the market has largely reconciled themselves with the same expectations. But with attention now starting to look beyond to the G20, one aspect which has been given less assessment is what exactly the USD is going to do tonight after the meeting. Let’s assume the FOMC plays out in step with the market’s expectations; unchanged rates and no mention of an end to QE. Looking at the way FX markets have behaved in recent weeks, it would seem a good bet that it would be game on for further USD weakness and a run on 1.49 in EURUSD. However the law of increasing probability logically brings us closer to QE withdrawal with every passing day, and with the DXY teetering within a major support level around 76.00, the slightest hint that the Fed is even thinking about when that day may come could be enough to prompt a sharp correction higher for the USD. Nevertheless, our base case scenario is for them to leave the door open by reaffirming they are not ready to withdraw QE at the present time, but avoid mentioning any future date of when this might change or be re-assessed. The sheer amount of money that fled to the US during the onset of this crisis has still not fully been extracted, so we see further USD weakness going forward. QE is also likely to be the market-moving topic when the BoE minutes are released today. It’s almost certain that at the last meeting the vote to leave rates unchanged was a unanimous 9-0, but focus will be concentrated on the likely vote regarding the continuation/increase in the size of the QE programme (consensus 7-2). GBP is still a beneficiary of USD weakness at this juncture but is highly susceptible to further weakness vs other majors, and indeed perceptions that it too is funding currency as the global recovery begins.


Today's Key Issues (time in GMT):

08:00 EUR E16: Flash manufacturing PMI, index Sep 49.8 exp. 48.2 prior

08:00 EUR E16: Flash services PMI, index Sep 50.6 exp. 49.9 prior

08:00 EUR E16: Flash composite PMI, index Sep 51.0 exp. 50.4 prior

08:00 NOK Norway: Unemployment rate AKU, % Jul 3.1 exp. 3.0 prior

08:30 GBP UK: BoE MPC minutes, vote 9-0 prior

08:30 GBP UK: BBA mortgage approvals, K Aug 38.2 prior

08:30 GBP UK: BBA net mortgage lending, £ bn Aug 1.6 prior

08:30 GBP UK: BBA net consumer credit, £ bn Aug -0.2 prior

09:00 EUR E16: Industrial orders, % m/m Jul 2.0 exp. 2.5 (-27.8) prior

12:00 NOK Norway: Norges bank interest rate announcement, % 1.25 exp. 1.25 prior

18:15 USD US: FOMC interest rate announcement, % 0-0.25 exp. 0-0.25 prior

22:45 NZD New Zealand trade balance NZD bn Aug -0.273 exp. -0.51 prior

The Risk Today:

 EurUsd The pair looks like it's broken out the top of the descending triangle we saw last night on the 15-minute chart and it seems very likely we could see a run higher to the major resistance at 1.4875-1.4900 as risk appetite drives USD lower. 

  GbpUsd The release of the BoE minutes spurred GBPUSD higher, threatening the top of the larger downtrend (see today's chart). But last week's 1.6454 high will pose a considerable headwind to a GBP rally, there should be some support below through 1.6350 and further down at 1.6300. 

  UsdJpy USD/JPY has taken out the weak support at 91.00 with the next target at the September 10th low at 90.10. Any rally in the dollar is likely to be capped by resistance around 92.50 and more supply at 93.70. 

  UsdChf The orderly downtrend continues in USDCHF with fresh selling yesterday. Price action will be sticky between 1.0205-1.0230 with weak support just below the figure at 1.0175. 

Resistance and Support:

1.4910 1.6700 93.70 1.0540
1.4850 1.6435 92.00 1.0390
1.4870 1.6410 91.70 1.0340
1.4795 1.6400 91.00 1.0230
1.4700 1.6210 90.50 1.0205
1.4569 1.6115 90.15 1.0175
1.4520 1.5947 89.90 1.0130
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot