AUD, NZD: Battling the Fed? - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that after the FOMC slackened the trajectory of expected rate hikes into 2017 pointing to just two rate hikes (down from three in June) in a move is supporting risk appetite.

Key Quotes

“Following the GBP and the SEK, the USD is the third worst performing currency in the year to date on the back of the market’s changing expectations regarding the pace of Fed rate hikes in both 2016 and 2017. It is our view that the Fed will hike rates in December but that 2017 may only bring only one hike. A soggy USD could continue to have significant implications for other central banks.

The RBNZ left rates on hold as expected. It stated that “a decline in the exchange rate is needed” but acknowledged that “low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate”. Arguably the 150 bps reduction in RBNZ rates since the middle of last year has been partly spurred by the resilience of NZD/USD. Possibly the soggy tone of the USD will enhance the prospect of further easing going forward. While we expect further easing from the RBNZ, we see little room for USD/NZD to push below 0.72 on a 6 month view in the absence of a surprise pick up in the pace of US inflation expectations and the USD.

In contrast the RBA’s new Governor Lowe appears to have come to the conclusion that battling the mighty power of the US yield curve might be a fruitless task. Although Lowe acknowledged that a lower AUD “would be helpful”, he also said that it was “not particularly useful” to keep cutting interest rates in the hope that it would work.

We do expect the RBA to remain watchful for risks in the global economy but in the absence of a move higher in US yields we see downside potential in AUD/USD as being contained. On the back of Lowe’s remarks we have edged up our AUD/USD forecast and see downside potential as being limited to 0.75 on a 6 month view. We look for AUD/NZD to edge up to 1.06 by the middle of next year.”