Written by Steven Dooley, Head of Market Insights, and Shier Lee Lim, Lead FX and Macro Strategist
Aussie drops on RBA comments
Major FX moves were relatively muted overnight as markets waited for today’s decision from the Reserve Bank of New Zealand and tomorrow’s all-important US inflation report.
The USD index paused at two-month highs after last week’s rally saw the world’s most traded currency gain 2.5%.
Instead, markets were mainly focused on the Chinese reopening after a series of new stimulus measures were announced before last week’s Golden Week holidays. In China, the Shanghai Composite jumped 5.9% but Hong Kong’s Hang Seng dropped 9.4%.
The Australian dollar was weaker as yesterday’s Reserve Bank of Australia minutes indicated that while the RBA was still worried about higher inflation, a slowdown in growth was also a concern for the central bank – opening the door to rate cuts. Financial markets now see the RBA as likely to cut by February (source: Bloomberg). The AUD/USD fell 0.5%.
In other markets, the euro and British pound were broadly steady, while the USD/JPY eased from two-month highs.
Kiwi braces for RBNZ cut
The Reserve Bank of New Zealand looks likely to cut rates by 50 basis points at today’s meeting, due at 2.00pm NZDT, with markets currently having 45bps of cuts priced in (source: Bloomberg).
According to survey data released this week, inflation risks are skewed to the downside.
Given the NZ economy is likely in recession and that inflation is likely to undershoot the midpoint of the RBNZ’s 1-3% target range, we think a swift return to more neutral settings will be seen as the most appropriate course of action.
In fact, our current projection calls for five straight rate reductions of 50 basis points, bringing the cash rate down to 2.75% by May 2025.
For now, key support on NZD/USD is seen at 0.6100, with any break lower setting up a move to 0.5900.
CAD weaker ahead of Canadian jobs report
The US’s extremely positive September employment statistics served as the primary catalyst for the Canadian dollar this week, sending USD/CAD to two-month highs.
The robust US job reading lessens the likelihood of a 50bp rate cut from the Federal Reserve, boosting USD/CAD, and raises the upside risk for Canada’s September employment data, which is released on 11 October.
However, despite the improved US data, the underlying fundamentals for the US and Canadian job markets continue to weaken. As such, Canada’s domestic economy is weak enough to justify a bigger cut.
The Bank of Canda has made it quite evident that negative risks to activity could result in a quicker return to a neutral rate, and that the growth estimates for GDP are still likely to be significantly revised downward in the BoC’s October update.
We forecast a further weakening in the labor market with a higher unemployment rate of 6.8% for September.
Employment and CPI statistics will be the most crucial determinants influencing the size of the October cut, although we continue to pencil in 50bp from the BoC later this month.
In other markets, the CAD’s broader weakness saw the AUD/CAD recently near 18-month highs, while the SGD/CAD is close to all-time highs.
NZD in focus as RBNZ looms
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 7 – 12 October
All times AEST
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*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.
