By Stuart Talman, XE currency strategist
The waiting game continues as the market gets set to digest the latest policy update from the Federal Reserve, widely expected to deliver a dovish hold in the early hours of Thursday morning.
US treasury yields are higher, equity markets lower whilst commodity linked currencies again outperform against the backdrop of higher energy prices. The oil sensitive Norwegian Kroner and Canadian dollars join the antipodeans in occupying the top four spots on the G10 leaderboard, although net intraday moves have failed to exceed half-a-percent.
Climbing close to a quarter-of-a-percent, the New Zealand dollar probes the upper bound of the past fortnight's range, bid from the low 0.59's to mark Tuesday's high a couple of pips shy of 0.5950. Yesterday we flagged a key NZDUSD resistance zone at 0.5930/50 which has halted the Kiwi's upside on multiple occasions throughout September.
A topside breakout through here to open a path to re-test 60 US cents is required to back the call that NZDUSD formed a medium-term bottom near 0.5860 earlier in the month.
Alternatively, should the Fed deliver a hawkish surprise, propelling the dollar higher, NZDUSD tips over to initiate a fresh leg down, extending the year-to-date low down into the mid to low 0.58's.
Given Jerome Powell and his FOMC colleagues are universally expected to hold the target rate at 5.25% - 5.50%, how can the Fed present a more hawkish position than expected?
Via its summary of economic projections.
Each quarter the Fed releases its latest growth, inflation and unemployment projections in addition to the expected path for the Fed funds target rate. These are referred to as the dot plots given each FOMC voting members projection is represented by a dot.
The median dot plots are referenced to determine if the Fed is more hawkish, dovish or simply maintaining the current view/outlook.
For example, when the dot plots were last released, in June, the key change was the addition of an extra rate hike into the median forecast, thereby lifting the projected the target rate to 5.50% - 5.75% by year end.
The September dot plots as they relate to the path of the Fed funds rate will remain unchanged for 2023, so the focus will be on 2024.
Will the median dot plots for 2024 change from June's summary of economic projections, for example, stripping out a portion of the 100bps of cuts that FOMC officials projected?
This would be interpreted as a hawkish update as the Fed again emphasises its higher for longer mantra.
Likewise, higher median dot plots in relation to both inflation and growth would also be framed as hawkish, boosting US bond yields and the dollar.
And of course, Jerome Powell's answers during the press conference will also be scrutinised, although the Fed chair has refrained from adopting a hawkish tone at most FOMC pressers through 2023.
We expect the outcome to be the Fed maintains its view that upside inflation risks persist, and the incoming data will dictate whether additional tightening is required - effectively not delivering any surprises.
And whilst treasury yields, the dollar and US equities will jump around in the ~90 minutes that contain the decision, statement, dot plot and presser, we suspect that net moves will be restrained.
Like the Fed, the Reserve Bank of Australia acknowledges the risk that inflation could re-accelerate. Tuesday's RBA meeting minutes, the summary of outgoing governor Philip Lowe's final meeting, recorded that the decision to hold the cash rate at 4.10% was finely balanced, ultimately refraining from a hike given the view that policy settings were now sufficiently restrictive. Via the minutes…..
The recent flow of data was consistent with inflation returning to target within a reasonable timeframe while the cash rate remained at its present level. Members recognised the value of allowing more time to see the full effects of the tightening of monetary policy since May 2022, given the lags in the transmission of policy through the economy.
Ultimately the minutes in addition to recent RBA-speak suggest that the bar is now set high for additional tightening. The quarterly CPI read on 25 October will likely prove the deciding factor re one more 2023 hike.
The reaction to the minutes was muted, NZDAUD continues to track sideways, anchored below 0.9200.
Looking to the day ahead, UK CPI is the other major event to accompany the FOMC decision. Expectations are for headline inflation to increase to 7.0% from 6.8%, whilst core is seen falling incrementally to 6.8% from 6.9%. A soft outcome is unlikely to deter the BoE from hiking 25bps at tomorrow's meeting, lifting the bank rate to 5.50%.
The Kiwi continues to track higher against the pound, advancing over 3.5% from the 21 August 7 year low in the 0.4630's Tuesday's high was marked a few pips shy of 0.48, a level that has not been breached since early August.
Regarding the path for NZDUSD over the next 24 hours, whilst we don’t expect thew FOMC meeting induce a large directional move, we look for the Kiwi to challenge the 0.5930/50 resistance zone, perhaps ending the day above.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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