Forecasts

U.S. Dollar’s Three-Year Lows Run into GDP, BoJ, ECB

Price action and Macro.

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U.S. Dollar’s Three-Year Lows Run into GDP, BoJ, ECB

Talking Points:

Fundamental Forecast for USD: Neutral

It was the start of another rough week for the U.S. Dollar as markets re-opened after an extended holiday weekend in the United States. DXY sank down to a fresh three-year low, extending the dramatic fall from last week after a bit of resistance began to show off of the December low. Last week’s move was pushed by a batch of releases last Friday when U.S. CPI and Advance Retail Sales figures were released. While core inflation surprised to the upside, a miss in Retail Sales seemed to grasp markets’ attention, and this led to a strong bearish move that continued into the start of this week.

The Greenback struggled to regain its footing initially, with another lower-low printing on Tuesday evening; but since that’s come-in, support has appeared to settle just a bit above the 90.00 level on DXY. This support has held up even throughout a disappointing piece of data on Friday of this week: University of Michigan consumer confidence came-in at 94.4 versus the expectation of 97.00, and this represents a fresh six month low in that data point. But this was perhaps offset by a bit of profit taking as bears tighten up risk ahead of this week’s close.

U.S. Dollar via ‘DXY’ Four-Hour: Dollar Attempts to Carve Out Support Above 90.00

U.S. Dollar’s Three-Year Lows Run into GDP, BoJ, ECB

Chart prepared by James Stanley

U.S. GDP, ECB, BoJ Headline Next Week

The big piece of U.S. data for next week comes out on Friday when Q4 GDP is released. We also get a high impact print with the Advanced Goods Trade Balance on Thursday, but before that we have some major Central Bank rate decisions out of Japan (Tuesday) and Europe (Thursday morning). Each of these can bring significant bearing on flows in the Dollar, as macro trends have been a large factor in the currency’s recent movement.

The big question surrounding both of those Central Banks at the moment is when they might be gearing up towards a stimulus taper, and while markets have been appearing to price-in such a theme out of Europe for much of last year, this is a more recent debate surrounding the Bank of Japan. While the ECB has continually evaded the topic of stimulus exit, markets spent much of last year bidding the Euro-higher in anticipation of as such. When the ECB extended their stimulus program in October, this brought a mere two weeks of weakness into EUR/USD; but when a red-hot GDP number was released out of Germany in mid-November, buyers came right back to continue the 2017 bullish trend. This, of course, helped to create significant Dollar weakness throughout last year as forward-looking flows swapped out a weak USD with the Euro.

Regarding Japan – the Yen was one of the few currencies that could keep pace with the Dollar’s weakness for the last eight months of 2017. This created a range-bound environment in the pair, but early last week rumors began to circulate that the BoJ may be looking slowly begin tapering asset purchases when they bought fewer long-dated bonds. This created a spate of Yen strength that lasted for a few days around worries of a ‘stealth taper’, which was eventually faded out of markets, but it bears focus nonetheless as we approach next week’s BoJ rate decision. If the BoJ does signal that stimulus taper may be on the horizon, as could be noted by the insertion of the key word of ‘normalization, ’ then we will likely see Yen strength that will help to bring another leg of weakness into global U.S. Dollar flows.

Next Week’s Fundamental Forecast

The fundamental forecast for the U.S. Dollar will be set at neutral for next week. While the down-trend in the Greenback is extremely attractive, the inability to break below 90.00 this week, combined with the stretched nature of the longer-term trend make for a difficult backdrop to prod for continuation whilst so near multi-year lows.

--- Written by James Stanley, Strategist for DailyFX.com

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Euro Turns to 2017’s Final CPI Figures After ECB Minutes Hint at Faster Exit

News events, market reactions, and macro trends.

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Euro Turns to 2017's Final CPI Figures After ECB Minutes Hint at Faster Exit

Fundamental Forecast for EUR/USD: Neutral

- The ongoing build up in net-long Euro positioning received a blessing from the ECB this week after the December meeting minutes hinted at a potentially faster than previously anticipated QE exit.

- If there’s anything that could derail the Euro right now it would be inflation data, of which we’ll get the final December (and thus, 2017) figures this week.

- The IG Client Sentiment Index has cooled on EUR/USD in the near-term.

The Euro was among the top performers last week, adding another +1.42% versus the US Dollar, with EUR/USD on its way to three-year highs. The big spark for the Euro rally came mid-week with the reveal of the European Central Bank’s December meeting minutes, whose underlying tone was more hawkish that anticipated. If a few things break right early on in 2018, the ECB has positioned itself as willing to withdraw stimulus faster than what is currently scheduled.

The subtle yet meaningful shift in the ECB’s tone would seem to hinge on economic data continue to point to accelerated rates of growth and higher inflation down the line. In general, economic data has been strong, with the Euro-Zone Citi Economic Surprise Index finishing Friday at +58.3, up from +46 the week prior. As noted last week, the decay over the past month appears to be a function of data rolling off the calendar and a lack of new releases at the end of December to replace them; now that data are being released again, the gauge is strengthening).

Likewise, recall that the final Euro-Zone Composite PMI reading for December showed that growth momentum in the Euro-area is at its strongest pace since January 2011, while the Euro-Zone Manufacturing PMI hit its all-time high to finish 2017.

In the coming week, attention will be on the final Euro-Zone CPI reading for December, in what amounts to the final inflation print of 2017 altogether. The final revision could very well be the wrinkle that gives traders pause in their determination to push the Euro higher, even if momentarily. Due in at +1.4% y/y from +1.5% y/y, and at +0.4% m/m from +0.1% m/m, the report doesn’t seem like it’s poised to be fuel for more upside.

But any pause the inflation data give mid-week should be temporary. Market measures of inflation continue to trend higher, and with the 5-year, 5-year inflation swap forwards, one of ECB President Draghi’s preferred gauges of inflation, closing last week at 1.739% - its highest level since February 21, 2017 – the ECB is probably feeling confident about its current trajectory of normalizing policy.

Traders will need to remain cautious about the overextended state of the futures market, where speculators are holding their largest net-long Euro position ever. For the week ended January 9, speculators held +144.7K net-long contracts, an increase from the previous all-time high set a week earlier at +127.9K. We maintain that as long as the Euro has strong fundamentals behind it, traders may continue to find excuses to look long the single currency as we approach the ides of January.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX.

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BoJ Discusses Reversal Rate as The Quest Continues Towards the Elusive 2%

Price action and Macro.

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BoJ Discusses Reversal Rate as The Quest Continues Towards the Elusive 2%

Fundamental Forecast for JPY: Bearish

Next week brings the final Bank of Japan rate decision for 2017. It’s been a rather quiet year for the BoJ, all factors considered; and quite the respite from the past few years when their very own policies were very much in the spotlight. Last year saw the stealth move to negative rates in January, catching many by surprise and leading to a troubling five-month period that saw USD/JPY drop all the way from above 121.50 to below 100.00. The oncoming ‘reflation trade’ that started around the U.S. Presidential Election in November pushed prices back towards that 120.00 level, falling just short as a double-top was set at 118.67 in December/January. After a pullback in the first quarter of the year, USD/JPY sank into a range that’s lasted ever since, now going on for seven full months.

USD/JPY Has Spent the Bulk of 2017 in a Range-Bound Fashion

BoJ Discusses Reversal Rate as The Quest Continues Towards the Elusive 2%

Chart prepared by James Stanley

The big item of pertinence circling around the Bank of Japan, and likely to be on full display next week is the bank’s outlook towards stimulus. The stimulus program that came into markets around the election of Prime Minister Shinzo Abe has continued to drive into Japanese markets going on five years now. And while inflation initially showed a promising response, eclipsing the BoJ’s 2% target temporarily in 2014; those hopes have fizzled in the years since as the Japanese economy has moved back towards the deflationary cycle that defined the economy for much of the past thirty years.

For the past year, inflation has remained between .2 and .7% in Japan, and this is with an outsized stimulus program in effect. After four consecutive months at .4% this summer, a quick visit to .7% in August and September led into a drop back-down to .2% in October. So, it would appear that we remain very, very far away from attaining the BoJ’s goal, with little hope in the immediate sights.

In September, we started to hear machinations around a potential increase in stimulus. This is when incoming BoJ member, Gouishi Kataoka, dissented at the BoJ’s rate decision. Dissent within the BoJ isn’t necessarily new, as we regularly heard prior board members Takahide Kuichi and Takehiro Sato dissent at meetings in the past. But their dissent was largely looking for an end to stimulus, or at least less of it; and the thought was that we’d seen more unanimity when their terms ended in July of this year. But, with Mr. Kataoka coming into the BoJ in July, the dissent continued, and this time in the opposite direction as the proposition was to see even more stimulus in the effort of driving the Japanese economy towards the 2% inflation target.

This theme saw a twist last month. BoJ Governor Haruhiko Kuroda mentioned the ‘reversal rate’ in a speech, and questions began to populate as to whether the head of the BoJ was dropping hints towards an eventual stimulus exit. Reversal rate is the rate at which rate cuts become detrimental for an economy, and given how loose policy has been for so long in Japan, this could be denoting a higher bar for future stimulus endeavors. This was initially interpreted as Gov. Kuroda noting that additional rate cuts may actually do damage to the Japanese economy, and this put market participants on high alert for a potential announcement moving the bank away from their gargantuan stimulus program in the coming months. But – in a clarification after the fact, we learned that ‘reversal rate’ entered the conversation at the prompting of Mr. Kataoka, in order to flag risks around additional easing; and now it seems as though this inclusion of the term ‘reversal rate’ is actually in order to lay the groundwork for even more stimulus in the future.

The BoJ appears committed here, and given the Japanese economy’s continued struggle to attain the elusive 2% inflation target, it would appear as though we’re nowhere near the conversation of stimulus exit.

The forecast for the Japanese Yen will be set to bearish through the end of 2017.

This note was originally published on December 15, 2017.

--- Written by James Stanley, Strategist for DailyFX.com

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GBP: Perhaps Not Ready Yet For Assault on $1.40

Financial markets, economics, fundamental and technical analysis.

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GBP: Perhaps Not Ready Yet For Assault on $1.40

GBP Talking Points:

  • GBPUSD remains firm but the 1.40 level will likely prove a difficult barrier to jump.
  • Unemployment, earnings and GDP data are all potentially market moving.
  • Bank of England Governor Mark Carney will be at Davos but is unlikely to change interest rate expectations.

Fundamental Forecast for GBP: Neutral

Find Out Here What the First Quarter May Hold for GBP, Equities, Oil and Other Key Markets

GBPUSD continues to advance but price action on Friday was interesting: the pair fell on weaker than expected UK retail sales figures, stabilized and then dropped back further. At its high point of the day it was at 1.3945, its strongest level since the day after the UK referendum vote to leave the EU in June 2016, but it was unable to hold on.

This suggests that resistance is now solid at the 1.40 level and it would be no surprise to see a correction, though a spell of sideways trading seems more likely.

GBPUSD Price Chart Daily Timeframe (May 18, 2016 to January 19, 2018)

GBP: Perhaps Not Ready Yet For Assault on $1.40

Chart by IG

UK data in focus

While a weak US Dollar and the rising prospects of an agreed Brexit deal have been largely responsible for the Pound’s advance, the week ahead will likely be dominated by UK economic data. In particular, Tuesday’s figures for unemployment and average earnings will be important even though both will likely be little changed: the unemployment rate staying at 4.3% and the increase in average earnings at 2.5%.

The latter is particularly significant as earnings growth remains below the inflation rate and this continues to curb spending and therefore the consumption component of economic growth. That should become even more evident Friday, when the “advance” fourth-quarter readings for GDP are released. Quarter/quarter a same-again 0.4% growth figure is possible but that would still lower the year/year rate of expansion to a rather weak 1.4% from the previous 1.7%.

Carney at Davos

Data aside, Bank of England Governor Mark Carney is scheduled to speak at a panel meeting at the World Economic Forum in Davosbut is unlikely to say anything market moving. The Bank has indicated that any further interest rate increases after November’s quarter-point hike will be “limited and gradual” – widely interpreted as meaning the next rise will come late this year.

However, two more this year cannot be completely ruled out, with the first perhaps coming in May.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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Gold Prices Snap Five-Week Winning Streak, U.S. GDP in Focus

Short term trading and intraday technical levels

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Gold Prices Snap Five-Week Winning Streak, U.S. GDP in Focus

Fundamental Forecast for Gold:Neutral

Gold prices snapped a five-week winning streak with the precious metal down 0.26% to trade at 1334 ahead of the New York close on Friday. The losses come despite continued weakness in the greenback with the DXY (Dollar Index) down nearly 0.4% as all three major US equity indices closing markedly higher on the week.

Looking ahead to next week traders will be eyeing central bank rate decision from the BoJ (Bank of Japan) and the ECB (European Central Bank) with the advanced read on 4th quarter U.S. GDP highlighting the economic calendar. Consensus estimates are calling for a print of 3%, down from 3.2% q/q in Q3 with Core PCE (Personal Consumption Expenditure) expected to rise to 1.9% q/q.

With the inflation outlook remaining the laggard of the Federal Reserve’s dual mandate of maximum employment and price stability, a stronger print on these data point next week could see interest rate expectations increase with such a scenario likely to weigh on gold demand. That said, prices have turned just ahead of resistance and although the broader picture remains constructive, the rally remains vulnerable near-term.

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Gold Prices Snap Five-Week Winning Streak, U.S. GDP in FocusGold Prices Snap Five-Week Winning Streak, U.S. GDP in FocusGold Prices Snap Five-Week Winning Streak, U.S. GDP in Focus
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +1.79 (64.2% of traders are long)- bearish reading
  • Long positions are 2.0% higher than yesterday and 4.0% lower from last week
  • Short positions are 0.7% lower than yesterday and 7.8% higher from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Spot Gold trading bias.

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Gold Weekly

Gold Prices Snap Five-Week Winning Streak, U.S. GDP in Focus

Last week we noted that the technical focus was on the breakout rally with the, “+7% advance off the December low now eyeing key technical resistance. Interestingly enough, a similar setup exists in oil prices and if the current interpretation is correct, we’ll be looking for a possible exhaustion trade early in the session.”

Indeed prices topped on Monday just ahead of the 2017 high-week close at 1346 before pulling back sharply. Two of the last four times prices posted five-week advances saw considerable corrections before resumption (April 2017 & 2012 highs). That said, this week marks the interruption with the broader uptrend at risk near-term while below 1346.

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Gold Daily

Gold Prices Snap Five-Week Winning Streak, U.S. GDP in Focus

Gold Prices Snap Five-Week Winning Streak, U.S. GDP in Focus

A slight adjustment to our slopes keeps prices within the confines of an ascending pitchfork formation extending off the December lows. Note that daily momentum has recovered from the overbought condition and highlights the risk for a move lower next week. Interim support rests at the monthly opening-range highs / the 50-line at 1325- a break below this threshold would shift the focus back towards 1311 with bullish invalidation now raised to the yearly open which converges on the median-line at 1302.

Bottom line: gold prices are struggling just below up-trend resistance with the advance vulnerable at these levels. That said, ultimately a pullback into slope support would have me looking for more favorable long-entries with breach of the highs targeting the 2016 high-day close at 1355.

---Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex contact him at mboutros@dailyfx.com or Click Here to be added to his email distribution list.



USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Central bank policy, economic indicators, and market events.

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USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Fundamental Forecast for Canadian Dollar: Neutral

USD/CAD trades near the monthly-high (1.2902) as the Federal Open Market Committee (FOMC) appears to be on course to further normalize monetary policy in 2018, but a marked pickup in Canada’s Consumer Price Index (CPI) may rattle the near-term resilience in the exchange rate as it puts pressure on the Bank of Canada (BoC) to follow a similar path to its U.S. counterpart.

Fresh forecasts from Fed officials suggest the central bank will stay on its current course of delivering three rate-hikes per year, and the hiking-cycle may prop up USD/CAD over the near-term especially as the BoC endorses a wait-and-see approach for monetary policy.

USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

With Fed Fund Futures showing budding expectations for a March rate-hike, the pair stands at risk for a more meaningful recovery going into the end of 2017, but key data prints coming out of Canada may spark a bearish reaction in the dollar-loonie exchange rate as the headline reading for inflation is expected to climb to an annualized 2.0% from 1.4% in October.

The threat for above-target inflation may heighten the appeal of the Canadian dollar its raises the risk of seeing Governor Stephen Poloz and Co. adopt a more hawkish tone in 2018, and the central bank may increase its efforts to prepare Canadian households and businesses for higher borrowing-costs as officials note ‘higher interest rates will likely be required over time.’ On the other hand, a below-forecast CPI print may fuel the near-term resilience in USD/CAD as it raises the BoC’s scope to retain the current policy for the foreseeable future. Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

USD/CAD Daily Chart

USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Near-term outlook for USD/CAD remains clouded with mixed signals as the pair marks a failed attempt to test the monthly-high (1.2902), with the pair stuck in a narrow range as the 1.2620 (50% retracement) region offers support. Keep in mind, the Relative Strength Index (RSI) highlights a similar dynamic as it struggles to push back into overbought territory, but the broader outlook remains supportive as the oscillator preserves the bullish formation carried over from August.

With that said, topside targets remain on the radar for USD/CAD, with a break of the near-term range raising the risk for a move back towards the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region. Want to learn more about popular trading indicators and tools such as the RSI? Download and review the FREE DailyFX Advanced Trading Guides!

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Australian Dollar Could Use A Breather- It Might Just Get One

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Australian Dollar Could Use A Breather- It Might Just Get One

Fundamental Australian Dollar Forecast: Neutral

  • The Australian Dollar has climbed mightily against its US cousin in the last month
  • Why should it not with both domestic and international factors aligned on its side
  • However, the coming week offers few likely booster, even if the currency need not fall very far either

Which 2018 trading opportunities do the DailyFX team of analyst find most compelling? Find out here.

The Australian Dollar is riding pretty high as a new week gets under way.

At face value there are plenty of good reasons why it should be. The market may have been unsure as to what to make of last week’s mixed bag official employment data. Who could blame it? Growth was strong but part-time roles predominated. The participation rate rose but so did the overall unemployment rate.

Still, the Australian economy seems to be quite the labour machine. The three-month rolling average for job creation is now 35,500 per month. That could be as much as twice the country’s rate of population growth. If this keeps up, then the weak wage settlements which have bedevilled the overall inflation picture must surely be history.

Moving on, China can never be far from any assessment of Australia’s performance. Here, too the signs look good. Official growth numbers from Asia’s largest economy came in last week and topped forecasts for 2017 as a whole. China’s economy expanded by 6.9% in 2017, comfortably meeting Beijing’s target for growth of “6.5% of better” and banishing at least to some extent the bitter memory of 2016’s 26-year low of 6.7%.

Mix in a generally more cautious view on the US Dollar and its Australian cousin looks well placed to benefit. So it has. AUD/USD crossed the psychologically important 0.80-point last week to reach highs not seen for four months.

Australian Dollar Could Use A Breather- It Might Just Get One

So far so good, at least for the Aussie bulls. They’ve been firmly in charge of AUD/USD since December. But the coming week is a bit light on heavyweight scheduled economic numbers from Australia, China or the US –with the obvious exception of official US growth numbers which will see daylight on Friday.

AUD/USD is also looking a little overbought. Moreover, although the Reserve Bank of Australia has yet to weigh in with any commentary about the more unwelcome effects of its strength, the pair is now firmly in the area where such warnings have come before. They might come again.

Even if they don’t, the Aussie looks like a currency in need of a rest if not necessarily a climb-down. Given the relative paucity of data and the strong gains already seen, this could be the week when it finally gets one.

It’s a neutral call for it over the coming five sessions, with a warning caveat that the clouds over the US Dollar might just lift a little. That could make life less comfortable for Aussie bulls than it’s been for a while.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX



The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Price action and Macro.

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The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Talking Points:

Fundamental Forecast for NZD: Bearish

The New Zealand Dollar spent much of this week clawing back losses that had very much dominated the currency’s price action over the past few weeks. Bigger picture, we can really draw back to July to focus in on when the pain really started to show for the Kiwi. This is when NZD/USD was trading over the psychological level of .7500, and this came on the heels of an aggressive rally that took two-and-a-half months to build-in over 700 pips on the pair. But in the three months since, the entirety of those gains have been eradicated. This bearish move in the New Zealand Dollar saw another fresh wave of selling on last month’s news around New Zealand elections, and after catching a bounce at the 2017 low last week, prices spent most of this week trudging-higher.

NZD/USD Daily: Corrective Gains for the Kiwi After Last Week’s Bounce at 2017 Low

The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Chart prepared by James Stanley

After newly-installed Prime Minister Jacinda Ardern’s Labour party crafted a coalition with the NZ First Parties, a blip of strength had temporarily showed-up in the Kiwi spot rate. This was very much driven by the prospect of an increase in the minimum wage; with the hope being that higher wages as brought upon by legislation could force stronger rates of inflation which, eventually, can put the Reserve Bank of New Zealand in a spot where they have to hike rates. But – that strength was short-lived, as Ms. Ardern is also promoting a modification to the Reserve Bank Act, and this can radically change the way that the RBNZ does business.

The proposed change would make the RBNZ also accountable for full-employment. This would be the incorporation of an additional mandate, on top of the RBNZ’s current focus of inflation. The change would effectively put the RBNZ in a spot where they have to try to balance the forces of inflation and employment, similar to the Federal Reserve utilizing a dual mandate versus the single mandate of Central Banks like the ECB. This is also happening while lawmakers consider an additional committee to manage the cash rate, and this invites a whole host of uncertainty around the future of the Kiwi-Dollar spot rate, along with that of the RBNZ itself.

On top of all of that potential change, next week sees Interim RBNZ Governor Grant Spencer conduct his first full monetary policy statement, and this also happens to be the first RBNZ rate decision under the new Labour-led government. There are no expectations for any moves on rates, and for the next expected adjustment, markets are currently looking out to Q4 of 2018 for a potential hike. The one possible area for change at next week’s rate decision is an adjustment to inflation expectations in order to account for the weaker currency. In Graeme Wheeler’s final press conference as the head of the bank in August, the RBNZ said that they anticipate rates staying on hold until at least September of 2019. Since then, we’ve seen inflation come-in at 1.9% versus the RBNZ’s projection of 1.6%, and the additional slide in NZD will likely necessitate a small adjustment for forward-looking inflation figures.

While stronger rates of inflation could eventually drive rates-higher, the prospect of change within the Reserve Bank Act will likely continue to dampen demand for NZD, at least in the near-term, as the rest of the world becomes more familiar with what a Jacinda Ardern-led New Zealand will end up looking like. The one thing that does appear certain is that Ms. Ardern is not satisfied with business as usual, and this can lead to further change. Markets, generally speaking, abhor change as this presents risk; and while the potential around those changes remain uncertain, we will likely see some element of risk aversion until market participants can gain more clarity. The forecast for next week will be set to bearish on the New Zealand Dollar.

--- Written by James Stanley, Strategist for DailyFX.com

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