Bernanke outlined that ‘tapering’ would start later this year and asset purchases could cease mid next year if central forecasts pan out

By Kymberly Martin


The last 24-hours can be broken into ‘before’ and ‘after’ the US Federal Reserve announcement. The NZD/USD was on an ascending trend against a broadly softer USD overnight, ahead of the announcement.

Afterward it plunged from 0.8040 before finding some support around 0.7860. Key support for the NZD/USD today remains just below 0.7800, which marks the early June lows.

The NZD has shown volatility on the crosses after the FOMC announcement, but is only slightly below yesterday morning’s levels relative to its European peers.

The NZD/GBP and NZD/EUR sit at 0.5090 and 0.5940 respectively.

The NZD/AUD has pushed on higher to sit around 0.8490 currently, its highest levels since the end of 2008. We continue to see further appreciation over the medium-term taking the cross to 0.8900 by year-end.

Today, the fate of the NZD remains largely at the hands of sentiment toward the USD. The break higher in US Treasury yields is consistent with broad USD strength. Later this morning NZ GDP will be released.

We are looking for a 0.6% expansion. This would be a good result following Q4’s heady 1.5% outcome. This is consistent with our view that domestic fundamentals (growth, interest rates and commodities) continue to provide support for the NZD, and should help limit the pressure exerted over the medium term from a stronger USD.


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The night was about a market in gentle ‘wait and see’ mode ahead of the US FOMC meeting, with a dramatic surge in the USD in response.

Most markets seemed fairly frozen in the headlights in anticipation of the Fed meeting. Our risk appetite index (scale 0-100%) held fairly stable around 63% and equity markets recorded modestly negative returns.

Against this backdrop the USD index gently depreciated from 80.70 to 80.50.

Then the Fed announced. In its statement it left asset purchases unchanged at $40b of MBS and $45b of Treasuries per month. It repeated that it will keep buying assets “until the outlook for the labour market has improved substantially”.

However it lowered its unemployment and inflation forecasts for this year and 2014 and 2015. Crucially this now sees the unemployment rate falling to 6.5%-6.8% in 2014 (previously 6.7%-7.0%).

The Fed also stated that the committee saw “the downside risks to the outlook for the economy and the labour market as having diminished”. In subsequent comments Bernanke outlined that ‘tapering’ would start later this year and asset purchases could cease mid next year if central forecasts pan out.

However, he was at pains to emphasise that while the Fed continues to hold its stock of assets, and keep interest rates close to zero, stimulus to the economy remains substantial.

The initial market response was for the USD index to surge from 80.50 to 81.40, strengthening against all its peers. US 10-year bond yields moved from 2.20% to 2.34%.

In response, the EUR/USD plunged from 1.3400 to 1.3260. The USD/JPY jumped from 95.20 to around 96.80. The AUD/USD also saw a rapid descent from 0.9550 to around 0.9340, breaking below previous support levels. It now sits at its lowest level since September 2010.

Yesterday evening the Bank of England Minutes showed the Committee voting unanimously to keep the Bank Rate unchanged at 0.5%.

The Committee voted 6-3 to maintain asset purchases at £375 billion, with Governor King voting for an extension of £25 billion, along with two other members.

Next meeting the BoE will be under the leadership of Governor Carney. The GBP’s knee-jerk response to the announcement was to dip from 1.5660 to below 1.5620, before clawing its way back to the former level ahead of the FOMC meeting. Subsequently it plummeted to sit around 1.5470 currently.

Today, the market will be occupied with absorbing the implications of the Fed’s comments. In addition, today will bring the release of the China HSBC flash PMI. This is expected to remain slightly below expansion level (50) at 49.1. Eurozone consumer confidence and the US Philadelphia Fed will be released tonight.

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