Market sentiment has been positive overnight, ahead of the US FOMC. The Fed made little change to its statement, as expected, maintaining a dovish stance, and price action following the meeting was fairly muted. The USD remained under pressure ahead of the meeting, and as we go to press, it has just popped higher after falling immediately after the statement.
The Fed’s updated policy statement showed very little change from that in June, opening with the same language “The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.” The policy settings remained unchanged, with the Fed continuing with its current pace of asset purchases. The economic outlook message remained downbeat, with the public health crisis posing “considerable risks” to the medium-term outlook.
The market sees scope for some potential changes in strategy – such as firming up forward guidance – in the next September Statement, when a forecast update will be completed. In his opening remarks to the press conference, Chair Powell reiterated the commitment to low rates until there is a durable recovery.
US equities were on a higher plane leading up to the announcement, and that was sustained, with the S&P500 currently up just over 1%. The US 10-year rate didn’t move much after the statement and was tightly range-bound overnight between 0.57-0.60%. The USD was on a weaker path heading into the announcement and a further small loss ensued afterwards, but as we hit send, it has popped a little higher.
So for the day, the BBDXY USD index is now down only 0.2%, extending its recent losses. It has been a broadly-based decline, with European currencies leading the charge, with GBP pushing up through the 1.30 mark and EUR breaking 1.18, but as we go to press a reversal is underway.
AUD has pushed higher and was on the verge of breaking up through 0.72, before reversing course. The NZD has lagged the performance of others and trades this morning around 0.6650, respecting the high earlier in the week of just above 0.67.
NZD/AUD sustained its move below 0.93, with the market unperturbed by news that Queensland will close its borders to all visitors from Sydney from Saturday, as the outbreak of COVID19 in the city linked to various clusters grows in size. The market sees that the longer international borders remain closed, the greater the relative hit to NZ’s economy versus Australia, given NZ’s heavier reliance on global tourism.
In other news, there was little sign of progress in talks on reconciling competing US fiscal plans for the next package, ahead of Friday’s expiration of supplementary unemployment benefits. President Trump and Treasury Secretary Mnuchin argued for a stop-gap measure while broader negotiations continued, but that continues to be rejected by House Speaker Pelosi. This is really going down to the wire and the market assumes that a stop-gap deal will be done, but trading conditions from Monday will be “interesting” if no deal is made.
US pending home sales were very strong, recovering further in June and now well above pre-COVID levels (up 12.7% yoy), reflecting record low mortgage rates, some increased activity as households adjust to the working-from-home environment, and the economic recovery.
NZ rates were lower across the curve yesterday, with NZGBs and swap rates down 1-3bps, driven by global forces during the previous overnight session. NZDM published its bond tender schedule for August, with the syndicated tap of the 2027 bond coming later in the month, in the week beginning 24 August. There won’t be much long-end supply during the month, only $150m of 2037s and $300m of 2033s after taking account the likely cancellation of the tender during the week of the syndication. The weekly pace of tenders will remain close to $1bn, similar to the RBNZ’s pace of bond buying.
The economic calendar in the day ahead is full. The final ANZ business outlook survey readings need to show an increase from the flash release to confirm the NZ recovery is on track. Tonight sees the release of Germany and US Q2 GDP, both expected to show large falls, somewhat of academic interest, given we know that recoveries from that depth are well underway as lockdown restrictions eased. More importantly, US jobless claims are expected to show another weekly increase, highlighting the risk to the US recovery story, given the COVID19 outbreak across a number of States.