USD fighting back; NZD/AUD making another run at 97c; speculation grows for a further RBA rate cut in April

By Raiko Shareef

One of the blogs on your correspondent’s reading list has a series entitled “This is nuts. When is the crash?” The moves in currency markets over the past 24 hours deserve an entry in that series.

EUR/USD, which accounts for roughly a quarter of all FX turnover, traded from 1.0620 to 1.1040 in the space of two hours.

The squeeze on USD long positions looked set to continue. If you’d told us that the post-FOMC move would be fully reversed by the time we walked in this morning, we would have laughed.

But there you have it. Major currencies, having gained hard against the USD yesterday morning, are now effectively back to the levels prevailing before the FOMC meeting. The reversal has been led by EUR, down 2.3% on an uptick of concern around Greece.

To recap, the FOMC statement yesterday was roundly more cautious that many in the market anticipated. As Fed Chair Yellen put it, just because the FOMC has removed the word “patience” from the policy statement, does not mean that they will be impatient when it comes to rate rises. The collective wisdom of the FOMC, captured by ‘dot points’, downgraded the predicted path of interest rate hikes.

Most intriguing for us was the Fed’s downgrade to what it sees as the natural rate of unemployment. It now sees this in a 5.0% - 5.2% range, down from 5.2% - 5.5% previously. This is what has likely driven the lion's share of the downgrade in the dot points. Looking forward, this should reduce the market's excitability of a sub-5.5% unemployment rate, and the wage pressures that might be expected to produce. The focus will now be on how quickly we approach 5.2%.

With these goal posts shifted, it seems appropriate to be more cautious on the prospect of rate rises. We still pick June for lift-off, but the risks have certainly skewed further in favour of a later start, especially in light of continued US data disappointments. Last night’s miss in the Philly Fed Index was only the latest example. As such, we’re surprised to see such a violent reversal of the USD sell-off.

EUR was the worst performer overnight, with the focus returning to Greece. Bloomberg reports that deposit outflows from Greece have reached their highest daily level since the bailout extension deal was struck just one month. There is now concern that Greece will run out of the liquidity headroom provided to it by the ECB.

NZD/USD participated in last night’s reversal, but its 1.5% fall was relatively modest. We are now firmly back in the middle of the 0.72 – 0.76 range. We were stopped out of our short NZD/USD at 0.7450 (for a miserly profit of 1.8%), but would look to re-enter the trade near or at 0.7600. However, there are better vehicles to express a bullish USD view over the near-term, like EUR, AUD, and GBP.

On the crosses, NZD/AUD looks to be making another run at 0.97. We’d be unsurprised to see further fresh highs in the cross, as speculation grows for a further RBA rate cut in April. NZD/AUD should remain well-supported above 0.95 until the second half of the year, when it should become clear that a third RBA rate cut will not be forthcoming.

Today, there is little on the data calendar that looks threatening. Of most interest will be Fed speakers Lockhart and Evans tonight, to gauge their impression of the market’s reaction to yesterday’s decision.

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