FX Rate News

The dollar edged higher versus major peers on Friday but within a narrow range as traders awaited clues from the U.S. non-farm payrolls report on the pace of Federal Reserve policy normalization.

The U.S. Dollar Currency Index, which measures the greenback against a basket of six peers, rose 0.1% to 94.294, keeping within sight of last week’s one-year peak of 94.504.

The dollar gained 0.3% to 111.96 yen, and touched 111.975, the highest level this month, helped by higher Treasury yields, with the benchmark 10-year note hitting 1.6010% for the first time since June 4.

The euro consolidated around $1.1550, after weakening on Wednesday to a 14-month low of $1.1529.

The Federal Reserve has said it is likely to begin reducing its monthly bond purchases as soon as November and follow up with interest rate increases potentially next year, as the U.S. central bank’s turn from pandemic crisis policies gains momentum.

The non-farm payrolls data, due out later on Friday, is expected to show continued improvement in the labour market, with a consensus forecast for 500,000 jobs added in September, although estimates ranged from 250,000 to 700,000, a Reuters poll showed.

“Our expectations are for a 470k rise in employment (consensus is around 500k), which should be enough to endorse market expectations around a November tapering announcement and late-2022 rate hike, in our view,” said Francesco Pesole, G10 FX strategist at ING.

“Ultimately, a solid number should give little reason to turn any less bearish on the longer end of the curve. In FX markets, this may well translate into general support for the dollar and another bad day for the yen, the worst performing G10 currency so far (this year),” Pesole said.

Following the September Federal Open Market Committee meeting, Fed Chair Jerome Powell said the upcoming payrolls report need not be “a knock-out, great, super-strong” report to keep policy makers on track toward tapering, but it would need to be “reasonably good”.

Powell’s comment “should make markets more tolerant of a downside surprise in particular, and the balance of risks favours a positive USD reaction” to the jobs data, Adam Cole, the chief currency strategist at RBC Capital Markets, wrote in a research note.

Meanwhile, the Australian dollar slipped back 0.26% to $0.7293, following a 0.55% surge on Thursday. It earlier touched $0.7324 for a second day running, the strongest level since Sept. 16.

The Aussie has made “a decent go at breaking higher,” but the test will be whether it can stay at about $0.7315 following several failed attempts this year, Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney, wrote in a client note.

Sterling slipped 0.16% to $1.3595, holding on to most of a 0.26% gain from Thursday, when new Bank of England Chief Economist Huw Pill said inflation pressures were proving stickier than initially thought, reinforcing expectations for a rate hike by February.

The Canadian dollar was little changed at C$1.2548 per greenback after earlier strengthening to a one-month peak of C$1.2534 on the back of rising oil prices.

The dollar inched higher in choppy trade on Wednesday amid heightened nerves about the global growth outlook and as traders awaited U.S. jobs data for a clue on the timing of Federal Reserve policy tightening.

The Reserve Bank of New Zealand lifted its official cash rate for the first time in seven years, but the well-telegraphed hike was expected and the New Zealand dollar barely budged.

The kiwi was last 0.3% weaker at $0.6931 and the greenback posted similar gains elsewhere.

The euro was pinned below $1.16 and last bought $1.1590, scarcely higher than the 14-month low of $1.1563 it struck last week. The yen eased to a one-week low of 111.64 per dollar and was within range of the 18-month trough of 112.08 that it visited last Thursday.

The Australian dollar weakened 0.3% to $0.7267.

The greenback has won support as investors brace for the Federal Reserve to begin tapering asset purchases this year and lay the ground for an exit from pandemic-era interest rate settings well before central banks in Europe and Japan.

“Interest rate differentials are starting to have more of an influence on currencies than they have for quite some time,” said Kim Mundy, analyst at the Commonwealth Bank of Australia in Sydney, as an era of suppressed super-low rates starts to end.

“Now that the Fed is starting to look to taper and look to the exit, we think we might see a lift in market pricing for rate hikes which will help to support the USD,” she added.

Fed funds futures markets are priced for rate hikes to begin around November 2022, but anticipate rates topping out at just over 1% through most of 2025 even though Fed members project rates reaching 1.75% in 2024.

U.S. non-farm payrolls data due on Friday is seen as crucial to informing the Fed’s tone and timing, especially should the figures wildly impress or disappoint. Private payrolls figures, a sometimes unreliable guide, are due around 1215 GMT.

A large miss on market expectations for around 428,000 jobs to have been added in September could dampen expectations for Friday’s broader figure, which is forecast at 473,000.

Dollar in charge

Elsewhere, commodity-linked currencies drew support from oil prices, which have surged to three-year highs. The Canadian dollar sits near a one-month peak and is close to testing its 200-day moving average. Against the euro, the Canadian dollar hit a 19-month high overnight.

Sterling has recovered some of last week’s sharp selloff against the dollar but lost momentum through the Asia session and it steadied at $1.3616 and held just below Tuesday’s three-week peak on the euro .

In New Zealand a 25 basis point rate hike and familiar hawkish tone from the central bank turned out to be a non-event for traders and did little to shift the currency or expectations for further hikes in November and February.

“We’re on a path towards a series of rate hikes and the market is well priced for that,” said Jason Wong, senior market strategist at BNZ in Wellington. For the kiwi, that means “the U.S. dollar is in charge,” he said.

“That’s about the Fed, really, but globally what we’re seeing in China and the energy crunch we’re seeing in Europe all feeds into the mix and all makes markets nervous which adds to support for the dollar.

The U.S. dollar edged back toward a one-year high versus major peers on Tuesday ahead of a key payrolls report at the end of the week that could boost the case for the Federal Reserve to start tapering stimulus as soon as next month.

The safe-haven greenback was also supported by an equity sell-off that spread from Wall Street to Asia.

The risk-sensitive Australian dollar was among the biggest decliners, with the Reserve Bank of Australia reiterating it doesn’t expect to raise interest rates until 2024 after keeping policy steady, as expected.

The U.S. dollar index, which measures the currency against six rivals, rose 0.13% to 93.957, moving back toward Thursday’s peak at 94.504, its highest since late September 2020. The index had rallied as much as 2.8% since Sept. 3 as traders rushed to price in tapering this year and possible rate rises for 2022.

The dollar has also benefited from haven demand amid worries spanning the risk of global stagflation to the U.S. debt ceiling standoff.

“The dollar started the week on the back foot yesterday, failing to rise on yet another equity sell-off, and suffering from the OPEC+ decision to stick to gradual supply hikes (400k barrels/day) which sent oil prices (and oil-sensitive currencies) higher,” ING strategists said in a note.

“As highlighted in yesterday’s FX Daily, we think markets will keep buying the dips in the dollar, and this is what appears to have happened overnight, as the greenback rebounded across the board.”

Friday’s non-farm payrolls data is expected to show continued improvement in the labour market, with a forecast for 488,000 jobs to have been added in September, according to a Reuters poll.

Meanwhile, an index of Asia-Pacific equities skidded 0.92%, following a 1.3% tumble overnight for the S&P 500.

The Aussie dropped 0.34% to $0.7263, retreating further from Monday’s four-day high of $0.73045. The New Zealand dollar declined 0.34% to $0.6939, also backing away from a four-day peak at $0.6981.

The Reserve Bank of New Zealand decides policy on Wednesday, with markets priced for a quarter point rate hike.

“The RBA’s firm on-hold stance is a weight on AUD,” Commonwealth Bank of Australia strategist Joseph Capurso wrote in a report.

For the RBNZ, “with markets already pricing a rate hike cycle, the likelihood of material NZD upside is low,” he said.

The dollar gained 0.25% to 111.19 yen, while the euro slid 0.21% to $1.15965. Sterling traded flat at $1.3612.

While the consensus view is for further gains for the greenback – with speculators pushing net long bets to the highest since March 2020 – TD Securities warns that headroom may be limited.

“While the near-term USD bias leans higher, we’re wary about chasing the move at these levels,” Mark McCormick, TD’s global head of FX strategy, wrote in a report.

“There’s a lot of bad global news priced into the USD” already, and “the key for markets in the weeks ahead is to sort out the extent of the risk premium already priced in versus how these factors play out,” McCormick said.

The dollar eased from last week’s peaks on Monday as encouraging trial results for a Covid-19 pill supported risk appetite, but investors remained cautious ahead of central bank meetings in Australia and New Zealand as well as U.S. labor data this week.

The euro crept back above $1.16, and was up 0.1% at $1.1606, a recovery from last week’s 14-month low of $1.1563. The yen has also bounced from a 19-month low and was similarly up 0.1% in Asia trade at 110.92 per dollar.

Sterling, the Australian dollar and the New Zealand dollar all edged higher in early trade, extending late-week gains.

“Whether it follows through or not, I don’t know,” said Westpac analyst Imre Speizer on the phone from Christchurch.

“I’d say there could still be more downside and that would prop up the U.S. dollar and Aussie and kiwi would fall a little bit further,” he said, with sentiment in the driver’s set.

In the week ahead, the Reserve Bank of Australia meets on Tuesday and is expected to keep policy steady. Across the Tasman, a 25 basis point hike from the Reserve Bank of New Zealand on Wednesday is priced in.

And on Friday, U.S. labor data is expected to show continued improvement in the job market, with a forecast for 460,000 jobs to have been added in September — enough to keep the Federal Reserve on course to begin tapering before year’s end.

Sterling rose 0.25% to $1.3568, a third consecutive session in the green after a sharp drawdown last week when traders shrugged off hawkish central bank rhetoric to focus on a sour outlook and the risk of both higher rates and inflation.

“Investors are judging the UK by its whole suite of fundamentals factors and movements in sterling suggest that many are not liking what they are seeing,” said Rabobank strategist Jane Foley, as the currency erases early 2021 gains.

“The UK no longer has an advantage on the vaccine front…and, while PM (Boris) Johnson likes to view Brexit as ‘done’, many businesses and commentators are only just starting to evaluate its impact.”

The Australian dollar was up 0.1% to $0.7273 and kiwi was marginally firmer at $0.6952.

Economists polled by Reuters expect the cash rate on hold in Australia until at least 2024, as the RBA has been insisting it will be.

Swaps markets show a 97% probability of a rate hike in New Zealand on Wednesday and a 96% chance of another one in November.

Traders likewise think that it will take a lot to derail the Fed from its tapering track, but steadying Treasury yields along the curve points to some risk to the timing.

“The question is whether there is a number that alters the Fed’s view on tapering its bond purchases in November, and what a really weak or hot number means amid the backdrop of rising stagflation fears,” said Pepperstone’s head of research, Chris Weston.

“If U.S. treasuries find further buyers this week into Friday’s U.S. non-farm payrolls, the dollar may go on sale this week.”