The US dollar turned in a mixed performance last week. It recovered in the second half of the week against the euro and yen. It was an unusual week in that the New Zealand dollar was the strongest of the major currencies, gaining 1.8% against the US dollar, while the Australian dollar was the weakest, losing almost 1% against the greenback.

Disappointing US retail sales and a split among the Federal Reserve Governors over the appropriateness of a rate hike this year weighed on the dollar. NY Fed President Dudley comments and the better-than=expected consumer confidence report helped spur a six bp recovery in the US 2-year note yield and a recovery in the dollar.

To be sure, it was not only the US side that was driving the exchange rates. The dollar recovered smartly from the JPY118 area tested at mid-week and managed to finish the week just below JPY119.50. This was aided by the Japanese government downgrading its economic assessment and the final estimate of August industrial production.

Recall when the preliminary estimate was first released on September 26, the 0.5% decline shocked the market where the consensus forecast was for a 1.0% increase. The revised estimate compounded the injury; showing that August industrial output actually declined 1.2%. Even though the BOJ has shown no sign that it is preparing new stimulative measures, many in the market, still smarting from last year’s surprise (when on a 5-4 vote the BOJ increased the base target to JPY80 trillion from JPY60 trillion) expect additional easing to be announced at the end of the month.

In a similar vein, the message from the ECB is that the asset purchase program can be adjusted in terms of size, length of operation, and composition. Despite the introduction of rotating voting on the ECB, the institution works by consensus. That consensus is still being forged. Draghi’s press conference following next week’s ECB meeting can be expected to take another step in this process. Many in the market expect a consensus will be reached by the end of the year.

Print Friendly, PDF & Email