London, July 13
The Australian and New Zealand dollars were the biggest beneficiaries of a second day of gains for stock markets on Thursday, comments by U.S. Federal Reserve chair Janet Yellen bolstering a global rally that dates back 7 years. The impact of the first day of Yellen’s Congressional testimony, which markets took as a signal the U.S. central bank may go softer with monetary policy tightening than it has previously insisted, was fading on the U.S. dollar in morning trade in Europe.
A pair of reports on the European Central Bank’s expected wind-down of quantitative easing buffetted the single currency in midday trade in Europe. But the dominant factor was further gains for share prices across Europe and Asia, driving bids for the currencies most closely-connected to appetite for risk on financial markets and pushing the kiwi to a five-month high. “The focus is shifting to these more risky trades,” said John Hardy, head of FX Strategy at Saxo Bank in London. “Yellen proved more dovish on the margin than expected. That gave the green light to carry trades… and emerging markets and commodities have performed strongly. That may be the focus for the next 10 days, maybe longer.” Against the basket of currencies that measures its broader strength, the U.S. dollar fell back to its lowest since last October in Asian trading, undoing all of a recovery last week driven by generally higher global bond yields. But it steadied in the European morning, trading flat against the basket at 95.754 and 0.1 percent higher against the euro at $1.1402. The kiwi and Aussie dollars rode out a poor set of New Zealand data to stand respectively 1.5 percent and 0.8 percent higher on the day, leading gains for the G10 group of developed world currencies along with the Swedish crown. Athanasios Vamvakidis, head of G10 FX strategy with Bank of America Merrill Lynch in London, said that while the dollar looked broadly weaker, there was substantial resistance to any gains past $1.15 for the euro. A number of major banks say investors have also not bought heavily into the yen’s gains against the dollar over the past fortnight, making it riskier for them to jump on the rally now.
“Dollar/yen has been appreciating but investors do not have the trade,” he said. “Overall positioning on emerging markets is still long. On G10 it is very light. People are going to try and pick the central banks which will be going faster on rate rises in the future.”
The U.S. currency has been falling steadily since hitting a 14-year high at the start of this year and a number of major banks who had previously backed it to gain further have called its longer-term rally as over. But against that is the continuing contrast in interest rates – and the outlook for them – in the United States and Europe and Japan. U.S. 10-year interest rates are 4 times – or almost 2 full percentage points – higher than those in Germany. “Our data suggests that U.S. inflation is actually picking up again,” said Bart Wakabayashi, branch manager for State Street Bank and Trust in Tokyo. “The Fed appears to still be in a position to
continue hiking rates.”
London, July 13