Markets have been quiet ahead of the FOMC announcement in the next hour or so. The NZD and AUD have trended higher since the NZ close for no obvious reason, seeing the NZD back up probing the high seen earlier this week. Ahead of the FOMC, the USD is slightly on the soft side, while US treasury yields have drifted lower.
There has been little news overnight. US core CPI figures were in line with market expectations, remaining at a non-threatening level that won’t change any monetary policy expectations. The US FOMC announcement at 8am is expected to keep policy unchanged after three successive easings and we also expect little change to the economic and rates projections. We wouldn’t expect much currency reaction as long as Chair Powell sticks to the script of the economic baseline outlook remaining favourable, albeit with some noteworthy risks. Recent post-FOMC press conferences have recently thrown up some currency and rates volatility as the market over-reacts to Powell’s soundbites. Ahead of the meeting, US treasury yields have drifted lower, with the 2-year rate down 1bp to 1.64% and the 10-year rate down 3bps to 1.81%. The USD is on the soft side, down against all majors since the NZ close apart from CHF, although losses against most majors have been small.
The NZD and AUD stand out, both rising by about 0.7% since the NZ close to 0.6570 and 0.6865 respectively, with the upward trend beginning from the London open. We can’t see any obvious reason for the move, but they have been stronger against a backdrop of stronger EM currencies overnight, suggesting a risk-on move for currencies (even if positive risk sentiment isn’t obvious in equity and bond markets).
Yesterday, the gain for the NZD following the government’s fiscal announcement was small and short-lived and once the details were digested the NZD was weaker into the NZ close. Some commentators took the view that while the headline “stimulus” looked good, in practice it will take a long time to filter through the economy. We don’t necessarily agree with that sentiment. The government announced plans for $12b of new capital expenditure, with two-thirds of that assigned to “shovel ready” projects. Further spending announcements will be made in the May Budget. The projected underlying operating balance flicks around the zero mark (as a % of GDP) over the next few years, while the cash deficit widens to 2.4% of GDP. Treasury's fiscal impulse has been revised up by 1.5% of GDP over the next 2 years. So the RBNZ will be taking this new information into account in its next forecasts. The extra fiscal stimulus plays to the view that the RBNZ easing cycle is over, with the baton handed over from monetary to fiscal policy.
Despite the fiscal stimulus, the bond tender programme for the current fiscal year and the following two fiscal years was unchanged, with the government choosing to run down financial assets and issue another $1b of Treasury bills, amongst other factors. The market half expected a new long bond syndication but this has likely been held off until the Budget. The announcement provided some support for the bond market, which expected to see a ramp up in supply. Against a backdrop of higher Australian yields, the NZ swaps curve was little changed, while government rates were down slightly.
NZD/AUD rose to a fresh high of 0.9625 but selling pressure emerged and overnight the cross has settled around 0.9575.
GBP was weaker yesterday morning after the highly respected YouGov MRP poll showed a likely closer election result that implied by the previous poll – the implied Conservatives majority sliced down to 28 seats from the previous poll of 68 seats. Given the margin of error of the poll, YouGov suggested that a hung Parliament couldn’t be ruled out. After falling to 1.3110, GBP is back up to 1.3180. EUR continues to meet resistance just under the 1.11 mark. USD/JPY is fairly flat, seeing NZD/JPY probe resistance around 71.5.
After the FOMC is out of the way this morning, focus will turn tonight to the ECB’s first monetary policy meeting under new President Lagarde. No change is monetary policy is widely expected, but there is scope for some change in language around the policy outlook as she makes her mark. Behind the scenes, finance ministers and board members are said to be airing their concerns about the impact of negative interest rates. A new person at the helm throws up some extra EUR uncertainty around the meeting.