Eyers focus on RBNZ and Fed with an emphasis on inflation risks.
USD ends on Wall Street in solid form and makes new highs for the year. It has moved from 0.6863 up to a high at 0.6964, an increase of 1.16% since the time of writing. These moves have been made despite comments by US Federal Reserve Chair Jerome Powell.
Yesterday Powell increased the Fed’s hawkishness, causing bond yields to respond. The USD is still a preferred safe-haven currency, and the Russia/Ukraine talks have yet to yield any tangible results. CME’s FedWatch Tool shows that traders are now pricing in a 66.1% probability of a 50-basis point increase at the Fed’s May meeting. This is up from a little more than half a week ago. DXY traded near 99, the number that surpasses the May 25th 2020 high of 99.975.
The tides have turned on Tuesday. Investors were in a risk-on mood as US stocks rose, which eroded some of the safe-haven appeal associated with the greenback. Equities also gained a boost partly from bank shares regarding Fed rate hike expectations. Despite talk of larger Fed hikes and growing concerns about the possibility of a hard landing locally, the move was not surprising, according to analysts at ANZ bank.
“Amidst a quiet week locally the Kiwi was always going dance to a worldwide beat. Positioning could cap it down the track. Speculative positioning swung between short and long last week according the CFTC – which partially explains the rally. It is currently basking in glory, along with AUD,CAD and, to a lesser degree, NOK, as the best performers in G10 this year. This is in line with the moves in commodities.
Inflation risks in the focus
On Bloomberg TV, James Bullard, the President of the St. Louis Fed, reiterated his call for aggressive Fed action earlier in the US session. Mary Daly, San Francisco Fed President, stated that she believes the biggest risk to the economy’s health is an increase in inflation due to rising oil prices from the conflict in Ukraine. Also, disruptions in supply chains caused by China’s COVID-19 countermeasures.
Inflation expectations in New Zealand have risen rapidly over the past year. Analysts at ANZ Bank believe there is a risk that expectations could be unanchored by the RBNZ’s 2% target. Omicron, a strain on already stretched domestic supply chains, has also contributed to rising inflation expectations.
“”The RBNZ saw inflation expectations in February MPS as the greatest risk. Now, the risk of unanchored expectations seems even greater.
We believe this is why the RBNZ should increase the OCR aggressively to 50bps in April and May. Although it will be painful, it is still a significant improvement over what the RBNZ would have to do to the economy to stop inflation from spiraling further in the wrong direction.
