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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

Ilya Spivak, Head Strategist, APAC

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

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

Current Account GDP Ratio YTD (3Q)

-3.3%

-3.4%

-3.4%

21:45

NZD

BoP Current Account Balance (3Q)

-4.749B

-4.861B

-1.174B

23:30

AUD

Westpac Leading Index (MoM) (NOV)

-0.2%

-

0.1%

23:30

AUD

RBA's Debelle Speech in Sydney

-

-

-

00:00

AUD

Skilled Vacancies (MoM) (NOV)

1.2%

-

1.6%

01:35

JPY

Nikkei Japan PMI Mfg (DEC P)

52.5

-

52.6

06:00

JPY

Machine Tool Orders (YoY) (NOV F)

-

-17.9%

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

08:00

EUR

Markit France Mfg PMI (DEC P)

50.6

50.6

Low

08:00

EUR

Markit France Services PMI (DEC P)

50.8

51.0

Low

08:00

EUR

Markit France Composite PMI (DEC P)

51.0

51.0

Low

08:30

EUR

Markit/BME Germany Mfg PMI (DEC P)

52.8

52.9

Medium

08:30

EUR

Markit Germany Services PMI (DEC P)

55.5

55.6

Medium

08:30

EUR

Markit/BME Germany Composite PMI (DEC P)

55.0

55.2

Medium

09:00

EUR

Markit Eurozone Mfg PMI (DEC P)

52.8

52.8

Medium

09:00

EUR

Markit Eurozone Services PMI (DEC P)

54.0

54.2

Medium

09:00

EUR

Markit Eurozone Composite PMI (DEC P)

54.2

54.2

Medium

09:30

GBP

Claimant Count Rate (NOV)

2.3%

2.3%

Low

09:30

GBP

Jobless Claims Change (NOV)

0.8K

3.3K

Medium

09:30

GBP

Average Weekly Earnings (3M/YoY) (OCT)

2.5%

3.0%

Low

09:30

GBP

Weekly Earnings ex Bonus (3M/YoY) (OCT)

2.3%

2.5%

Low

09:30

GBP

ILO Unemployment Rate 3Mths (OCT)

5.3%

5.3%

Medium

09:30

GBP

Employment Change (3M/3M) (OCT)

150K

177K

Low

10:00

EUR

Eurozone Trade Balance SA (OCT)

20.6B

20.1B

Low

10:00

EUR

Eurozone Trade Balance NSA (OCT)

-

20.5B

Low

10:00

CHF

Credit Suisse ZEW Survey Expectations (DEC)

-

0.0

Low

10:00

EUR

Eurozone CPI (MoM) (NOV)

-0.2%

0.1%

Medium

10:00

EUR

Eurozone CPI (YoY) (NOV F)

0.1%

0.1%

Medium

10:00

EUR

Eurozone CPI Core (YoY) (NOV F)

0.9%

0.9%

Medium

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EUR/USD

1.0655

1.0810

1.0871

1.0965

1.1026

1.1120

1.1275

GBP/USD

1.4773

1.4929

1.4984

1.5085

1.5140

1.5241

1.5397

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

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

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