Risk assets climb as US Fed takes market by surprise and does not announce tapering plan

by Kymberly Martin

NZ Dollar

The NZD traded sideways ahead of the US FOMC announcement early this morning. It then gapped from 0.8240 to above 0.8300. It now sits around 0.8350.

Yesterday’s NZ current account data (-4.3% vs. -4.8% expected) came and went without too much reaction from the currency.

Currency markets had their eyes firmly set on the US FOMC meeting in the early hours of this morning.

In contrast to broad expectation, the Fed failed to ‘taper’ its asset purchases at the meeting. As a result the USD fell sharply against all its peers. The NZD was a key beneficiary.

The NZD/USD, at 0.8350, is now at its highest level since early May. Technically, the next layer of resistance will be encountered in the 0.8400 to 0.8480 window, though the NZD is now being propelled by positive momentum.

The NZD was also stronger on the crosses, after some initial volatility around the FOMC announcement. The NZD/AUD has popped higher to sit at 0.8810 this morning.

Today, markets will continue to digest the longer-term implications of a slower start to the Fed’s process of reigning in its highly accommodative policy. However, this morning focus will also return to the domestic market with the release of NZ Q2 GDP.

We expect a -0.2%q/q outcome (consensus +0.2%), partly reflective of drought impacts on the quarter. We see this as a precursor to a 1.3% rebound in Q3. Therefore, given positive NZD momentum, a weak reading today may not be sufficient to significantly dampen the currency.

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Majors

It was the calm before the storm ahead of the US FOMC meeting this morning. Currencies traded fairly tight ranges last night. Post the meeting the USD gapped lower relative to all of its peers.

Confounding expectations that it would begin its ‘tapering’ process, the US Fed left its asset purchases unchanged at $85b per month in September. The markets response was swift and harsh. As US bond yields plummeted, the USD index gapped lower. From 81.00 it fell below 80.40, before stabilising around the 80.50 level, its lowest level since February.

Although the Fed acknowledged some “growing underlying strength in the broader economy” it wanted to wait for more evidence this was sustainable before adjusting the pace of its asset purchases. The Fed may have been specifically concerned about the impact of the recent rise in long yields on the housing market recovery.

The Fed’s new forecasts show the Fed funds rate at 1.0% at the end of 2015 and 2.0% at the end of 2016. This is slightly below market futures pricing ahead of the announcement. This, as much as the ‘no tapering’ announcement was likely reason for the market’s sharp response.

US equities gapped higher. Up 1.2% on the day, the S&P500 is now at a new all-time high of 1720. Emerging market currencies were also key beneficiary e.g the BRL and ZAR are up 2-2.5% relative to the US over the past 24-hours.

Within developed market currencies, the ‘risk sensitive’ AUD and NZD were key beneficiaries. Post the announcement the AUD/USD surged around 1.30% to sit close to 9500 currently. It is now at its highest level since mid-June.

European currencies also popped higher. The EUR/USD has broken through key resistance levels to sit around 1.3500 this morning, its highest level since mid-February.

The GBP/USD was also catapulted to its highest level since January. Earlier in the evening it had gained an initial boost. Bank of England minutes showed a 9-0 vote in favour of leaving UK rates unchanged at 0.5% and asset purchases unchanged. Later, after the US FOMC announcement the GBP/USD surged to 1.6110. The turn of the year highs in the 1.6300-1.6400 window are now coming into view.

Tonight the UK delivers August retail sales data. A strong rise, that we expect, could be sufficient to spur the GBP to greater heights relative to the USD.

The JPY was not immune from all of the excitement. The USD/JPY fell from around 98.90 before finding its feet around 98.00. However, the prospect of a still accommodative US Fed needs to be weighed against the prospect of further accommodation from the Bank of Japan.

Today will be about the market licking its wounds in the wake of the surprise FOMC announcement. Across the Tasman, the RBA’s release of FX transactions data may be of passing interest. Tonight, attention will return to the US with the release of weekly jobless claims, US Philadelphia Fed Survey and existing home sales data.

All its research is available here.