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Currency traders have strong 'positive' reaction to rising US CPI data, reinforced by Yellen comments. NZD awaits Fonterra signals

Currencies
Currency traders have strong 'positive' reaction to rising US CPI data, reinforced by Yellen comments. NZD awaits Fonterra signals

By Raiko Shareef

The USD gained very sharply after an upside surprise in US core inflation, with the Bloomberg Dollar Spot Index posting a 0.9% gain for the day.

GBP and AUD were among the biggest losers.

If we had known the results of the US’ April CPI report ahead of time, we would not have guessed anywhere near the magnitude of the market’s reaction. EUR/USD, having drifted from 1.11 to above 1.12 over the Asian session, collapsed to 1.10 in an hour, a cool 1.6% loss.

The violent response suggests that we might be at the end of the broad USD sell-off, which has prevailed since mid-March. Investors look exceedingly keen to jump back on the strong USD story, upon any evidence than the Fed remains on track for a September lift-off in rates.

Investors were so bruised, and the USD had moved so far, that by the time Fed Chair Yellen affirmed her view that rate hikes would come in 2015, the market’s reaction could only be described as muted. The USD pushed only a little bit higher, but closed at its strongest level since late April.

Yellen generally kept to well-known themes, noting that delays to rate hikes would risk over-heating the economy, and that lower oil prices will prove supportive for the US consumer. She confirmed that she continues to believe the Q1 economic slowdown is transitory, an important signal, in our minds. Had it not been for the CPI report earlier, this comment would have been a strong USD-positive influence.

Of course, not all is rosy in the US economy, and Yellen continues to believe the strength of the labour market is overstated by the level of the unemployment rate. She conceded that it is “approaching full strength”, but “we are not there yet”. Overall, as rather unrepentant USD bulls, we are comforted by the Fed Chair’s messages.

NZD was not spared in the USD rally, but was one of the better performers, losing only 0.5% to 0.73. We continue to look for NZD outperformance against the crosses in any USD move (up or down), on the belief that the RBNZ will not deliver a rate cut in June.

Amid a rather quiet data week, we are keeping a keen eye out for Fonterra’s first estimate of its 2015/16 milk payout. It is due before the end of May. We would view anything over $5.50kg/MS as a positive signal for NZD, and anything below $4.50 as unequivocally negative.


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

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