USD pushed higher on Fed speakers indicating a March rate rise; NZD and AUD suffered the most, with NZDUSD trading around 0.7050; Australian trade balance was much lower than expected, this has seen NZDAUD rise back to 0.9325

By Jason Wong

While Trump was meant to be the headline act this week with his speech to Congress, it continues to be Fed speakers that are hogging the limelight.  A coordinated approach to guide market expectations to a March rate hike seems to be in force and that has continued over the past 24 hours, supporting the USD and adding to upside pressure on bond yields.  The NZD has fallen to its lowest level since mid-January.

Following the Fed’s Dudley, Harker and Williams earlier in the week, Brainard and Powell have jumped in, singing from the same song sheet, promoting the idea that another Fed hike is imminent. 

Yesterday morning, Governor Brainard, usually dovish by nature, signalled that a rate hike “will likely be appropriate soon”.  Overnight, fellow Fed Governor Powell said that a case for a rate increase at March had “come together”.

The OIS contract for the Fed’s March meeting is now priced at close to 80%, making a rate hike in a couple of weeks a fait accompli, unless the US employment report next week is a big shocker.  Fischer and Yellen tomorrow morning are expected to give a similar nod.

The Fed raising rates in March (rather than the prevailing expectation until a few days ago of June) has increased the odds that three rate hikes could be in play this year.  Compared to the end of last week, an extra 12bps of tightening has been built into the US OIS curve for this year – comfortably more than two hikes but not quite three yet.

Adding to the increased rate hike expectations were US data showing US jobless claims dropping to their lowest level in almost 44 years.  The consumer comfort index, a weekly series that usually doesn’t get much attention, rose to an almost 10-year high.

So the USD has continued to push higher and it has been a pretty steady increase since Dudley’s policy guidance almost 48 hours ago, with the USD major currency TWI rising by about 1.2% over that period.

Overnight, the NZD and AUD have been hit the hardest, perhaps a reflection that these have been two of the strongest currencies over the year to date (and 6-months and 12-months) and traders have been wrong-footed by the surprise coordinated Fed “intervention”.  NZD is flirting with 0.7050 and the AUD is down to 0.7560, the AUD’s slight underperformance has been aided by a much weaker than expected trade balance reported yesterday.  NZD/AUD sits at 0.9325 having reached a low of 0.9288 before that trade data.

There was little sustained market reaction to RBNZ Governor Wheeler’s speech yesterday.  As expected, the tone was identical to that of the February MPS, where he saw both upside and downside risks to the OCR.  His negative tone towards the global outlook is remarkable, really, in the face of some of the indicators that have been released this year.  It also runs counter to the vibe coming out of other central banks.  The market disagrees with the Bank’s assessment of risks and so do we.

Against the strong USD, EUR and GBP falls have been modest.  Annual euro area CPI inflation jumped to a 4-year high of 2%, while the core measure remained at 0.9%. Higher headline inflation is likely to see the ECB revise up its inflation forecasts, although soft core inflation helps justify its current QE programme.  EUR is holding up close to 1.05 while GBP has steadied over recent hours around the 1.2260 mark.  NZD/EUR is down to 0.6715 while NZD/GBP is down to 0.5750.  Rising bond yields have helped push the yen down, so USD/JPY is up to 114.55.

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