NZD falls after FOMC statement. Attention now turns to RBNZ, and later to data on currency intervention signals

By Raiko Shareef

NZ Dollar

The NZD is significantly weaker this morning in the wake of an upbeat FOMC statement.

NZD/USD is down by 1.0% at 0.7840, and is one of the weakest performing majors.

The NZD’s overnight gains on the back of AUD strength were completely reversed, and today’s upcoming event may see this sell-off extended.

Today’s RBNZ statement is widely expected to be softer in tone than in September, as Governor Wheeler accounts for subdued inflationary pressure.

Confirmation of a greatly reduced hawkish bias should play with the grain of NZD weakness.

Later in the afternoon, the RBNZ will release its FX transactions data for September.

We expect to see continued activity from the Bank, after August’s $521mn net sale. Anything close to matching that figure will keep downward pressure on NZD.

But a halt in selling activity would likely provide some support, if not provoke a mild (but misplaced) rally.

With the events today, it is feasible that we see a test of the 0.7709 low for 2014. But unless there are any great surprises, we doubt this would be breached today. We see initial support at 0.7800, and resistance at 0.7900.

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

----------------------------------------------------------

Majors

There were no data or news to speak of last night, ahead of the FOMC’s October statement this morning. There, the Fed’s rather upbeat tone saw the USD rally strongly, with the Bloomberg Dollar Spot Index up 0.5%.

As widely expected, the Fed ended its quantitative easing (QE) program, and left unchanged the reference to “a considerable time” between the end of QE and the first rate hike. A removal of the latter would have caused an explosive USD rally, and was the main focus of investors heading into the meeting.

But in the end, the key changes to the statement were elsewhere.

Firstly, the Fed upgraded its assessment of labour market health, with a fresh nod to “solid job gains” and a lower unemployment rate”. In September, the Fed called the unemployment rate “little changed”.

Additionally, the Fed no longer sees “significant” underutilisation of labour resources; these are now simply underutilised.

On the inflation front, policymakers pushed back against nascent fears that a softening inflation picture would cause them to delay policy tightening. They reiterated that longer-term inflation expectations remain stable, and that despite the fall in oil prices, thinks that the chance of inflation running persistently below target has diminished.

Lastly, there was no hint of any concerns about slowing global growth, a theme that saw equities and the USD sold in the first half of October. Back then, the market was rife with speculation that external weakness would cause the Fed to waver. Today’s statement has put paid to that speculation.

All in all, this was a much-needed public vote of confidence in the US economy, and one that vindicates the USD rally over Q3. It will help push USD indices back to their 2014-peaks, hit in early October. We retain a core bullish USD view over the medium-term.

Tonight, the first reading of US Q3 GDP will be closely watched, to see whether the Fed’s optimism is justified. The market expects an annualised growth rate of 3.0% y/y, which would be very respectable after Q2’s 4.6% surge. Also on the watchlist is the preliminary reading of German inflation, which is a precursor to the euro-zone result due on Friday night. Analysts expect the annual pace of inflation to edge higher to 0.9% y/y, from 0.8% in September.

All its research is available here.