USD was up on all crosses except the CAD; NZD continues to underperform, managing to climb back up to 0.7210 after falling as low as 0.7168; EUR has been under downward pressure through most of the night

By Jason Wong

The USD is in the driving seat, making broadly based gains, while the NZD continues to underperform.

The USD is up on all the crosses bar the CAD, with a steady climb from last night without any notable key driving factors.  It might reflect a number of factors, including more confidence that the USD is at a turning point after its steady decline for much of the year taking it well into “oversold” territory, increased confidence of tax reform and the EUR being out of favour after the surprising Germany Federal election results. Economic data haven’t been a factor, with a slight easing in US consumer confidence from recent highs and a cooling in new home sales, as the impact of the Hurricanes begins to impact the data.

The USD TWI majors index is 0.2% for the day and now up 2% from its early-September lows.  The USD was well on the ascendency before Yellen’s speech this morning, which has added some volatility into the mix.  The initial headlines flashing across the screen looked on the hawkish side: “”Imprudent to keep monetary policy on hold until inflation at 2 percent” and “Persistently easy policy can hurt financial stability”, but the overall speech was fairly well balanced. The Fed remains on a gradual tightening path but it will be carefully monitoring incoming data.  Just ahead of Yellen, Atlanta Fed president Bostic made his first public comments since taking office, and they were a little on the hawkish side. He says he is comfortable with a December rate hike and he sounded upbeat on inflation, saying he was hearing anecdotes of more pressure on wages and prices, “…more clearly and consistently than when I started in June.”

The NZD has traded lower since early afternoon yesterday.  There was some headline shock from the ANZ’s business outlook survey showing that confidence had slumped to 0.0 just ahead of the election, but we saw that as understandable, and on a seasonally adjusted basis the figure wasn’t nearly as bad.  Indeed, it was surprising that confidence had held up so strongly in the prior survey.  Certainly, it feels like the inconclusive election result has provided traders an excuse to sell the NZD, and it is lower on all the crosses.  But the underperformance of the NZD should also been seen in the context of widespread declines in emerging market currencies.  Overlaying the NZD against an EM currency index highlights the high correlation over the past week.  A stronger USD is typically seen as bad for emerging markets as it represents a tightening in global financial conditions.  Notably, NZ equities don’t see any bad news from the election result, with the two-day cumulative gain post-election up close to 1%, against a backdrop of flat global equity markets.

The NZD has managed to climb back up to 0.7210 after falling as low as 0.7168 as Yellen’s speech headlines came out.  NZD/AUD has tracked around 0.9115-0.9135 since the NZ close, with all the fall in the cross coming through yesterday afternoon.

EUR has been under downward pressure through most of the night, falling down to 1.1760, before recovering to 1.18.   Political risk has re-emerged in the euro area, with the increase in the far-right movement seen as a wake-up call to those who thought the threat of populism in the EU had subsided.  Political uncertainty overhangs Spain and Italy as well.  Spain’s top court ruled that Catalan’s plans for an independence referendum this weekend is illegal. 

There’s not much to say about the other major currencies, with JPY and GBP softness a reflection of the stronger USD path.  USD/JPY is up testing two-month highs around 112.20 while GBP hasn’t done too badly, only down slightly to 1.3450.

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