USD continues recent decline; ECB sees deflation risk receding and slow recovery; UK economy resilient to global stresses say BoE; Fed minutes highlight plenty of excuses not to hike yet

By Kymberly Martin

The USD is broadly weaker against most of its peers. Once again the NOK and NZD are the top performers over the past 24-hours.

Overnight, general risk appetite continued to stabilise. Equity markets on either side of the Atlantic made modest gains.

Our global risk appetite index (0-100%) remains at a fairly muted 43%, but well above its lows of recent weeks of 16%.

Data releases were fairly thin overnight but Central Bank-speak was rife. The ECB’s Minutes added little to previous commentary. The Bank sees deflation risk receding, but believes the Eurozone recover would be slower due to the slowdown in emerging markets. It reiterated more time was needed to assess the impact of recent market volatility.

The EUR/USD experienced choppy trading. It now sits a little higher than last evening, at 1.1270.

The GBP/USD pushed up above 1.5370 overnight, but was brought back down to earth with the Bank of England’s announcement. The Bank left policy unchanged as expected with an 8-1 vote.

However, accompanying commentary suggested no urgency to raise rates. The UK economy was seen as resilient to global stresses. However, the Bank said the near-term inflation outlook had weakened since August and the pace of activity had eased.

Subsequently, the GBP/USD dipped toward 1.5260, but has clawed its way back up to 1.5340 this morning.

The release of US Fed Minutes confirmed that global risks put the Fed off a Sept rate hike. However, at that time (pre-payrolls) the committee still saw it as being on track to raise rates later this year.

But Minutes noted that “compared with previous forecasts, the Fed now saw risks to inflation as tilted to the downside”. Given subsequent disappointment in US payrolls numbers, unless the global back drop really improves, the Fed will likely see plenty of excuses to further delay its first rate hike.

There is not too much new for markets in these Minutes as they already price little chance of a hike by year-end. Despite some immediate post-release volatility, most currencies have now settled back not far from pre-release levels.

The dovish undertone of the Minutes will likely provide the NZD/USD an excuse to extend its current rebound. However, we continue to see near-term resistance in the 0.6710-0.6740 window which has marked range highs for the past three months. This morning the NZD/USD trades at 0.6660.

As we noted in published research yesterday, if global risk sentiment continues to improve, we would not be surprised if the NZD/USD remains at these levels, or even briefly push through 0.6700 near-term. However, we’d still be looking for opportunities to sell. We continue to see the balance of risks on relative interest rates and volatility, tilted toward the NZD/USD returning to 0.6000, rather than extending its rally to 0.7000.

The AUD/USD has also made steady gains in the early hours of this morning, further boosted by the release of Fed Minutes. It trades at 0.7250 currently.

There is only a smattering of second tier local data to end the week. Tonight, further ‘Fed-speak’ is scheduled.

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