The U.S dollar rose to 4.5-year highs against the Japanese Yen and to 16-month highs against the euro today as Treasury yields extended their gains. With Federal Reserve Chairman Jerome Powell’s renomination, investors doubled down on tightening next year. Some market participants are looking for as many as three quarter-point hikes. We don’t think the Fed will be that aggressive, but if inflation fails to ease, it may have to respond quickly. Atlanta Fed President Raphael Bostic joined the chorus of policy-makers calling for faster tapering yesterday. He suggested that reducing asset purchases more aggressively at the onset gives them the option to raise interest rates sooner.
The pace of taper and timing of rate hikes will be on everyone’s minds tomorrow with the release of the personal consumption expenditure price index. The PCE deflator, the Fed’s preferred inflation gauge, is expected to rise. Although an increase is widely anticipated, pre-holiday trade could lead to exaggerated moves in the U.S. dollar. Wednesday will be a busy data day because U.S. markets are closed on Thursday for the Thanksgiving holiday and will close early on Friday. Aside from PCE, revisions to second-quarter GDP and the November University of Michigan Consumer Sentiment index are due for release, along with personal income, spending and new home sales. The Fed will also release the minutes from its last policy meeting. The outcome of most of these reports should be U.S. dollar positive and, on a lower liquidity day like Wednesday, we would not be surprised to see good data drive USD/JPY and EUR/USD to fresh lows.
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The biggest story today was the U.S. government’s decision to release strategic oil reserves in an attempt to ease gas prices. This was a coordinated announcement made with China, Japan, U.K., India and South Korea. Unfortunately, it failed to drive prices lower as oil ended the day up 2% because the announcement was widely expected and modest at best. The Canadian dollar recovered earlier losses to end the day lower.
The Reserve Bank of New Zealand’s monetary policy announcement is the main focus tonight. In October, the RBNZ became one of the first major central banks to raise interest rates. Later today, it is expected to tighten again. New COVID-19 cases remain very high, with little improvement, but the country has opted to end pandemic curbs and live with COVID. The RBNZ needs to act because inflation is at its highest level in 19 years, the housing market remains strong and the labor market is tight. With investors waffling between a 25bp and 50bp rate hike (market is pricing in a 40% chance of a half-point move), NZD is destined for big moves this evening.
The euro ended the day higher against the U.S. dollar following stronger-than-expected PMIs. Manufacturing and service sector activity accelerated in the month of November, but the impact on EUR/USD was limited because rising COVID-19 cases raises concerns about future growth. Cases are now rising in France and Belgium, which announced mandatory work-from-home four days a week. Tighter restrictions in Germany are inevitable with the worsening pandemic. U.K. PMI numbers were mixed, with manufacturing activity improving but service sector activity slowed. It drove sterling lower against the U.S. dollar on Tuesday.
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