Fed members key message is hike likely but market thinks otherwise; ECB President dampens hope for intensified QE; speculative positioning in NZD easing off

By Kymberly Martin

Against the backdrop of a broadly softer USD on Friday night, the AUD was the strongest performing currency.

On Friday night, equities made modest gains on either side of the Atlantic and our global risk appetite index (0-100%) has inched a little higher. It now sits at 48%, still cautious levels, but well above the lows, circa 16%, of recent weeks.

There were only limited data releases on Friday night, so ‘Fed-speak’ was in the spotlight.

From three members, Fischer, Dudley, and Lacker, the key message appears to be that a hike before year-end is still preferred. However, this is not what the market is keen to price.

Overall the USD index maintained a generally downward trend to end the week at 94.90.

The GBP/USD briefly gapped lower after the release of UK visible trade data that came in below expectation. However, it was not until the early hours of Saturday morning that the GBP/USD made a more sustained move lower. It ended the week at 1.5320.

The EUR/USD was on the front-foot from Friday evening. From 1.1280, it ended the week at 1.1360.

On Saturday, a published interview with ECB President Draghi further dampened hope for a step up in the intensity of QE. He said “we are satisfied with QE, as it has met and even surpassed our initial expectations”. He said it will take longer to get inflation up to 2% but “that is largely because of a drop in oil prices”.  The EUR/USD remains well within its range of the past few months.

The AUD/USD extended its recent rebound on Friday. Gaining more than 1% against the USD, it was the strongest performer. The AUD/USD ended the week at 0.7340, its highest level since late August.

The NZD also extended it recent rebound. However, it still underperformed on the cross. From intra-night highs near 0.9200 the NZD/AUD ended the week at 0.9120.

We continue to expect further decline in the cross. This is partly predicated on our view the RBNZ will cut rates by year-end while the RBA remains on prolonged hold (against market expectation for circa 35bps of cuts).

CFTC data released on Friday showed speculative positioning in the NZD is now almost neutral, having moved from a severe net short position not so long ago. This suggests the currency may be more even-handed in responding to future data surprises. The NZD/USD ended the week a little higher at 0.6690, its highest close since 21 August.

It looks to be a relatively quiet start to the week with limited local data releases (though look out for China data due within the next few days), and the US celebrating Columbus Day.


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Daily exchange rates

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Kymberly Martin is on the BNZ Research team. All its research is available here.