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Dollar Rises As Fed Powell Rules Out Negative Rates

By Kathy LienForexMay 14, 2020 00:24
Dollar Rises As Fed Powell Rules Out Negative Rates
By Kathy Lien   |  May 14, 2020 00:24
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The US dollar traded higher against all of the major currencies on the back of risk aversion and comments from Federal Reserve Chairman Jay Powell yesterday. While his outlook was very cautious, Powell ruled out negative interest rates. In his economic update webinar, Powell said the virus raises concerns of long term economic harm and the outlook is uncertain with downside risks significant. Therefore additional policy measures may be needed to shield the economy as the loss of thousands of businesses would limit recovery. The unemployment rate could rise further as he expects the peak in the next month or so. Powell really didn’t have anything good to say about the economic outlook outside of the obvious, which is that the economy will recover once the virus is under control. He thinks it may take a few more months for a recovery and when it happens, it may be slower than we like. When asked about negative rates, Powell said “its not something we’re looking at, the FOMC’s view on negative rates hasn’t changed.” He admits there are fans of negative rates but the evidence on effectiveness is very mixed and they feel they have tools that work. Nonetheless negative rate bets increased with traders looking for more aggressive easing in the coming months. Jobless claims are scheduled for release on Thursday. Weekly claims are expected to rise by only 2.5 million, down from 3.17 million the previous week.

Meanwhile the Reserve Bank of New Zealand sent the New Zealand dollar tumbling lower after they surprised the market by doubling the size of their Quantitative Easing program to NZ$60B. Interest rates were left unchanged at 0.25% but the central bank said they are prepared to cut interest rates further if needed and negative rates are an option. “The aim of their expansion in QE is to cut borrowing cuts quickly and sharply.” With the economy opening up, the RBNZ’s surprise decision to add stimulus is a sign that they are trying to get ahead of the economic crisis. According to the central bank, the balance of economic risks remain to the downside and Governor Orr made it clear that they are “prepared to do whatever it takes” to keep bond yield curve flat and low because they don’t expect the economy to get back to pre-COVID GDP levels until 2022. This unambiguously dovish outlook should limit gains in the New Zealand dollar and lead the pair to underperform in the near term.

The Australian dollar also traded lower yesterday and further losses are likely after the abysmal labor market report. Major job losses were reported in the manufacturing, service and construction sectors in the month of April according to PMIs. While consumer confidence rebounded, the business sector remains weak.

Compared to other major currencies, euro and sterling withstood dollar strength better thanks to stronger than expected economic data. Industrial production in the Eurozone fell less than expected while the contraction in Q1 UK GDP was narrower than anticipated. With that said, both numbers paint an ugly picture of Europe’s economy with EZ industrial production falling -11.3% in March, the biggest decline ever. The UK is basically in recession with the economy contracting 2% in Q1 and stagnating in Q4 2019. Q2 growth will be even worse, making recession official.

Dollar Rises As Fed Powell Rules Out Negative Rates

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Dollar Rises As Fed Powell Rules Out Negative Rates

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