Fate of NZD lies in hands of FOMC; Australian CPI reading could determine if RBA cuts; BoE's Weale believes weak PMI justifies more stimulus; size of Japan's fiscal stimulus up in the air

By Kymberly Martin

Markets remained fairly calm overnight ahead of the US FOMC meeting announcement early tomorrow morning (NZT).

Equities on either side of the Atlantic were relatively flat. The CRB broad commodity index also trades not far from yesterday morning’s level.

The USD index has rebounded from evening lows, no doubt helped by solid US data delivery, to trade at a similar level to yesterday morning.

The JPY strengthened yesterday afternoon. There is a lot of uncertainty around what kind of stimulus the Bank of Japan will announce on Friday, if anything.

Since last evening the JPY has weakened a bit. Overnight Japan’s Finance Minister Aso said the government has not yet decided on the size of a fiscal stimulus package. The USD/JPY now trades around 104.70.

There was a bit of volatility in the GBP and EUR overnight although little in the way of regional data delivery. After a brief spike toward 1.1030 last evening the EUR/USD now trades at 1.0990.

Yesterday, Bank of England member Weale gained headlines. Recall he recently suggested the BoE should be patient before adding further monetary stimulus. However, he now believes that weak UK PMI data provide the evidence that was needed to justify further stimulus. The GBP/USD trades at 1.3140 this morning.

The AUD and NZD both stepped higher yesterday afternoon. Ahead of today’s AU Q2 CPI print the AUD/USD trades just above 0.7500. Today’s release will be a crucial influence on RBA rate cut expectations and the AUD, ahead of the RBA’s meeting next week. Our NAB colleagues look for a slightly above-consensus CPI print.

The NZD/USD currently trades around 0.7040, down from late-evening highs above 0.7080. With little scheduled on the domestic calendar for the next couple of days, the fate of the NZD will lie with offshore developments. It will likely suffer from contagion from any move in the AUD today, related to the CPI print.

Tonight, the NZD/USD’s fate lies with the US FOMC and any impact its comments may have on the USD. However, we remain sceptical that the inherently dovish Fed will deliver a message that significantly boosts the USD. The Fed may be fairly comfortable with current market pricing, which allows them close to a 50/50 option of a hike by year-end.

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