Fed Chair Yellen set the tone for a USD positive session on Friday, delivering a speech where she placed herself in the camp looking for a US rate hike this year.
Most major currencies closed lower against the USD on Friday, with the conspicuous except of NZD.
Yellen’s speech was a comprehensive look at US inflation dynamics, defending her view that subdued inflation has mainly been driven by (falling) energy and non-energy import prices. These effects will drop out over time, provided that oil prices and the USD remain relatively steady.
Regarding the state of the global economy, the Chair was fairly sanguine: "The Committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy."
Perhaps most interestingly, Yellen revealed herself to be in the camp of FOMC voters who expect a rate hike before year-end. In the past, the Chair had shied from espousing her own personal views, preferring to speak on behalf of the Committee.
The message from all but the most cautious FOMC members since the September ‘on-hold’ decision has been consistent, and should draw a line under any USD weakness.
This week sees no less than nine further Fed speaking engagements, but barring significant surprises, we’ll try and refrain from blow-by-blow coverage.
NZD bucked the trend to gain against the USD on Friday on little fundamental news, and sits on the cusp of trend-line resistance at 0.6390. We suspect this outperformance can continue, but are wary that strong resistance nearby in NZD/USD (at 0.6480) and NZD/AUD (0.9160) could cap a further material rally.
However, with local data unlikely to prove negative, this week is as good a chance as any for NZD to finally break higher out of its recent range.
It’s a busy week, capped by Friday’s US employment reports. Ahead of that, we’ll be looking to the US PCE inflation print (Mon), the local ANZ business confidence reading (Wed), and the two China PMIs (Thu).
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Raiko Shareef is on the BNZ Research team. All its research is available here.
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