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NZD and AUD outperform G10 peers on Wednesday

By OFX

The Kiwi, along with its Australian counterpart were the best performing G10 currencies on Wednesday. The NZD rose nearly a whole cent against the greenback, launching from 0.6789 to touch intraday highs of 0.6885 amidst broad based USD weakness before settling into this mornings open around the 0.6876 handle. The moves were largely driven by commentary from US Federal Reserve Chair Jay Powell which indicated the bank sees US rates as “just below” neutral levels. This cautious approach contrasts with the recent messaging from the Central Bank regarding monetary policy and places further uncertainty on future rate hikes.

Lasering in on the domestic economy, yesterday saw the Reserve Bank of New Zealand release its financial stability report, announcing a loosening of lending restrictions and forecasting house price growth to “remain modest” for the foreseeable future. Markets generally ignored the release which lacked any new information regarding the monetary policy outlook.

Looking ahead to today’s session, we have the ANZ business confidence survey for November due out. Markets are expecting a continuation of the recent run of soft domestic macroeconomic indicators however market impacts are expected to be minimal. The NZD/USD seems to be well supported at the 0.6767 level on the downside whilst topside moves are expected to meet resistance approaching Wednesdays daily high of 0.6885 before 0.6901.

The Australian Dollar jumped sharply through trade on Wednesday pushing back through 0.73 to touch intraday and week-long highs at 0.7320. Having maintained a largely modest trading band through much of the domestic session the Aussie enjoyed strong support in the wake of commentary from Fed Chair Jerome Powell. While largely hawkish when assessing the broader economic outlook markets focused on a single/central theme, Powell’s shift in rhetoric to suggest the FOMC was nearing neutral rate estimates. This assessment offers a stark contrast to the Fed outlook in October where Powell suggested “we are a long way from neutral at this point”. This shift in commentary implies oil price pressures, slowing global growth, a decline in corporate earnings and ongoing trade tensions are perhaps weighing on the Fed’s growth outlook and possibly tempering the pace of additional rate hikes.

The AUD has enjoyed renewed support holding above 0.72 for much of the month to date as focus turns to the Fed’s November meeting minutes and this weekends G20 summit. Trade tensions remain crucial in governing medium-term direction and any détente between the US and China could help foster another AUD upward run. A break above resistance at 0.7330 opens the door for an extension toward 0.74 and possibly on to 0.75 if the Fed refrains from hiking rates in December.

The Great British Pound has received a boost overnight following the release of analysis from the Bank of England that suggests the economy could grow an extra 1.75% more than previously thought should there be a deal to exit from the European Union.

Opening yesterday morning struggling at 1.2735, cable was steady in its movement higher to reach resistance levels at 1.2800 during the UK session with the key driver being Brexit headlines heading into the UK Parliamentary December 12 vote.

The Bank of England released its Financial Stability Report overnight with its suggestion that the current deal between the EU and Britain would be a favourable result. The BOE has also warned that should Britain face a hard exit the consequences would be far more damaging with the expectation that GDP could fall by as much as 8% in 2019 and put Britain into a harsh recession.

Greenback was also sold off this morning as FOMC’s Chairman Jerome Powell advised interest rates were “just below” neutral causing the GBP/USD currency pair to rocket up from overnight session lows of 1.2740 to eventual highs of 1.2847.

Sterling finished 0.67% higher for the day and opens this morning at 1.2830.

The US Dollar Index suffered a sharp decline on Wednesday following Federal Reserve Chairman’s speech at The Economic Club of New York. In his speech Jay Powell said US monetary policy was not on a “pre-set” path and added that interest rates were just below neutral which dampened optimism amongst investors for a more aggressive rate-hike cycle. The DXY fell from 97.53 to a low of 96.69 in just minutes.

The somewhat dovish speech saw the S&P 500 rise 1.8% on the session. The Dow Jones Industrial Average surged 600 points seeing its biggest rally in eight months Meanwhile, the Nasdaq Composite Index (IXIC) closed at 7,082.70, gaining 85 points.

Oil prices were back under pressure after Saudi Arabia said it would not cut production on its own to stabilise the market.. WTI slumped to its lowest level in more than a year at $50.05

Looking ahead, the macroeconomic calendar sees the release of Us PCE Price Index, Personal Spending, Unemployment Claims, Pending Home Sales and the FOMC meeting minutes.

The Euro was relatively stable during Wednesday’s European session, trading around the 1.1280 handle. Global markets were startled late in the New York session however, as US Federal Reserve Chair Jay Powell said interest rates were “just below” neutral levels; the Euro jumped to 1.1386 as the greenback fell 0.6% on the day as the short end of the treasury yield curve also steepened.

Looking ahead to today’s session, we have European commission business surveys, business climate indicators and economic confidence metrics all due out for the month of November. Markets are bracing for a slight decline in the reads, in line with the recent macroeconomic trends throughout the Eurozone. We also have the ECB financial stability review due out as well as a speech from ECB vice president Guindos at a central bank forum held in Frankfurt.

As we have been saying all week, the key risk events for the Euro are delivered on Friday through October core CPI and the October unemployment rate. Both reads are historically market movers, we expect any deviations from expectations to inject some volatility into the Euro.

Thursday’s Sydney open sees the Euro trading at 1.1375 against the greenback. Levels to consider from a technical standpoint remain at 1.1250 on the downside and daily highs of 1.1388 on the topside.

The Canadian Dollar slipped below 0.75 through trade on Wednesday before commentary from Fed Chair Jerome Powell forced a sharp USD correction and saw the Loonie bounce back to touch intraday highs at 0.7548. Having moved through 0.75 to make new 15 month lows the CAD found support as the USD tumbled on revised interest rate expectations. Powell’s comments suggest the Fed and FOMC’s view of the economy has shifted and perhaps the hawkish dominance is slipping, helping the CAD to stave off recent downside extension and perhaps mount a sustained bounce above 0.7550.

The recent depreciation in oil prices and increasing trade tensions have dampened demand for the CAD and seen investors test key psychological support at 0.75. A break below this handle could foster a deeper correction and attentions turn to this weekend’s G20 summit and next weeks OPEC meeting for a broader trade outlook and possible review of long term oil prices.