G10 FX Weekly – USD & commodity FX lower

by: Georgette Boele , Roy Teo

G10-FX-weekly-20-August-2015.pdf (145 KB)
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  • Expectations of a later Fed hike weigh on US dollar…
  • …but we remain US dollar bullish
  • Commodity price weakness weighs on commodity currencies
  • …but a recovery in NZD as dairy auction price rose

Expectations of a later Fed hike weigh on US dollar

The sentiment towards the US dollar has been deteriorating despite the better-than-expected housing market data this week. The main trigger was the release of yesterday’s US inflation report. This showed a smaller increase month-on-month than financial markets had anticipated. Consequently markets now believe that it is less likely that the Fed will raise official rates in September. The FOMC minutes that were released later that day also gave financial markets ammunition to believe that the rate hike will come later. They resulted in lower Treasury yields, lower expectations about rate hikes and a lower US dollar. As long as these expectations dominate in financial markets, the US dollar will probably remain under some pressure. However, we expect strong US economic data going forward to turn sentiment in the US dollar in a positive direction. We expect “some” further improvement ahead as the gains in the job market continue to support the economy and the Fed to hike rates in September. Therefore, we remain bullish on the US dollar.

…while commodity price weakness weighs on commodity currencies…

Lower commodity prices have not only weighed on emerging market currencies, but also of currencies of G10 countries that are major commodity exporters. For example, the Norwegian krone and the Canadian dollar fell on the back of weaker oil prices. WTI dropped to a new low this year on a sharp increase in oil inventories, while Brent oil is just hoovering above this year’s low. Norway’s economic growth turned negative (-0.1% quarter-on-quarter) in the second quarter, which was in line with expectations.

…but a recovery in NZD as dairy auction price rose

The New Zealand dollar (NZD) was supported as dairy auction prices recovered by 15%. However, we maintain our bearish view on the NZD as current dairy prices are still 25% and 60% lower since the beginning of 2015 and 2014 respectively. We expect the Reserve Bank of New Zealand to lower the Official Cash Rate by 25bp in September and to remain dovish on the exchange rate. Our year end NZD/USD forecast is 0.63.

Further weakness in business capital expenditure

We expect business investment plans in Australia to remain weak in the second quarter (27 August Q2 print). Investment plans in the next year are also expected to deteriorate due to declining commodity export prices and weak consumer confidence. The former is expected to weigh on mining investment plans, while the latter is expected to impact the retail sector. We maintain our bearish view in the Australian dollar (AUD) and expect further weakness towards 0.70 by the end of this year.

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