Pound May Rise on Wages Data, US Dollar Mired in Fed Speculation

Talking Points:

• Pound May Rise on Wage Inflation, US Dollar Looking to Data for a Lifeline
• Australian Dollar Slumps as Westpac Bank Fuels RBA Rate Cut Speculation
• NZ Dollar Erases Knee-Jerk Drop as Markets Re-Evaluate RBNZ Comments

UK jobless claims figures headline an otherwise quiet economic calendar in European trading hours. Expectations point to a 2.2k decline in September, marking an improvement after a 1.2k jump in the prior month marked the largest gain since October 2012. More notably however, core weekly earnings are seen growing at an annualized pace of 3 percent in the three months through August, the fastest since January 2009. Accelerating wage inflation may rekindle BOE rate hike speculation, boosting the British Pound.

Later in the day, September’s US retail sales data and the Fed’s Beige Book survey of regional economic conditions will renew the debate about the timing of the first post-QE interest rate hike. Traders seem increasingly dismissive of an endless stream of conflicting Fed commentary. Indeed, while most voters on the rate-setting committee have voiced support for a 2015 rate hike, the markets price in tightening no sooner than March 2016. The hawkish narrative might sound more compelling if it were supported by hard data, meaning a pickup in receipts and/or an optimistic Beige Book might boost the US Dollar. Soft outcomes could prove less market-moving however considering the markets are already positioned on the dovish side of the spectrum.

The Australian Dollar underperformed overnight amid swelling RBA rate cut speculation after Westpac Banking Corpsaid it would raise its mortgage rates by 20 basis points to help offset an increase in capital requirements. Traders speculated that other Australian lenders would follow suit, forcing the RBA to counter the increase in borrowing costs with additional easing. Indeed, the currency’s descent tracked a drop in front-end government bond yields. The markets now price in a 55 percent probability of a rate cut at the next policy meeting, reflecting the strongest conviction in on-coming stimulus expansion in six weeks.

The New Zealand Dollar rebounded having plunged following seemingly dovish comments from RBNZ Governor Graeme Wheeler. The central bank chief said “some further easing is likely,” which triggered a knee-jerk selloff until traders appeared to realize that the remark was a repeat of the language used in the last policy statement rather than new guidance.

In fact, Mr Wheeler sounded conspicuously dubious about cutting rates. He said the RBNZ is conscious of low borrowing costs’ impact on housing – presumably suggesting they have helped stoke frothy prices – and argued that policymakers need capacity to ease if the global economy slows a lot. The latter point hints the central bank may prefer to keep its powder dry for now.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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