USDOLLAR Index Yo-Yos; Aussie and Kiwi Break Conventional Wisdom
- The USDOLLAR Index has been ebbing and flowing all week.
- August is typically a bad month for risk and a good month for the US Dollar - see the August forex seasonality report.
Two rate cuts in two weeks from the Reserve Bank of Australia and the Reserve Bank of New Zealand, and in both cases, the Australian and New Zealand Dollars rallied. This seems counter-intuitive; yet it makes perfect sense. The beauty of contemporary integrated, global markets is that investors are adept at discounting expectations of the future. In other words, it mattered more to the market that the RBA and the RBNZ didn't necessarily promise future dovish action than the fact that cuts were actually made.
Or, in a few other words, expectations matter more than reality. I refer to this as the "Dodgeball" effect, named after the comedy starring Vince Vaughn and Owen Wilson. There's a line early in the movie where Vince Vaughn's character alludes to the secret to his happiness: "I find if you keep your expectations low, you're never disappointed." This is, in effect, what went wrong for Aussie and Kiwi bears around the anticipated RBA and RBNZ rate cuts the past two weeks: dovish expectations were too high, and therefore disapointment for the bears was all but guaranteed.
--- Written by Christopher Vecchio, Currency Strategist
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