NZD retreats in face of stronger USD

Key Movers

Against a backdrop of lower global rates, the USD outperformed, while the euro was the poorest performing Major and the GBP continued to relinquish gains hard won through November. Dovish commentary from European Central Bank (ECB) policy maker Schnabel prompted a correction in European yields and drove the euro back below US$1.08. Schnabel, traditionally a hawk, noted that underlying inflation was falling at a faster rate than anticipated and that another rate hike was “rather unlikely”. While she stopped short on being drawn into when the ECB may cut rates, she did offer some insight into policy makers timelines stating, “We should be careful making statements about something that is going to happen in six months’ time”. The suggestion that the ECB will cut rates within 6 months emboldened investors and as yields fell equities rose. Analysts are now pricing a near 90% chance of a 25-basis point rate cut as early as March with 150 points cut from the official cash rate through next year. With US domestic data mixed our attention now turns to Friday’s non-farm payroll print. Softening labour market conditions will support the view that the Fed need not tighten rates again and monetary policy can begin to ease through next year. Given the markets’ sensitivity to Fed rate guidance, we expect volatility into the end of the week.