The USD was stronger against most currencies overnight with the exception of the yen and the Swiss franc (both safe haven beneficiaries) and the GBP (due to the hawkish BoE – see below). The Bloomberg DXY is at 2 week highs but remains down for the year. The appreciating USD has probably weighed on commodities, with Brent crude oil now almost 10% off its highs reached in late January. A pick-up in US oil production has also reportedly contributed to the decline in the oil price, as the shale oil industry starts to gear up production again.
The GBP initially strengthened over a percent after BoE Governor Carney noted that “monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period”. The BoE upgraded their growth forecasts for the coming few years a bit, mainly due to the more positive global environment. And it continued to highlight the lack of spare capacity in the economy, with the unemployment rate at a multi-decade low of 4.3%. The market now prices a 75% chance the BoE will raise rates at its May meeting (from 50% beforehand). The GBP has since fallen back, but it remains slightly up on the day against the USD.
The NZD is around half a cent lower than this time yesterday with most of that move happening in the immediate aftermath of the RBNZ MPS. The RBNZ lowered its CPI forecasts and now expects to reach its 2% target in 2020, almost two years later than it expected in November. But the RBNZ kept its OCR track and mild tightening bias unchanged; it projects the first full rate rise in early 2020. The 2 year swap rate fell 1bp yesterday in response to the RBNZ, and the market reduced the probability of a February 2019 rate rise to around 75%. We suspect some offshore investors may have been looking for more hawkish commentary from the RBNZ.
The AUD also weakened around 0.5% overnight. Having been over 0.81 barely a week ago, the AUD is now below 0.78 and down for the year. Overnight, RBA Governor Lowe said that while he expected the next move in rates to be up, the RBA had time and didn’t need to move in “lock-step” with other central banks. While he noted that “the RBA Board does not see a strong case for a near-term adjustment in monetary policy”, he expected inflation to move gradually towards target and the unemployment rate to keep falling. The Statement of Monetary Policy is released today, but given Lowe said that the RBA’s forecasts for the economy hadn’t changed much since November, it doesn’t seem likely to contain many surprises. The NZD/AUD has reversed its losses in the immediate aftermath of the RBNZ Statement and is back to 0.9265.
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