USD weaker as NY Fed chief notes tighter conditions. NZD gains on both jobless rate fall and Wheeler comments. Global equities weaker while commodities gain

By Jason Wong

It has been a crazy session in FX markets.

The USD is weaker across the board, with the NZD at the top of the leaderboard with a 2.3% gain.

Fed NY head Dudley was interviewed by a newswire and said that a significant global downturn and higher USD could hurt the US economy.  Dudley said the FOMC must see financial conditions reflect the real economy, and he noted the considerably tighter financial conditions since the December meeting. Our NAB colleagues report that one backdrop to this is the Fed’s recently released Senior Loan Officers Survey, which was the softest since 2010 and has something of a record of forewarning and leading economic downturns.

Dudley’s comments sent the USD off on a weaker track and triggered all sorts of panic buying and selling of currencies in the process.  The market has been heavily positioned for USD strength so liquidity can evaporate quickly when everyone wants to adjust positions at the same time.  The US ADP employment figure came in slightly above expectations but the US ISM non-manufacturing index fell to 53.5, the weakest in nearly two years and weaker than market expectations. The components weren’t flash with both employment and new orders lower.  This fuelled the USD downturn.

USD/JPY traded in a wide 250 bp range.  We were sitting around the 120 mark this this time yesterday and hit a low of 117.50 early this morning.  EUR/USD is up 1.3% to 1.1065 and reached a high of 1.1080, while GBP/USD is up 1.2% to 1.4580.  USD/CAD is down 1.6% to 1.383, helped by a 5-6% gain in oil prices.  Remarkably, it was only a couple of weeks ago that this cross was above 1.46.

Commodity prices are generally stronger across the board.  As mentioned, oil is surging up as I write but we also saw some good gains in base and precious metals.  Along with USD weakness, this has supported the AUD, up 1.6% to 0.7153.

The weaker USD across the board and higher commodity prices have supported the NZD but local drivers have also been at play.  NZD/USD is up 2.3% to 0.6662, not far off the highs for the session.  The NZD was bid after a strong employment report.  The unemployment rate for Q4 of 5.3% was a shocker, coming in well below expectations of 6.1%.  The surprise largely reflected in the fall of the participation rate, as employment growth was only marginally stronger than expected.

This was followed closely by RBNZ Governor Wheeler’s first speech for the year.  While most local observers would not have been surprised by the speech’s content or tone, offshore players likely read the speech as hawkish.  With headline inflation heading towards zero and some core measures below 1%, one line in the speech was enough to scare the doves and change perceptions. Wheeler suggested that “some recent inflation indicators are encouraging”.  This confirmed the Bank’s lack of urgency in responding to the weak inflation dynamic, sending the NZD higher.

Finally, global equity markets are weaker across the board, with Europe down 1.5% and the S&P500 down 0.9%, despite gains for the energy sector – worries about the economic outlook are clearly dominating here.  So this isn’t your classic risk-off day, as commodities and commodity currencies are higher.

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