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US Dollar Likely to Rise vs. Aussie, Kiwi on Fed Rate Hike

US Dollar Likely to Rise vs. Aussie, Kiwi on Fed Rate Hike

Talking Points:

  • FX Markets Mark Time Overnight as Traders Await FOMC Policy Announcement
  • Scenario Analysis Hints Fed Hike to Boost US Dollar vs. Aussie, Kiwi Alternatives
  • NZ Dollar Briefly Lower as FinMin English Suggests RBNZ May Cut Rate Further

Currency markets are treading water in Asia trading hours as all eyes turn to the FOMC monetary policy announcement. Chair Yellen and company are forecast to deliver the first post-QE interest rate hike. Fed Funds futures show the outcome is widely expected, with traders pricing in a close to 80 percent probability of a 25bps increase in the benchmark lending rate. The consensus seems to likewise call for dovish commentary that sets the stage for a cautious, shallow tightening cycle.

Sizing up the possible scenarios for price action after the Fed rate decision, the bar for a dovish surprise seems relatively high considering investors are already primed for timid rhetoric. On the hawkish side of the equation, the large skew in implied rate hike probabilities suggests the surprise element would need to come from either the updated set of FOMC economic forecasts, the text of the policy statement or Chair Yellen’s press conference. If the markets judge any of this to be less dovish than expected, a one-sided US Dollar rally against the G10 currencies may materialize.

In the event that the Fed delivers in line with expectations, the markets’ response may be filtered through the prism of risk sentiment trends. The Fed’s aggressive easing over the past seven years slashed returns on safer assets and encouraged a reach for yield outward along the risk spectrum. The growing proximity of stimulus withdrawal since mid-2014 might have been expected to begin reversing this dynamic. Various false starts failed gain traction however even as the greenback embarked on a long-lasting rally to reflect the looming policy shift.

This warns that a period of portfolio readjustment is still pending and may be triggered in earnest once the rate hike is finally a reality. The ensuing risk aversion may bode ill for the sentiment-linked Australian and New Zealand Dollars, sending them downward alongside stock prices, while boosting funding currencies like the Euro and the Japanese Yen. This may make for disparate USD performance, putting the benchmark unit on the defensive against the anti-risk contingent even as it rises against higher-yielding alternatives.

The New Zealand Dollar dipped briefly downward overnight after Finance Minister Bill English said exporters would prefer the currency in the mid- to low-0.60s and hinted that the RBNZ may have scope to cut rates if an on-coming drought proves severe. For its part, the central bank hinted that its easing cycle may be over at December’s policy meeting.

Gauge Trends and Spot Reversals in the Major Currencies with DailyFX SSI

Asia Session

21:45NZDCurrent Account GDP Ratio YTD (3Q)-3.3%-3.4%-3.4%
21:45NZDBoP Current Account Balance (3Q)-4.749B-4.861B-1.174B
23:30AUDWestpac Leading Index (MoM) (NOV)-0.2%-0.1%
23:30AUDRBA's Debelle Speech in Sydney ---
00:00AUDSkilled Vacancies (MoM) (NOV)1.2%-1.6%
01:35JPYNikkei Japan PMI Mfg (DEC P) 52.5-52.6
06:00JPYMachine Tool Orders (YoY) (NOV F) --17.9%

European Session

08:00EURMarkit France Mfg PMI (DEC P) 50.650.6Low
08:00EURMarkit France Services PMI (DEC P) 50.851.0Low
08:00EURMarkit France Composite PMI (DEC P) 51.051.0Low
08:30EURMarkit/BME Germany Mfg PMI (DEC P) 52.852.9Medium
08:30EURMarkit Germany Services PMI (DEC P) 55.555.6Medium
08:30EURMarkit/BME Germany Composite PMI (DEC P) 55.055.2Medium
09:00EURMarkit Eurozone Mfg PMI (DEC P) 52.852.8Medium
09:00EURMarkit Eurozone Services PMI (DEC P) 54.054.2Medium
09:00EURMarkit Eurozone Composite PMI (DEC P) 54.254.2Medium
09:30GBPClaimant Count Rate (NOV)2.3%2.3%Low
09:30GBPJobless Claims Change (NOV)0.8K3.3KMedium
09:30GBPAverage Weekly Earnings (3M/YoY) (OCT)2.5%3.0%Low
09:30GBPWeekly Earnings ex Bonus (3M/YoY) (OCT)2.3%2.5%Low
09:30GBPILO Unemployment Rate 3Mths (OCT)5.3%5.3%Medium
09:30GBPEmployment Change (3M/3M) (OCT)150K177KLow
10:00EUREurozone Trade Balance SA (OCT)20.6B20.1BLow
10:00EUREurozone Trade Balance NSA (OCT)-20.5BLow
10:00CHFCredit Suisse ZEW Survey Expectations (DEC)-0.0Low
10:00EUREurozone CPI (MoM) (NOV)-0.2%0.1%Medium
10:00EUREurozone CPI (YoY) (NOV F) 0.1%0.1%Medium
10:00EUREurozone CPI Core (YoY) (NOV F) 0.9%0.9%Medium

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3

--- Written by Ilya Spivak, Currency Strategist for

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.