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Forex daily: New Zealand hike dispels hopes that central bank hike cycle is ending

Published 05/10/2022, 08:12
Updated 05/10/2022, 08:40
© Reuters.  Forex daily: New Zealand hike dispels hopes that central bank hike cycle is ending

© Reuters. Forex daily: New Zealand hike dispels hopes that central bank hike cycle is ending

A busy Wednesday of macroeconomic data and policy changes is expected to drive currency movements, with the euro-dollar nearing parity, the pound up for the seventh day in a row but the New Zealand dollar topping the charts.

The Kiwi was sent higher as the Reserve Bank of New Zealand lifted interest rates 50 basis points to 3.5%, a seven-year high, and promised further hikes as “inflation is too high and labour resources are scarce”.

This might dampen some of the buoyancy in FX markets that drove what ING called a "tremendous" risk rally yesterday, across equities, European currencies, and bonds, with high yield credit spreads narrowing 30 basis points and emerging markets bouncing back.

"To what degree that owed to expectations of a slowdown in monetary policy tightening or just position adjustment remains unclear. However, we remain firmly on the side of the dollar, given that the Fed is unlikely to pivot early," said analysts at ING Bank.

The winds of optimism were triggered by a set of favourable factors, reckoned analyst Ipek Ozkardskaya at SwissQuote.

"First, the softer than expected RBA rate hike has been taken as a sign that the central banks may be slowing the pace of their rate hikes, to avoid sending the world economy into a deep recession without even being able to tame inflation as fast as they wish. (But Reserve Bank of New Zealand didn’t sing the same song, it hiked by 50bp as expected).

"Second, the US JOLTS data smelled like a first victory for the Federal Reserve (Fed). US job openings plunged by 1 million in August, the largest drop since April 2020, the peak of pandemic lockdowns. However, unfortunately for the Fed, not many people quit their jobs, or were laid off."

Currency volatility, as tracked by Deutsche Bank (ETR:DBKGn)'s Cvix index that measures three-month implied volatility across G10 currency pairs, is at its highest point since the initial pandemic outbreak in early 2020 and before that the sovereign debt crisis around a decade earlier.

USD weakness seen in the past week lingered, with the dollar index (DXY) sliding to the 110 mark, back to where it was a fortnight ago.

On Wednesday morning the euro came within a whisker (0.99948) of regaining parity against the dollar, but the rough movement was a continuation of the sideways move from the day before.

Sterling also continued its recuperation, up 0.1% against the US dollar to 1.14845, as well as 0.2% higher versus EUR and its biggest gains of 0.4% against the JPY and NOK.

Wednesday’s economic calendar is full of services purchasing managers’ index (PMI) prints from most major economy.

A non-monetary policy meeting also takes place, as well as an OPEC meeting.

Later, the US ADP (NASDAQ:ADP) employment report will be due but is seen as an unreliable forerunner of Friday’s all-important non-farm payrolls report.

Read more on Proactive Investors UK

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