New Week, Dollar Pressure Continues

Amid light news, the downward pressure on the US dollar has continued against the majors but is more mixed against the emerging market currencies.  The key driver is illustrated by the spate of comments from the Fed’s Fischer, the ECB’s Draghi, and BOJ’s Kuroda.  

Fischer indicated that he agreed with the majority that a Fed hike this year may still be appropriate. However, his remarks were tempered by the caveat that it was an expectation, not a commitment. 

In contrast, Draghi claimed that its asset purchases were having a greater impact than initially anticipated, even though the staff revised down its forecasts for growth and inflation.   Indeed, tomorrow euro area will likely learn that the fall in industrial production in August largely offset the gain in July.  It will be the third decline in four months.   On Thursday, the slip back into negative inflation reading in September will likely be confirmed. The euro’s pre-weekend gains were marginally extended with the $1.1400 level remaining intact through the European morning.  Above there the $1.1460 high from September 18 beckons.

Kuroda assured investors that the BOJ will provide more stimulus if necessary.  However, he did not sound as if he thought it was necessary.   He wants to look past the impact of the decline in energy prices, without which Japan’s CPI would be in line with core readings in Europe. The dollar has been confined to less than a quarter of a yen range against the Japanese unit.

The bottom line is that the Fed is on hold until at least December (and many are pushing lift off into late-Q1 16 or even early Q2), and other major central banks do not seem to be in hurry to ease policy further.  This appears to be spurring an unwind of long US dollar positions.  

The Australian and New Zealand continue to lead the way. Since the start of the month, the only major currency to do better has been the Norwegian krone, which is up 5.5% compared with 5% gains in the Aussie and Kiwi. The krone has been aided by the recovery in oil prices and firm CPI, which deters speculation of an imminent follow-up rate cut.