G10 FX Weekly – Cautious Fed weighs on dollar

by: Georgette Boele , Roy Teo

G10-weekly-18-June-2015.pdf (65 KB)
  • More dovish Fed weighs on the US dollar, while euro’s resilience continues
  • New Zealand dollar underperformed on weak economic growth…
  • Norge Bank cut rates to support the economy and the krone slips





Cautious Fed weighs on dollar…

Even though, the FOMC decision and statement were in line with market consensus, the downward adjustment of rate expectations of FOMC members was clearly US dollar negative. This resulted in a downward adjustment in the market rate hike expectations for this year and next year. Going forward, we expect financial markets to scale up rate hike expectations in the coming months driven by a strong acceleration in the US economy and the prospect of the start of the rate hike cycle in September. This should support the US dollar. We continue to expect EUR/USD to reach parity this year.

…while euro’s resilience continues

The euro has remained resilient this week despite the fact that financial markets have become more nervous about the possibility of a Greek default or even a Greek exit. This nervousness was visible in the above average short-term volatility in the options market. Surprisingly, this has not hurt the euro, mainly because other currencies, such as the US dollar, were weaker because due domestic factors. In addition, developments in the bond markets continue to support EUR/USD.


The New Zealand dollar underperformed major FX

The New Zealand dollar slumped by more than a cent to below 0.69 after economic growth in the first quarter of this year disappointed market expectations. The economy expanded by 2.6% yoy, the slowest pace since 2013 Q4 and below Reserve Bank of New Zealand’s projection of 3.1%. This has increased market expectations that the RBNZ may need to lower the Official Cash Rate at a faster pace. Indeed, financial markets have priced in a more than 50% probability of a 25bp rate cut in July and see the OCR declining below 3% by the end of this year. We remain bearish on the NZD but see a risk that a relief rally in the short term could materialise, as financial markets are too dovish in the short term. For more details, please refer to our FX Watch – NZD: more bearish, near term upside risk.

Norges Bank cut rates to support the economy

This morning, the Norges Bank cut interest rates by 25bp to 1.0%. It stated that developments in the Norwegian economy have been weaker than expected and the economic outlook has deteriorated. Therefore, they lowered the official interest rate. This decision was in line with market consensus. However, the Norwegian krone slipped after the result. This signals that there were some doubts if the rate cut would be delivered today after the recent higher than expected inflation data.