Market Drivers August 10, 2016

Dollar Dump continues for 2nd day
Kiwi up ahead of RBNZ
Nikkei -0.18% Dax -0.45%
Oil $42/bbl
Gold $1358/oz.

Europe and Asia:
AUD Westpac CC 101 vs. 99.1

North America:
NZD RBNZ 17:00

The dollar was trampled for the second day in a row declining against all its major trading partners in Asian and early European trade. The selloff has been to yesterday’s weak productivity figures which sowed seeds of doubt that the Fed would actually tighten rates despite relatively robust jobs data.

Yesterday’s Non-Farm Productivity report shocked the market printing at -0.5% versus 0.4% eyed. This was the one of the worst readings in years and greatly soured sentiment towards the dollar as traders quickly became skeptical that the Fed will want to tighten against such lackluster productivity growth.

As we noted yesterday the Fed may also be constrained by the global trend towards more easing. With all the other G-11 central banks remaining in highly accommodative mode the Fed may be reluctant to tighten even if it wanted to for fear of creating sharp imbalances in dollar linked economies.

All of this has translated into a complete 360 turn in sentiment towards the buck, as the euphoria of strong NFP data has now fully worn off and the dollar once again is sold across the board. Still the reaction over the past 24 hours may be a bit overdone especially if US data continues to impress. This Friday’s US Retail Sales report will be a key test of US economic conditions and if it proves supportive the buck could find its groove once again.

Meanwhile the North American calendar is empty today, but the market will be watching the RBNZ rate announcement at 2100 GMT on the close of NY trade. The central bank is expected to lower rates but a 25bp cut my not be enough to take the kiwi lower. With markets now less hawkish on the Fed a cut of only 25bp would still leave kiwi with ample yield and the pair could actually rally on the news. Ahead of the report the market has been buying NZDUSD almost challenging the RBNZ to cut more. Given the New Zealand’s authorities desire to see the kiwi lower we wouldn’t be surprised to have the central bank lower rates by a full 50bp in order to scare off the complacent longs.

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