FOREX Comments and Fundamentals
18 Nov FOREX Comments
- The USD has scope to strengthen further the rest of this week driven by the “bullish” details of the FOMC October meeting minutes tonight (7pm London).
- AUD/USD drifted lower during the Asian session as iron ore futures prices dropped 2.3%, to near its July cyclical low, and the USD strengthened.
- NZD/USD continued to stabilise during the Asian session despite the third consecutive fall in dairy prices.
The USD is trading less than 1% below its March cyclical high as the Asian session responded to the modest pick-up in US October inflation. Core US CPI inflation accelerated at an annual pace of 1.9% in October (in line with consensus).
The USD has scope to strengthen further the rest of this week because we anticipate tonight’s FOMC October meeting minutes (7pm London) to signal the FOMC is prepared to raise the Fed funds rate and the 16 December meeting is indeed “live”. Fed funds futures are only discounting a 60% probability of a 25bps rate hike in December.
AUD/USD drifted lower during the Asian session as iron ore futures prices dropped 2.3%, to near its July cyclical low, and the USD strengthened. RBA Assistant Governor Debelle speech on financial benchmarks and soft Q3 Australian wage growth had little immediate impact on AUD. Australian wages grew at an annual pace of 2.3% in Q3, in line with consensus and the slowest pace since the series began in 1998. Excess spare capacity in Australia’s labour market and falling commodity prices suggest wage pressures will remain benign, leaving the door open to more RBA rate cuts (see attachment for details).
In the near term, we think the RBA will be reluctant to cut interest rates because of improving domestic economic conditions. This will support AUD on crosses, particularly versus NZD. However, external factors such as lower commodity prices, a firmer USD and softer major trading partner growth will continue to weigh on AUD/USD.
NZD/USD continued to stabilise during the Asian session despite the third consecutive fall in dairy prices. Whole milk powder prices (NZ’s main commodity export) declined by 11%, reinforcing our view the RBNZ will cut its cash rate in December. After the dairy auction, the OIS pricing has lifted, but the market continues to price in only a ~50% chance of a 25bps cut in December.
Another RBNZ rate cut will keep NZD under downward pressure, and support a further rise in AUD/NZD in coming weeks.
EUR/USD remains heavy as Eurozone-US two-year swap spread widened to -103bps, near its mid-2007 lows. Monetary policy divergence between the ECB and the Fed will continue to push Eurozone-US two-year swap spread further into negative territory and undermine EUR.
The dovish rhetoric from the ECB may continue today as ECB policymakers Mersch (8am London), Coene (2:35pm London) & Lautenschlaeger (6:30pm London) deliver speeches.
GBP/USD pared back some of its post-UK inflation report gains during the Asian session on USD strength. There are no major UK economic data releases today but BoE Deputy Governor, Ben Broadbent, speaks on the outlook for Britain’s recovery from the financial crisis (9am London, followed by Q&A). The risk is Broadbent’s comments are on the dovish side which could temporarily weigh on GBP. In September, Broadbent warned the first interest rate hike “to be some way away”.