• Joel

AUD and NZD Slammed on Dovish Central Bank Expectations

Another day in the red for the US dollar and fellow FX haven JPY, despite global equities looking shaky, as markets contemplate the ongoing US political “circus” (i.e. last ditch fiscal stimulus negotiations between US House Speaker Pelosi and US Treasury Secretary Mnuchin). If no deal can be made, pre-election stimulus is almost certainly not happening.

In fact, likely Senate GOP opposition to any deal reached between Pelosi and Mnuchin means any deal they make likely won’t pass anyway. Equities, perhaps a little more short sighted than FX markets, appear not to like this fact; FX markets appear more focused on 2021, when a large fiscal stimulus package that will likely facilitate US and global growth is likely no matter the election outcome – hence why USD and JPY might be struggling.

Characteristically of weaker USD & JPY conditions, SEK, NOK, EUR, CHF and CAD all trade in the green, though not GBP (due to Brexit concerns).

But what is most staggering about today is the fact that AUD and NZD are both more than 0.6% lower on the day vs USD, despite the above noted softer USD conditions.

What on earth is going on?

Things are looking dovish down under…

RBA signals rate cuts to come in November

RBA Assistant Governor Kent (he confirmed that the RBA is looking at further easing via potential rate cuts and purchase of higher-maturity bonds, but added that the Bank Bill Swap Rate could go negative). RBA minutes were also released last night and the tone was unsurprisingly dovish; the board discussed case for further easing and AUD valuation was deemed consistent with fundamentals, though a weaker AUD would be beneficial).

According to TD Securities, “today's RBA October Minutes and Christopher Kent's speech earlier this morning are about as clear a signal as one can expect from the RBA, short of them explicitly stating that "we are cutting rates", that a further easing in policy is likely at the November Board meeting.”

In truth though, continues the Institution, it was the RBA Governor who “let the cat out of the bag last week when he detailed the shift in the Bank's forward guidance, with the Bank placing more weight on "actual" not "forecast" inflation and indicated that they would also like to see more than just progress towards full employment.”

Amid the dovish commentary, AUDUSD slumped to fresh lows on the month of below 0.7050 this morning, though has found some support ahead of the September lows of just 0.7000 as USD continues to sell off into the European afternoon.

RBNZ also sounds the dovish bell

RBNZ Governor Orr was on the wires last night noting that though the bank has “plenty of room left” in its QE programme, they will be “updating” their toolkit in November (some have taken this as an indication that further easing is coming).

As with AUDUSD, NZDUSD has also been on the back foot today, sliding roughly 0.5% vs USD, enough to take the cross as low as the 0.6550s, just ahead of the October low at 0.6547.

What’s next for the antipodes (i.e. AUD and NZD)?

With RBA and RBNZ easing now all but certain in November, one might argue that central bank dovishness has now been priced into both AUD and NZD. If true, AUD and NZD ought to find some respite over the coming weeks, assuming that USD continues to trade heavily and risk assets (basically global equities) continue to trade ok going into the election.

But as we approach the election, things could remain choppy. Image, for example, if Trump starts to recover in the polls, increasing the risk of a contested outcome, or that he might get re-elected. This would be a USD bullish outcome and stocks probably wouldn’t like it, not a great cocktail for AUD and NZD.

But the main point here is that now markets have been given the opportunity to price in RBA and RBNZ dovishness, the focus for both AUD and NZD ought to return to global themes, rather than domestic ones.


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