FOREX-Dollar, yen dip as U.S. stimulus hopes help risk-on mood

It recovered in early deals in London to trade 0.1% higher to the dollar on the day. Money-market pricing of an April 2021 rate cut increased after the remarks and the kiwi slipped to a three-week low against the Aussie, before paring losses a little.

The dollar and safe-haven Japanese yen nursed losses on Thursday, after revived hopes for U.S. fiscal stimulus improved investor sentiment, while the prospect of negative interest rates knocked the New Zealand dollar lower.

President Donald Trump and House Speaker Nancy Pelosi seem open to pursuing a stimulus package for the airline industry, even though Trump halted talks with Democrats for a bigger plan. Investors also expect Joe Biden, if elected, would quickly spend money to stimulate growth.

That mood has lifted equity markets and sunk the yen to a three-week low of 106.11. The dollar struggled to recoup losses against other majors, excluding the kiwi. Against a basket of currencies, the dollar was down 0.1% on the day.

The euro edged up to $1.1782. The risk-sensitive Australian dollar rose 0.3% to $0.7163. "Overall, investors seem to be focusing more on the increasing odds of a Biden win and what that might imply for a stimulus package after the election," said Marshall Gittler, head of investment research at BDSwiss.

"With that eventuality in mind, Trump’s decision to stop negotiations now is ultimately a risk-on move, as it increases the likelihood of a decisive Biden win." The New Zealand dollar was the biggest loser among G10 currencies, dropping as much as half a percent after central bank officials again hinted that negative interest rates are possible. It recovered in early deals in London to trade 0.1% higher to the dollar on the day.

Money-market pricing of an April 2021 rate cut increased after the remarks and the kiwi slipped to a three-week low against the Aussie, before paring losses a little. It was last down 0.2% against the dollar at $0.6570. "Today's rhetoric from the RBNZ leaves us of the view it will cut the official cash rate into negative territory before too much longer," BNZ economist Craig Ebert said in a note, forecasting rates at -0.50% later in 2021, from 0.25% currently.

FED SPEAKERS ON RADAR Minutes of the U.S. Federal Reserve's September meeting, released on Wednesday, hinted at more easing. Many participants had assumed the economy would be supported by fiscal spending, and some were open to further debate about the Fed's bon- buying programme.

"This nuance did not come across in Powell's post-meeting press conference nor in recent speeches," National Australia Bank economist Tapas Strickland said in a note on Thursday. "In that vein it is worth noting that the Fed's (Loretta) Mester on Monday said she might support shifting asset purchases to more longer-dated bonds."

It has also focused investor attention on speeches from Fed members Eric Rosengren and Raphael Bostic, at 1610 GMT and 1800 GMT respectively, for any further hints at the Fed's thinking. Elsewhere, the U.S. vice presidential debate reinforced investor expectations on the likely policies of a Trump or Biden administration.

"Pence reiterated his hardline stance against China ... meanwhile, Senator Harris said Trump lost the trade war with China," said Mizuho's chief Asia FX strategist Ken Cheung. "That says Biden's victory should mitigate the risk of resuming the trade war, which could prompt the People's Bank of China to allow yuan depreciation again to counter the tariffs impact," he said.

He expects the onshore yuan to be fixed around 6.79 per dollar when trading resumes after a week-long holiday in China on Friday - more or less steady despite a weaker dollar. The yuan last traded at 6.7898 onshore and is at 6.7389 in offshore trade.

Sterling traded 0.3% higher at $1.2945. Bank of England Governor Andrew Bailey said he believed Britain and the European Union should be able to reach a trade deal, and that he did not expect the new wave of coronavirus cases to be as damaging as the first.

 

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