FX Daily: DXY and EUR back at the centre of this year’s ranges; RBNZ could signal a pause

EUR vs USD outlook, NZD on negative watch
Philip Wee24 May 2023
    Photo credit: Unsplash Photo

    DXY appreciated 0.3% to 103.5, while EUR depreciated 0.4% to 1.0770 on Tuesday. DXY is near the middle of this year’s 101-106 range, and EUR is just below the centre of its 1.05-1.11 range. EUR started declining after the European Central Bank joined the Fed in downsizing hikes to 25 bps on 4 May amidst more division over the direction of monetary policy. ECB member Francois Villeroy de Galhau (France) said EU rates might peak by the end of summer, but Joachim Nagel (Germany) insisted several hikes were still needed for the policy to be restrictive. Conversely, Fed officials kept the door open for more hikes this year without firm guidance on a pause next month. The subtle narrative shifts were sufficient to widen the negative EU-US 2Y bond differential, lifting the DXY off its lows and dragging the EUR from its high. Converging monetary policies will likely keep DXY and EUR confined in this year's ranges.

    NZD depreciated 0.6% to 0.6248. Today, we expect the Reserve Bank of New Zealand to lift the official cash rate by a “normal” 25 bps (to 5.50%) for the first time since February 2022. CPI inflation fell to 6.7% YoY in 1Q23 after holding at 7.2% in the previous two quarters. During the Budget announcement on 18 May, the Treasury Department forecast inflation falling to 3.3% in mid-2024. However, the Treasury also announced a fiscal deficit of NZD6.63bn for 2023, significantly more than the NZD3.63 projected in December, ahead of the general elections in October. Hence, we need to see if the RBNZ shares the government’s optimism about inflation returning towards its 1-3% target and the NZD economy averting a recession this year. If the RBNZ keeps February’s guidance for rates to peak at 5.50%, expectations for rate cuts later this year will build. Another concern for the NZD is the persistently wide current account deficit which rating agency Standard and Poor’s warned could pressure New Zealand’s AA+ debt rating. Since February, NZD has tried and failed several times to break into the upper half of this year’s trading range between 0.61 and 0.65. According to CFTC data, speculators turned net short NZD from mid-March.

    Quote of the day
    “I expect today that we will be at the terminal rate not later than by summer. We have three possible Governing Councils either for hiking or pausing.”
         ECB member Francois Villeroy de Galhau on 22 May 2023

    24 May in history
    The first Eurovision Song Contest was held in Switzerland in 1956.



    Philip Wee

    Senior FX Strategist - G3 & Asia

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

    Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.