A Wednesday packed with macro data and policy shifts is expected to see currency moves, with the euro-dollar approaching parity, the pound up for the seventh day in a row but the New Zealand dollar topping the charts.
The Kiwi was sent higher when the Reserve Bank of New Zealand raised interest rates by 50 basis points to 3.5%, a seven-year high, and promised further hikes as “the inflation is too high and labor resources are scarce”.
This could dampen some of the momentum in the currency markets that led to what ING called a “tremendous” rally in risk yesterday, on equities, European currencies and bonds, with high yield credit spreads narrowing 30 basis points and emerging markets rebounding.
“To what extent this is due to expectations of a slowdown in monetary policy tightening or simply an adjustment in stance remains unclear. However, we remain firmly on the dollar side, given that the Fed pivots early,” ING Bank analysts said. .
The winds of optimism were triggered by a combination of favorable factors, believes analyst Ipek Ozkardskaya of SwissQuote.
“First, the RBA’s lower-than-expected rate hike was seen as a sign that central banks might slow the pace of their rate hikes, to avoid sending the global economy into a deep recession without even being able to get inflation under control as fast as they want (but the Reserve Bank of New Zealand didn’t sing the same song, it climbed 50bp as expected).
“Second, the US JOLTS data smelled like a first victory for the Federal Reserve (Fed). US job openings fell by one million in August, the biggest drop since April 2020, the peak of closings pandemics. However, unfortunately for the Fed, few people quit their jobs or were laid off.”
Currency volatility, as tracked by Deutsche Bank’s Cvix index which measures the three-month implied volatility of G10 currency pairs, is at its highest level since the initial onset of the pandemic in early 2020 and before that, the sovereign debt crisis about a decade earlier.
The weakness in the USD seen last week lingered, with the Dollar Index (DXY) slipping to the 110 mark, back to where it was a fortnight ago.
On Wednesday morning, the euro was a hair’s breadth away (0.99948) from regaining parity against the dollar, but the sudden movement was a continuation of the sideways movement of the day before.
The British pound also continued its recovery, rising 0.1% against the US dollar to hit a three-week high above 1.148, as well as rising 0.2% against the euro and its peers. largest gains of 0.4% against the yen and NOK.
Wednesday’s economic calendar is packed with services purchasing managers’ indices (PMIs) from most major economies.
A non-monetary policy meeting also takes place, as well as an OPEC meeting.
Later, the US ADP payrolls report will be released, but it is considered an unreliable precursor to Friday’s all-important Nonfarm Payrolls report.