The US dollar posted modest gains this morning after part one of US Federal Reserve Chair Powell’s testimony.

While yesterday the USD’s move had more to do with equities falling and waning risk appetite, but today risk is up, rates are flat, and the dollar is still holding the small gains.

The Forex market continues to trade to the beat of its own drummer, although I’m struggling to find out who that drummer is.

But I suspect traders will start shifting back to the central bank narrative, and that could be interesting as most central banks have been on autopilot since their emergency responses to COVID-19.

Central bank meetings and messaging have been mostly meaningless for many months. Now, each central bank could be forced to recalibrate policy in a world where the Fed has announced it will let the US-run hot. Global housing is on a ripper commodity-and-supply-chain-driven inflation adds short-term complexity.

Big day for New Zealand dollar

It’s a big day for NZ dollar rates, with the RBNZ MPS decision at midday (Sydney time) and Governor Orr’s first address since November. The challenge lies in balancing the remarkable domestic strength since November with the sizeable progress the RBNZ still needs to make hay towards their target.

I expect the market to focus more on the trajectory of the data flow than the level. On the dovish side, the RBNZ could affirm or commit to rates being on hold through 2021. There is only 3bp of hikes priced in November 2021, so there isn’t much room for a dovish reaction on the Kiwi.

Ringgit caught in a tight range

The ringgit remains mired in a very tight range as higher US yields offset the higher oil prices. But there is now some evidence that the BNM is adding US dollar reserves similarly to other central banks in the region.

Malaysia foreign reserves have climbed to 109.7 billion, the highest level since April 2018. From 103.6 billion at the start of the last year suggesting BNM could be showing their hand at the window buying US dollar to slow down the ringgit appreciation.

Central banks in Asia are forced to recalibrate policy with the FED allowing the US economy to run hot, potentially weakening the US dollar. More robust local currencies are a mostly unwelcome consequence of the Fed’s dovish policy.

The PBoC and the Yuan

The People’s Bank of China (PBoC) and the State Administration of Foreign Exchange have jointly taken steps to slow down capital inflows and encourage outflows by adjusting the so-called Macro Prudential Assessment framework to manage onshore companies’ capabilities to lend to and borrow from overseas.

Both measures haven’t been aggressive enough to stop the RMB from extending its rally, suggesting that the central bank is not necessarily uncomfortable with a stronger currency.

Still, Yuan traders are having a second thought about testing the 6.45 level thinking the Team National will be there to greet them at the window.

With China’s ‘dual circulation’ strategy, there’s less pressure on the currency to stay competitive against the US dollar.

However, officials’ critical message in China is that the pace of appreciation needs to slow down. Perhaps other central banks in the region are receiving the PBoC memo also.

Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi