The USD had a strong evening, with the broad Bloomberg Dollar Spot Index back at Monday’s heights. The US ADP report and Fed Chair Yellen’s speech helped encourage that strength. Tonight promises fireworks.
The USD rally started to gain traction in the European session, after a weak UK construction report and soft core inflation numbers out of the euro-zone. The move accelerated after the ADP private employment report handily beat expectations.
Fed Chair Yellen covered the expected bases in this speech: (1) the economy is improving (2) unemployment is near its long-term normal level, but she personally believes there to still be labour market slack, and (3) the decision to lift rates will depend on incoming data. There was nothing to suggest that the Fed’s hand would be stayed come 17 December.
There probably will be some attention on Yellen's discussion of the (lower) neutral interest rate, which initially gained focus in the October Minutes. For us, this tends to justify the disappointing economic response to ultra-low rates in this recovery, rather than signal anything new about the pace or extent of the coming tightening cycle. The latter, as we've known for some time, will be gradual and very likely to peak lower than in the last.
On the whole, there was nothing particularly revelatory here, but the USD hit fresh highs immediately afterward, before some paring of overnight gains.
AUD was a clear outperformer, thanks to a strong Q3 GDP report, and despite a fresh swoon in oil and iron ore prices. The underlying details were encouraging, especially considering that the Australian economy is managing a tricky transition away from mining-driven growth.
Our NAB colleagues expect a gradual economic recovery in 2016 and 2017. We expect AUD to outperform NZD over the coming year, taking the cross down to 0.86 by end-2016.
NZD/USD lost more than most major currencies overnight, but remains significantly higher for the week. We think the 0.6680 – 0.6720 area will prove tough to crack on the topside. There will be some support at 0.6600.
In a week of marquee events, tonight is the gala. The ECB will announce the depth and breadth of easing measures. The market is extremely short EUR (and long USD) in anticipation, but short squeezes have been rebuffed due to ECB President Mario Draghi’s reputation of beating even inflated market expectations. We’d expect significant volatility in currency markets.
Fed Chair Yellen is also due to testify to Congress, but again, we imagine she will stick to script, as much as possible.
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Raiko Shareef is on the BNZ Research team. All its research is available here.
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