Dollar in wait and see mode, kiwi extends gains

Fed minutes the next test for the dollar

The US dollar traded mixed against the other major currencies on Monday as US markets remained closed in observance of President’s Day. The greenback gained some ground against the pound, the franc and the loonie, while it lost notably against the kiwi.

With last week’s CPI and PPI data revealing that inflation in the US was stickier than expected in January, market participants continued to raise their Fed implied path, currently anticipating 90bps worth of rate cuts by December.

This is only 15bps more than the Fed’s latest projections and marks a remarkable repricing since the start of the year when the market was penciling in 160bps worth of reductions and was convinced that the first 25bps cut will be delivered in March. The Committee is now expected to start lowering rates in June.

The fact that the market is still anticipating more cuts than the Fed can translate into room for further advances in the dollar should incoming US data continue to corroborate the view that the US economy is performing better than its major counterparts and that inflation is not cooling as fast as previously anticipated.

Nonetheless, in the absence of any important data releases this week, investors may scrutinize the minutes of the latest FOMC decision on Wednesday, where policymakers dropped a longstanding reference to the possibility of further hikes but pushed back against imminent rate cuts.

Given that investors have already digested more up-to-date information and releases, like the January jobs report and inflation numbers, the minutes could be considered outdated. However, with no other top-tier data point on this week’s agenda, they could still allow the greenback to resume its prevailing uptrend if they highlight the “higher for longer” narrative.

Kiwi continues to gain, aussie ignores RBA minutes

The kiwi was the main gainer yesterday after New Zealand’s BusinessNZ Performance of Services index unexpectedly climbed above the 50 zone that separates expansion from contraction, adding to speculation that the RBNZ may not be done raising interest rates yet.

Following the projection by the Australia and New Zealand Banking Group (ANZ) that the RBNZ could hike by another 50bps, investors have been pricing in a 25% probability for a quarter-point increase at next week’s gathering, with that chance rising to above 50% in May. This may allow the commodity-linked currency to continue benefiting, but it also increases the risks of a sharp slide in case of disappointment.

In New Zealand’s neighbouring Australia, the RBA released the minutes of its latest gathering, at which it was revealed that policymakers considered raising interest rates but decided not to, given the balanced risks to the economic outlook. However, the aussie was not impressed, with investors remaining unconvinced that rates could be lifted again, perhaps due to last week’s disappointing employment report.

Today, loonie traders will have to digest Canada’s CPI numbers for January as they try to figure out when may the BoC start lowering interest rates. Currently, a first 25bps reduction is anticipated in July, with a more than 60% probability assigned to June.

China cuts key mortgage rate by the most ever

Traders of the commodity-linked currencies were not excited today, even after the People’s Bank of China (PBoC) cut its 5-year Loan Prime Rate by 25bps, the most ever, in order to support the deeply troubled property sector.

Chinese equity markets were not thrilled either, with China’s Shanghai Composite ending its session only 0.42% up. Perhaps investors are waiting for more fiscal stimulus before they feel confident that the Chinese market is out of the woods, although today’s cut is suggesting that policymakers are serious about taking action.

On Wall Street, traders will return to their desks after a long weekend to prepare themselves for tomorrow’s Fed minutes and Nvidia earnings.