FX Daily: Fed’s rate cut outlook aptly priced, RBNZ’s hike bets overdone
Wary of excessive USD pessimism and NZD optimism.
Group Research - Econs, Philip Wee23 Feb 2024
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DXY depreciated by 0.6% to 103.4 during Asia trading before recovering to 103.9 overnight.DXY closed below its 100-day moving average for the third session. with support at 103 or the 50d MA. Speculators believed that the Fed had achieved its goal of reining in the market’s aggressive rate cut bets. Interest rate futures now see 3-4 instead of the 7 cuts discounted in December, aligning more with the three cuts pencilled in December’s Summary of Economic Projections. However, Fed officials have not relented in warning that excessive easing could lead to a stalling or reversal in progress in restoring price stability. Next week, consensus sees the PCE deflator increasing to 0.3% MoM in January from 0.2% in December and core inflation to 0.4% from 0.2%. Fed officials are paying attention to the labour market for signs of progress on inflation. Yesterday, initial jobless claims slowed to 201k for the week ending 17 February; consensus had expected a shallower dip to 216k from 213k a week ago. If claims surprise in the next couple of weeks, they could reverse the expectations for February’s nonfarm payrolls to fall below 200k a fortnight from today. Fed Chair Jerome Powell’s semi-annual congressional testimonies on 6-7 March should set the tone for the FOMC meeting on 20 March.

NZD/USD’s appreciation stalled at 0.62 after rising by 2.8% over seven sessions. On 28 February, we expect the Reserve Bank of New Zealand to maintain its official cash rate at 5.50%. Last week, RBNZ Governor Adrian Orr joined the Fed and other central banks against pivoting towards an interest rate cut anytime soon. According to an RBNZ Survey in 1Q24, the median 2-year inflation expectations of households increased to 3.2% from 3% in the previous quarterly survey, slightly above the 1-3% inflation target. However, interest rate futures have gotten ahead of themselves, expecting a slight chance of a hike in the coming meetings. The NZ economy is fragile compared to its peers. The seasonally adjusted real GDP contracted QoQ in three of the four quarters through 3Q23. The final quarter of 2023 does not look promising. Retail sales ex inflation shrank by 1.9% QoQ sa in 4Q23, worse than the 0.8% decline a quarter earlier. The unemployment rate increased for a second year to 4% in 2023 from 3.4% in 2022. On balance, the RBNZ’s next move will likely be a rate cut than a hike

Quote of the day
"A guarded woman doesn’t jump into love until you show her it’s okay to fall.”
     Nicole Tarkoff

23 February in history
In 1782, James Watt was granted the patent for a rotary motion for the steam engine.  


Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]


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