The outlook for US monetary policy has been a key driver of markets this week and it remains that way.
The fallout from more dovish than expected FOMC minutes yesterday morning has continued, seeing broad-based selling of the USD.
The weaker USD and less fear about imminent Fed tightening are boosting equity, bond and commodity markets.
The USD is weaker against all the major currencies, with various USD indices down about 0.6%. Bloomberg’s commodity price index is up for its sixth successive day, piling on over 4% over that time. Brent crude oil has breached the $50 mark again and is up circa 20% for the month to date now.
Given those dynamics it is somewhat surprising that the NZD and AUD have had a middling performance by comparison. The AUD is up only 0.4% and is struggling to push up sustainably through 0.77. Stronger than expected labour market data yesterday afternoon provided only a temporary boost and the currency has managed to sustain only about half of the initial gain.
The NZD continues to struggle to push through 0.73. It has tried about nine times over the past eight weeks and it has failed to push further on all occasions. It currently sits up 0.6% for the day at 0.7295.
Our upgraded forecasts made earlier this week assume, somewhat courageously, that the Fed tightens in December helping the NZD to close the year at 0.70.
If that Fed move looks unlikely then we could well see a push higher. Certainly, the stronger commodity price dynamic underway is a positive factor.
GBP has performed well after retail sales for July were much stronger than expected. Some attribute the strength to the brilliant July weather and tourists and overseas shoppers getting more bang for their buck with the depreciated pound. Figures like this won’t continue as the economy falls into recession, but for now GBP is up to 1.3150. EUR has trended up to 1.1350 on the softer USD track.
USD/JPY plunged through 100 on the Tokyo open yesterday to a low of 99.65 but has since recovered a little to 99.90. Abe advisor Honda told the WSJ that the yen’s strength is “clearly excessive”, it was fine for Japan to take bolder policy measures on yen regardless of US opposition and that he sees a more than 50% possibility of the BoJ taking “bold” easing measures at its September meeting. The market is wary of the risk of currency intervention, but recognises that the BoJ’s policy options from here are limited.
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