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NZ Dollar Revels in Fading Fed Rate Hike Bets as Aussie Sinks

NZ Dollar Revels in Fading Fed Rate Hike Bets as Aussie Sinks

2017-07-21 06:39:00
Ilya Spivak, Head Strategist, APAC
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Talking Points:

  • Aussie Dollar sinks as RBA’s Debelle talks down hawkish policy bets
  • New Zealand Dollar revels in deteriorating Fed rate hike speculation
  • Lull in top-tier data, indecisive risk trends make for clouded outlook

The Australian Dollar plunged after RBA Deputy Governor Guy Debelle poured cold water on hopes for a more hawkish policy stance. The central bank said it believes the so-called “neutral” policy rate – a setting that is neither loose nor tight – is now above 3 percent. That makes the current official cash rate of 1.5 percent decidedly accommodative, so markets read the announcement as setting the stage for tightening.

Mr Debelle would have none of it. He bluntly said that there is “no significance” in the Board’s discussion of the neutral rate and added that Australian borrowing costs don’t have to rise with global peers. As if to really drive the message home, Debelle argued that a stronger Aussie Dollar undermines economic gains offered by faster global growth, then blame rate differentials for the currency’s strength.

Meanwhile, the New Zealand Dollar traded higher broadly higher. The currency traded inversely of a drop in US Treasury bond yields, hinting that gains reflected the influx of yield-seeking capital flows against the backdrop of deteriorating Fed rate hike expectations. Tellingly, outside of the Aussie’s plunge, the US Dollar was the worst-performing currency in Asian trade.

From here, a dull offering of European and US economic data laves prices without immediately obvious inspiration. A strong sentiment-based signal is also absent. Asian shares edged lower but S&P 500 and FTSE 100 futures are treading water, arguing against a strong risk-off lead. This might make for a quiet end to the trading week, although the threat of volatility-inspiring headlines from Washington DC remains as ever.

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Asia Session

NZ Dollar Revels in Fading Fed Rate Hike Bets as Aussie Sinks

European Session

NZ Dollar Revels in Fading Fed Rate Hike Bets as Aussie Sinks

** All times listed in GMT. See the full DailyFX economic calendar here.

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

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