The US dollar recovered last week despite the FOMC minutes and Fed officials signalling that both the labour market and inflation remain below target. The recovery was triggered by profit taking in short positions, which reflects more negative news for other currencies. Expectations of further monetary easing from the ECB continued to weigh on the euro. We judge that rate cuts are now fully priced in by the market.
Some USD recovery on weaker sentiment elsewhere
The US dollar (USD) recovered despite the FOMC minutes and Fed officials maintaining the view that any monetary tightening will not be for some time and will eventually be slow and gradual. However, given the dollar’s underperformance in the past few weeks, investors took profit on short positions in the USD as sentiment in other economies deteriorated. As the date draws nearer towards the next ECB monetary policy meeting, market repositioning in anticipation of further monetary policy stimulus continues to weigh on the euro. We judge that a 15bp ECB rate cut (our base case) is now fully priced in by the market. A weaker than expected German IFO also pressured the euro late last week.
The Australian dollar underperformed the US dollar as consumer confidence declined to the lowest level since August 2011, which was before the Reserve Bank of Australia started its monetary easing cycle in November 2011. The New Zealand dollar also eased lower as tighter monetary policy weighed on consumer confidence, particularly expectations for the future. Weak Swedish economic data have hurt the Swedish krona (SEK), because they have solidified the market’s opinion that a rate cut is in the making. The market is primarily focussed on the inflation data due 12 June ahead of the Riksbank meeting on 3 July. On the other hand, sterling was one of the few currencies that outperformed the US dollar last week. Sterling strengthened on Wednesday on the back of a the favourable cocktail of upbeat economic data and less dovish commentary in the minutes of the MPC’s meeting earlier this month. Meanwhile, the MPC appears to be very slowly edging towards a discussion on policy rate hikes. According to the minutes, ‘all members agreed that, in the absence of other inflationary pressures, it would be necessary to see more evidence of slack reducing before an increase in Bank Rate would be warranted’. However, for some members this decision was ‘becoming more balanced’.
Mixed performance in EM currencies
Emerging market currencies were mixed last week. The Russian rouble rallied after Russian President Putin said that his administration would work with the new Ukraine President. Optimism about India Prime Minister Modi’s reform agenda supported the Indian Rupee (INR). We maintain our view that the INR’s current strength is unlikely to be sustainable given challenges on growth, inflation, fiscal and current account balances. Although the Turkish lira (TRY) slightly outperformed the US dollar last week, its behaviour was erratic. The central bank of the Republic of Turkey surprised the market by cutting the benchmark repurchase rate from 10% to 9.5%. This resulted in a halt and even a turnaround of a short-term TRY rally. The Thai baht was hurt as the market has started to price in that the economy will be hurt more badly as there are still no signs of clarity on the political front after the military coup. The Indonesian rupiah was the worst performing currency after Presidential candidate frontrunner Widodo faced greater competition from the opposition in the upcoming elections.