The fall-out from the surprisingly dovish Fed continued overnight, with the USD in free fall, commodity prices pumped up and generally stronger equity and credit markets.
My colleague in London, Nick Parsons, summed the Fed up so well I thought I’d do a cut and paste job: “We’ve remarked here many times that the Fed is “all gong and no dinner”. Yesterday, it didn’t even bother to ring the gong.
A supposedly data-driven Fed looked at the stronger CPI, PCE and labour market data and collectively decided to lower the forecasts for policy tightening, removing two of the rate hikes it has previously been signalling for 2016.
In signalling concerns about potential global economic weakness and possible financial market instability, the FOMC externalised the blame for its no-change stance, yet failed to explained why a stock market some 5% higher than at the time of the January meeting is now a greater threat to its economic projections.
In short, the Fed is muddled and confused, fearful and timid. It is certainly not “data-dependent”.
The USD DXY index is down 1.3%, following on from its 0.8% fall yesterday.
All major currencies are higher against the dollar, led by the NZD, up 1.9% to 0.6855, close to its highs for the day. It is closing in on the strong resistance level of just below 0.69, the level threatened back in October and December last year.
The NZD got an extra kicker following slightly stronger Q4 GDP figures, which showed a back-to-back 0.9% q/q gain. The TWI sits at 72.55, just 30bps lower compared to the pre-RBNZ rate cut level.
The AUD is up 1.3% to 0.7650, reaching an 8-month high in the process. The currency kicked higher following a lower-than-expected unemployment rate print.
The NZD has outperformed the AUD since the Fed meeting, taking NZD/AUD up to 0.8960. This likely reflects some profit-taking on short NZD/AUD positions.
We think some consolidation around current levels is appropriate, but our fair value model suggests that the 0.86 handle is more reflective of recent trends in relative NZ/AU commodity price and interest rate trends.
Of the majors, GBP has performed relatively well. The BoE left its policy rate at 0.5% and the minutes dampened speculation that its next move is likely to be a cut. GBP/USD touched 1.45 overnight.
EUR and the Yen are both well up against the USD as well. EUR/USD broke through 1.13, while USD/JPY fell as low as 110.67 before recovering to around 111.35.
Commodity prices, denominated in the (weaker) USD, are stronger across the board. WTI crude reached the $40 mark for the first time since early December.
The wash-out from the surprise Fed move is likely to continue over coming days as currency projections with respect to the big dollar are reassessed. This will span across all asset markets. If the Fed has really gone soft on inflation, then a lower-for-longer rate environment is USD-negative, and positive for risky assets – this includes commodities, emerging markets and the NZD.
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3 Comments
Friday Funny..
THE FED....an analogy.
A retired guy sits around the house all day so one day his wife says, “Joe, you could do something useful, like vacuum the house once a week.”
The guy gives it a moment’s thought and says; “Sure why not. Show me to the vacuum.”
Half an hour later, the guy comes into the kitchen to get some coffee.
His wife says, “I didn't hear the vacuum working, I thought you were using it.”
Exasperated, Joe answers,”The stupid thing is broken, it won't start. We need to buy a new one.”
“Really,” she says, “show me - it worked fine the last time.” So he did (Click Here)...
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