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NZDUSD testing 0.7050 level and sits near the top of the leaderboard; Fed minutes from the May meeting supported a June rate hike and a gradual reduction of the balance sheet; Draghi plays down unwarranted side effects from negative rates

Currencies
NZDUSD testing 0.7050 level and sits near the top of the leaderboard; Fed minutes from the May meeting supported a June rate hike and a gradual reduction of the balance sheet; Draghi plays down unwarranted side effects from negative rates

By Doug Steel

Central bank comments generated the most action overnight. But generally subdued trading conditions prevailed through most of the night with limited movement across many markets ahead of this morning’s Fed minutes.

The minutes from the early May Fed meeting did cause some movement as they generally supported a June rate hike view with ‘most participants judged that if economic information came in about in line with their expectations it would soon be appropriate for the committee to take another step in removing some policy accommodation’. So a June hike remains probable, although not certain.

In addition, Fed staff presented a plan to gradually shrink the Fed’s balance sheet by increasing run-off limits every three months over a set period of time until fully phased in. Nearly all policy makers expressed a favourable view on this, agreed more details on the plan should be announced soon, and it would be appropriate to start the process this year. The market appears to have been looking for more detail on the latter.

The market reaction has seen a marginally weaker US dollar, slightly lower US bond yields and an edge higher in US equities. The DXY dollar index is down around 0.3% post-minutes, after resembling a flat line most of the night.

Earlier in the night ECB President Draghi played down any unwarranted side effects from negative rates and said that ‘there is no reason to deviate from the indications we have been consistently providing in the introductory statement to our press conference’. Translation: the ECB will be cautious in shifting its language. EUR/USD had pushed as low as 1.1170 at one point before finding support, and then spiking up toward 1.1220 post-Fed minutes. The pair currently sits around 1.1210.

GBP continues to mildly underperform in the aftermath of the Manchester bombing. The UK has lifted its terrorism threat to critical and deployed army personnel to assist police to provide safety. GBP/USD had dipped to around 1.2930 before lifting on a weaker USD to currently sit around 1.2960.

NZD/USD is again testing the top of the 0.6850 to 0.7050 following the Fed minutes. The pair currently sits just under the top of the range, up 0.5% and near the top of the currency leaderboard.

Yesterday’s positive NZ April trade figures and higher milk price forecasts from Fonterra set a positive tone, but it was curtailed as Moody’s downgraded China’s sovereign rating by one notch from Aa3 to A1 (moving in line with Fitch but one notch below S&P). In addition, Moody’s changed China’s rating outlook to stable from negative.

China’s Finance Ministry said that Moody’s is overstating economic difficulties and understating China’s reform capability. After initially sliding on the China downgrade toward 0.7440, AUD/USD recovered overnight and pushed on post the Fed minutes. AUD/USD opens this morning just under 0.7500. NZD/AUD hovers around 0.9400, up 0.2%.

The BoC held its cash rate steady at 0.5% but in describing the current degree of stimulus as appropriate the Bank added ‘at present’. This sent CAD to the top of the currency leaderboard. USD/CAD fell sharply to around 1.3440 from near 1.3530 just before the announcement. It has extended down to 1.3420, post-Fed.

Oil prices have been relatively subdued, down around 0.4%, ahead of today’s meeting between OPEC and other major oil producers to discuss extension of existing production curbs. At US$53.90, Brent crude sits at a similar level to this time yesterday.


 

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