Written by Steven Dooley, Head of Market Insights, and Shier Lee Lim, Lead FX and Macro Strategist
USD lower to end week
The US dollar mostly fell into the weekend as markets continued to be driven by the aftershocks of last week’s lower than expected US inflation report and poor retail sales numbers.
The USD index fell 0.8% last week as it dropped to six-week lows.
The kiwi was the largest beneficiary last week. The NZD/USD gained 1.9% but the pair could face more volatility ahead of Wednesday’s Reserve Bank of New Zealand decision.
The Australian dollar was also notably stronger, with AUD/USD up 1.4% to four-month highs. The Aussie was higher in most other markets, nearing four-month highs versus the euro and British pound and hitting new 11-year highs versus the Japanese yen.
In Asia, the USD/JPY and USD/CNH were both flat last week, but the USD/SGD was sharply lower, down 0.6% over the week as the greenback fell to six-week lows.
Powell’s scenarios: Hold, cut, or hike?
After last week’s easing in inflation, this week’s Federal Reserve minutes will be key. The Fed minutes are due Thursday morning.
Fed chair Jerome Powell’s most recent comments imply that there is still little chance of an increase, even though recent statistics have indicated the possibility of a later first cut.
Powell stated that it’s “clear” that policy is restrictive, but he was hesitant to suggest that an increase may be the next step, even in light of his relatively hawkish words.
Powell identified three possible scenarios for the economy and policy: one in which they “hold off on rate cuts” if inflation persists; another in which they feel more confident that inflation is declining; and a third in which the labor market unexpectedly weakens.
The route to a hike is probably rather restricted.
RBNZ key for kiwi
Looking forward, FX markets will closely watch central bank decisions from the Reserve Bank of New Zealand and Bank Indonesia this week.
From China, the benchmark loan prime rate is due early Monday, although no change is expected,
On Wednesday, the Reserve Bank of New Zealand is expected to keep rates steady at 5.50%, but could strike a more dovish tone in response to weakening labour market conditions. If so, the RBNZ’s could destabilise the NZD’s recent rally.
The Bank Indonesia is anticipated to hold rates at 6.25% on Thursday, though policymakers may reiterate their readiness to manage currency volatility.
Also on Thursday, the key PMI numbers (purchasing manager index), which provide the most up-to-date reading of major economies, are due.
The Singapore dollar could also see moves amid key data releases, including final Q1 GDP figures on Thursday that are expected to be revised lower to 2.2% year-on-year growth. Core CPI for April is forecast to remain elevated at 3.1% year-on-year, keeping pressure on the Monetary Authority of Singapore to potentially tighten policy later this year.
AUD, NZD end at highs
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 20 – 24 May
All times AEST
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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