USD rebound extends driven by negative developments overseas

USD: Negative developments overseas help to extend rebound

The US dollar has continued to rebound during the Asian trading session resulting in the dollar index rising to within touching distance of the 99.000-level for the first time in two months. It has extended the rebound to almost 3% since the low point just after the FOMC meeting on 17^th September. The US dollar has benefitted this week from political developments outside of the US which have undermined confidence in the euro and yen in the near-term and overshadowed the more negligible negative impact on the US dollar from the ongoing US government shutdown.

The yen has continued to weaken overnight against the US dollar for the fifth consecutive day resulting in USD/JPY hitting a fresh high of 152.37 reflecting expectations that the new LDP leader Takaichi will implement looser fiscal and monetary policies to boost growth in Japan. She is expected to be confirmed as the next Prime Minister when an extraordinary Diet session is scheduled to take place in the first half of the week of 20^th October. The stability of the ruling coalition is attracting attention after media reports suggesting that some within Komeito are calling for an exit. It was also reported overnight that Sanae Takaichi held talks with Democratic Party For the People head Yuichiro Tamaki as she seeks cooperation on a potential expansion of the governing coalition.

Heightened political uncertainty and fiscal dominance fears are likely  to remain a weight on the yen in the near-term until more clarity emerges over the outlook for economic policy in Japan. It has already prompted market participants to push back the potential timing of the BoJ resuming rate hikes. Those expectations for delayed BoJ rate hikes have been further encouraged by the release overnight of the surprisingly soft labour cash earnings report. The report revealed that labour cash earnings slowed sharply to an annual rate of 1.5% in August down from 3.4% in July. Slower headline wage growth was driven by a pullback after the temporary lift from summer bonuses in the prior month. However, the underlying trend for wage growth remained steady. Base salaries for full-time workers in the same sample remained at 2.4%Y/Y. While the report is unlikely to alter the BoJ’s plans for rate hikes on its own, it has added to expectations that the BoJ will remain cautious over resuming rate hikes in the near-term until political uncertainty eases and the US government shutdown ends so they have more clarity over the health of the US economy and labour market.

At the same time, the euro is continuing to weaken against the US dollar in response to the political deadlock in France. Prime Minister Lecornu’s last ditch efforts to reach a political agreement by today’s deadline appear likely to fail. President Macron’s close ally and his first Prime Minister Edouard Philippe has even suggested that he should take a more radical step of offering to resign before the end of his term in 2027 on the condition of a budget being adopted. Another of President Macron’s former Prime Ministers Gabriel Attal and head of his centrist Renaissance party even stated on national television that he no longer understood President Macron’s decisions and accused him of “ a kind of obstinacy in clinging to power”. The latest developments have created more unease amongst market participants contributing to EUR/USD falling closer to the 1.1600-level overnight. The pair is now approaching important support levels between 1.15000 and 1.1600. The lows since the middle of the year. In addition, euro selling has been encouraged this morning by the release of very weak industrial production data from Germany revealing that activity contracted sharply by -4.3% in August which may partly reflect “the combination of annual plant closures for holidays and production changeovers”. However, the weakness will add to concerns over the disruptive impact from higher tariffs.            

CORRECTING LOWER BUT STILL ABOVE IMPORTANT SUPPORT LEVELS

Source: Bloomberg, Macrobond & MUFG GMR

NZD: RBNZ delivers dovish policy update reinforcing kiwi sell-off

The worst performing G10 currency overnight has been the New Zealand dollar which has weakened  by around 1.0% against the US dollar. The sell-off for the kiwi since the summer has been reinforced overnight by the RBNZ’s decision to deliver a larger 50bps rate cut. It has lowered the RBNZ’s key policy rate to 2.50% and takes cumulative rate cuts up to 3.00 percentage points during the current easing cycle. The RBNZ has been the most aggressive G10 central bank in cutting rates. The New Zealand rate market had moved to price in around 36bps of cuts ahead of today’s policy meeting highlighting that market participants had been weighing up whether  the RBNZ would stick to 25bps rate cuts or deliver a larger 50bps cut. 

The RBNZ’s decision to deliver a larger rate cut today reflected greater than expected spare capacity in New Zealand’s economy, and increased downside risks to the medium-term outlook for growth and inflation. The update rate guidance also left the door open to further rate cuts as the policy rate moves into more stimulative territory. The RBNZ stated it “remains open to further reductions in the OCR as required” putting a dampener on expectations that today’s larger rate cut would limit room for further cuts this year. Due to economic slack in the economy, inflation is expected to fall back towards the middle of the RBNZ’s target band between 1-3% by next year. 

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com