Fed’s economic assessment a shade more upbeat and unemployment forecasts lowered accordingly

By Mike Jones

NZD

The NZD has underperformed overnight. Unlike the AUD and EUR, the NZD/USD failed to benefit from broad USD weakness, and simply languished in a 0.8215-0.8240 range.

Yesterday’s NZ current account deficit of 5% of GDP was in line with our expectations and only a smidge wider than the 4.9% expected by the market.

Still, the fact the deficit has a 5 in front of it and most, including ourselves, expect steady deterioration from here served to dampen demand for the NZD/USD yesterday.

We see the deficit nudging 6% of GDP by the end of 2013 and 7% by the end of 2014. That might, and should, garner a bit more attention from the NZD market and rating agencies alike.

Overnight, the NZD/USD shuffled sideways. This was despite an upbeat night in equity markets and a broad, albeit modest, weakening in the USD.

The FOMC ruffled few feathers this morning, but optimism that Cyprus may be able to negotiate another bailout package, on more favourable terms, has helped assuage default fears.

This morning’s Q4 NZ GDP figures (10:45am NZT) will set direction for the NZD today. We’re picking 0.8%q/q (consensus 0.9%), largely as the construction upswing continues, retail and wholesale trade bounce and, ironically, agriculture posts a strong lift in Q4 (being pre-drought).

However, uncertainty around the number is greater than usual, such has been the tug of war in the various indicators.

Analyst forecasts are relatively evenly distributed around 0.9%. But we suspect the market is more sensitive to an upside GDP surprise given the extent of speculative short positions built up in NZD/AUD over recent days.

Indeed, the cross slipped to 0.7920 overnight, leaving it ‘cheap’ according to our short-term valuation model.

We’d probably need to see a GDP number north of 1% for near-term NZD/USD resistance at 0.8285 to be tested. Initial support is eyed at 0.8190. As well as GDP, keep an eye on the Chinese Flash PMI due at 2:45pm.

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Majors

The USD has weakened against most of the major currencies overnight.

As expected, this morning’s FOMC policy meeting delivered few surprises. The Fed reaffirmed its bond buying programme and kept the pace of asset purchases steady at US$85b per month.

If anything, the Fed’s economic assessment was a shade more upbeat though, and unemployment forecasts have been lowered slightly accordingly. Year-end forecasts are now 7.3%-7.5% from 7.4%-7.7% in January.

Recent communications from the Fed have suggested that an unemployment rate of around 7% may be the trigger for the Fed to stop easing (6.5% is still the trigger to start tightening).

From this perspective, there is support here for our view that the Fed will maintain the current easing pace until the end of the year at least, limiting any gains in the USD.

Overall, there was little to change anyone’s views and the market reaction has been very subdued as a result.

Prior to the FOMC meeting, rumours and hopes a Plan B was being put together to rescue Cyprus helped reverse the negative tone of the past few days.

Global equity markets climbed 0.4 - 1.4%, with only the UK FTSE bucking the trend. Risk aversion gauges like the VIX index have generally eased off their recent highs.

A punch higher in the EUR/USD, from 1.2860 to 1.2950, kick-started a bout of broad USD weakness that has seen most of the major currencies notch up small gains.

JPY has underperformed, particularly following Nikkei reports this morning that the new BoJ Governor will undertake “bold easing”.

Uncertainty about the plight of Cyprus looks set to hang around for a while, leaving the EUR/USD a little vulnerable. The fact the Cypriot finance minister is in Moscow for talks has buoyed hopes of some sort of deal with Russia.

However, note that any deal would still have to be accepted by the Troika before a proper bailout package can be offered. We expect EUR/USD sellers to emerge around 1.3050 while Cyprus uncertainty remains.

The UK Budget was about as grim as expected, but the risk of a consequent collapse in GBP hasn’t materialised. Downward revisions to UK growth forecasts and more austerity saw GBP/USD initially slide below 1.5040.

But the GBP swiftly recovered after the BoE’s inflation target was maintained at 2% (rather than relaxed as some had feared). At 1.5130, the GBP/USD actually ended the night marginally stronger than where it began.

Other News:

*Bank of England minutes show policy was held steady (9-3 vote) over concerns additional asset purchases could further undermine the GBP and lead to public concerns over the BoE’s commitment to the 2% inflation target.

All its research is available here.