G10 FX Weekly – Lowflation pushes euro lower

by: Georgette Boele , Roy Teo

G10-weekly-1-October-2015.docx (209 KB)

“Lowflation” pushes the euro lower and also the US dollar on the defense

Economic data and rotational play supports NZD

RBA to keep Official Cash Rate (OCR) unchanged but shift to easing bias


“Lowflation” pushes the euro lower…

The euro was the weakest performing major currency this week. Eurozone inflation moved into negative territory in September (-0.1% yoy from +0.1% in August) and this hurt the euro as it is now more likely that the ECB will step up QE.

The ECB must be worried that inflation expectations have become dislodged. We continue to think the ECB will act to step up QE more likely in October. We think that the strong monetary policy divergence we expect will push EUR/USD to parity.

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…and also the US dollar on the defense

The US dollar has been on the defense this week, falling versus most major currencies. US economic data have continued to come in strong. Another strong US employment report tomorrow could trigger an upward adjustment in Fed rate hike expectations this year. This should support the US dollar across the board. Currently financial markets only price in a 38% probability of such a hike. What also helped is that the government shutdown was avoided at the last moment.

Economic data and rotational play supports NZD

In the past week, sentiment in the New Zealand dollar (NZD) was supported as business confidence recovered in September. In addition data from the Reserve Bank of New Zealand (RBNZ) showed that the central bank was a net buyer of NZD in the month of August as they seek to smooth volatility in the currency. Rising house price inflation has also reduced market expectations that the RBNZ may continue its monetary easing cycle in October. Indeed, we expect the RBNZ to pause on 29 October before easing again in December. This is expected to weigh on the NZD/USD towards 0.60 by the end of this year. The NZD also received some support as investors switch from the Australian dollar ahead of the Reserve Bank of Australia (RBA) monetary policy meeting on 6 October.

RBA to keep OCR unchanged but shift to easing bias

The RBA is widely expected to keep the Official Cash Rate (OCR) unchanged next week. However, we expect the RBA to signal that downside risks to the economy have increased. The RBA is also likely to acknowledge that with housing credit growth and house price inflation moderating, there is more scope for rate cuts to stimulate the economy. We expect the RBA to cut the OCR by 25bp to 1.75% in November. This is not fully priced in by financial markets and hence should push the AUD/USD towards 0.68 by the end of this year.

The Norwegian krone also recovered

The Norwegian krone has recovered as a result of the Norges Bank signaling that growth is more of a priority than inflation. In the current uncertain environment financial markets welcome measures that support growth and therefore the krone rallied (as the Indian rupee did after the larger-than-expected rate cut). What also helped is that oil prices did not weaken and investor sentiment improved.

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