Published : 8 years ago, on 10/08/2016

By Arnaud Masset, market analyst at Swissquote Bank

• USD struggling to gain positive momentum over the last month and now further losses cannot be ruled out as the world’s biggest economy tries to convince the markets that everything is fine
• A weak USD will allow riskier currencies to continue appreciating although central banks across the globe still have some fire power and are determined to prevent further appreciation of their local currencies
• NZ: Given recent USD weakness, the RBNZ will have to release an extremely dovish statement in addition to a rate cut if Governor Wheeler hopes to bring the Kiwi to more competitive levels
• Ahead of tonight’s interest rate decision, the risk is definitely on the upside for the Kiwi as a very dovish statement will be required to prevent the Kiwi from resuming its rally
• The cable is heading lower, towards 1.3000 and will continue to head south

The US dollar lost ground against all major peers on Wednesday as US treasury yields dropped amid fading expectations for a Fed rate hike. In the wake of the strong NFP report, the probability of a rate hike in September – extracted from the Fed fund futures – currently stands at (only) 26%, while the probability of a move before year-end flirts with the 50% threshold, suggesting that the market is giving up the idea of tightening in 2016. The monetary policy sensitive 2-year treasury yields slid to 0.6980%, down 4bps compared to post-NFPs levels. Consequently, the greenback was trading lower across the board, losing as much as 0.60% against the New Zealand dollar and 0.55% against the Japanese yen. The dollar index was down 0.40% overnight, completely reversing the gains made on the back of last Friday’s strong NFPs. The USD has been struggling to gain positive momentum over the last month and now it seems that further losses cannot be ruled out as the world’s biggest economy is struggling to convince markets that everything is fine. The weak USD will allow riskier currencies to continue appreciating; however central banks across the globe still have some fire power left and are determined to prevent further appreciation of their local currency. Competitiveness first!

The New Zealand dollar accelerated in overnight trading reaching 0.7228 against the US dollar in spite of an expected upcoming rate cut by the RBNZ no later than tomorrow morning. Given the recent USD weakness, the RBNZ will have to release, in addition to a rate cut an extremely dovish statement if Governor Wheeler wants to bring the Kiwi to levels considered as competitive by the RBNZ. Since Monday, the Kiwi has risen as much as 2% against the greenback, completely erasing the losses made on the back of the US jobs report. Ahead of tonight’s interest rate decision, the risk is definitely on the upside for the Kiwi as a very dovish statement will be required to prevent the Kiwi to resume its rally. NZD/USD moved back below the 0.7182 resistance implied by the 61.8% Fibonacci line on July debasement.

YannQuelenn, market analyst: “Sterling to continue its freefall: The cable is heading lower towards 1.3000 and for the second time since the Brexit vote, this level has been broken. In our view, this freefall will only continue but this is definitely not only due to the Brexit vote. Last week, BoE Governor Mark Carney announced that the rate cut was triggered by the potential downturn implied by the result of the 23rd of June referendum. We found this statement misleading. Essentially, we believe that the BoE is simply trying to save the GDP while it is in a complete free-fall. 2017 GDP forecasts have been slashed to 0.8% from 2.3%.

UK total debt was around CHF 2 trillion at the end of 2015 and servicing this debt costs around 3% of the GDP each year. But in this era of lowering interest rates, and declining growth, the cost of debt is growing, making it increasingly difficult to pay back. This is the real reason why Mark Carney cut the rate and announced the massive expansion of the BoE’s asset-purchase program to 425 billion pounds.

The BoE is just like any other major central bank in that “free money” reigns supreme. The Fed is now the only remaining central bank to announce a rate hike decision, the S&P 500 is at an all-time high but the Fed is afraid to raise rates by 25 basis points. All central banks act together and use the same monetary policy. The Fed is no different.” —

In the equity market, it is a day for profit taking as most equity indices are blinking red across the screen. In Asia, mainland Chinese shares edged lower with the Shanghai and Shenzhen Composites falling 0.20% and 0.13% respectively. In Japan, the Nikkei was down 0.18%, while in Singapore the STI edged up 0.03%. Offshore, Taiwan’s Taiex was up 0.50%, while in Hong Kong’s Hang Seng edged down 0.08%. European equity futures were no exception and followed the Asian lead in negative territory.