Fed’s Waller talks rate cuts and hurts the dollar

The hawk who turned into a dove

The US dollar accelerated its tumble yesterday, dropping against every other major currency, with the yen, the kiwi and the aussie, securing the most gains once again.

This time it was Fed Governor Chris Waller who pushed the greenback off a cliff as the normally hawkish policymaker made a surprise turn and said that if the decline in inflation continues for several more months, they could start lowering the policy rate. This was the first time a Fed official discussed the possibility of a cut, and that’s maybe why market participants ignored comments by Governor Bowman that higher rates may be needed in order to bring inflation back down to the 2% objective.

What’s more, investors may be thinking that if a well-known hawk is now considering rate reductions, some other members may be keener to push the cut button at some point during the first half of the year. This has prompted participants to add to their cut bets, with a 25bps cut now being fully priced in for May. Prior to Waller’s speech, the first cut was fully penciled in for June. Also, the full number of basis points worth of rate cuts for next year has increased from 90 to around 110.

Now, traders may be more eager to find out whether the core PCE index, the Fed’s favorite inflation metric, has further slowed in October, which is released on Thursday. But investors may get an early glimpse of where this metric may be headed as the preliminary q/q core PCE rate for Q3 is due to be released today alongside the second estimate of the US GDP for the quarter.

Having said that, given that this week is the last one before the usual pre-meeting blackout period, speeches by more Fed officials may also be of special interest. Today, Cleveland Fed President Loretta Mester will step onto the rostrum, while tomorrow, traders will hear from New York Fed President John Williams. On Friday, it will be the turn of Fed Chair Powell.

Yen, kiwi, and aussie take the podium again; RBNZ appears hawkish

The Japanese yen was once again the main gainer as expectations of several rate reductions by the Fed next year combined with yesterday’s report that the end of the BoJ’s negative interest rate policy is approaching, has increased the confidence of dollar/yen bears. However, during the Asian session today, the slide was stopped near the 146.50 zone and the pair rebounded somewhat as BoJ Board member Adachi said that policy will remain easy and that the Bank will take further easing steps if needed.

The kiwi was the second biggest winner, stretching its gains today after the RBNZ held its official cash rate (OCR) steady at 5.5% and noted that inflation remains too high and that if inflationary pressures were to become stronger than anticipated, interest rates would likely need to increase further. Officials also lifted their OCR projections to signal a decent chance for another 25bps hike before interest rates peak.

The aussie also gained notably yesterday but failed to maintain the bullish momentum today as Australia’s monthly CPI eased more than expected in October due to declining goods prices. Core inflation also edged down, but with the closely watched trimmed rate just ticking down to 5.3% y/y from 5.4%. The Australian currency is pulling back today, but with the implied path still pointing to around a 40% chance for another quarter-point hike by the RBA, its broader recovery against the wounded dollar may not be under threat.

Gold surges, oil rebounds as OPEC+ deal awaited

Waller’s rate-cut remarks were music to gold traders’ ears, with the precious metal surging to test the high of May 10, at around $2,050 as expectations of more rate cuts by the Fed next year are making the non-yielding metal even more attractive.

In the energy sphere, oil prices gained nearly 2%, perhaps as investors were reluctant to add to their short positions ahead of the outcome of the OPEC+ decision, scheduled to be officially made public tomorrow, though the latest headlines are suggesting that members are close to a compromise.

The rebound may have also been exacerbated by the slide in the US dollar, and it could extend should producers reach common ground tomorrow, but it is unlikely to lead to a long-lasting recovery. After all, oil prices did not rebound on the headlines suggesting an accord, perhaps as investors are now thinking that even if production cuts are agreed, the alliance may have been on track to agree more if it weren’t for the disagreements that led to the postponement of the meeting.