The USD has strengthened and UST yields have risen after the Fed’s latest policy statement. Against that backdrop the NZD and AUD have performed much better than other majors.
Market trading was quiet ahead of the FOMC statement at 6am this morning. Pre-release, the USD was at its low for the session, while the NZD and AUD were strong performers, up by about 1%. Yesterday afternoon, one of the major Australian banks upgraded its growth outlook and projected two RBA hikes next year. In NZ, the latest Colmar Brunton poll showed a jump in support for National at the expense on Labour, reversing Labour’s lead in its previous two polls. These factors were supportive for the AUD and NZD respectively.
On the release of the FOMC, the NZD spiked to a high of 0.7433 and the AUD spiked to 0.8102, but both currencies have since plunged, as the FOMC statement supported the USD, with a more hawkish outlook than some expected.
The Statement was very similar to that of July, with the key addition that the trio of hurricanes will only have a temporary impact on the economy and doesn’t change the medium term outlook. The likely boost to inflation will be temporary.
The dotplot of Fed Funds projections showed no change in the median through to the end of next year, still picking a hike by the end of this year and 3 hikes through 2018. This was despite a slightly lower projected inflation path. One less hike was projected for 2019 (down to 2 now) and the terminal median rate was reduced by 25bps to 2.75%. The new forecast for 2020 showed a further extension of the tightening cycle with another projected hike.
On balance sheet reduction (so-called quantitative tightening) there were no surprises. In October the FOMC will initiate the programme described in June, whereby $10bn (maximum) of maturing Treasuries and mortgage-backed securities will not be reinvested, and that monthly cap will rise throughout the next year towards $50bn.
After being down 0.3% for the day, the USD majors index is now up 0.7%, with EUR taking the brunt, currently down 1.0% to 1.1880. USD/JPY is up 0.8% to 112.50 and GBP is down only 0.3% to 1.3465. Earlier in the session UK retail sales were much stronger than expected, giving GBP a boost. The market hasn’t quite settled down yet as I write and Chair Yellen is still in the midst of her press conference, so these rates are bouncing around a bit.
The NZD is the only major that is still up for the day against the USD, currently sitting at 0.7335. The AUD is around 0.80 and NZD/AUD is up to around 0.9170. On the crosses, the biggest gain has been for NZD/EUR, up 1.2% to 0.6175.
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