by Raiko Shareef
NZ Dollar
The NZD was little changed ahead of the FOMC meeting this morning, but has dropped sharply following that release.
The NZD/USD is 0.7% lower to 0.8560, following the slightly more positive assessment of the US economy by the Federal Reserve. The NZ TWI is 0.5% lower at 80.13.
Yesterday’s Q4 2013 current account release had no impact on the NZD, printing at 3.4% of GDP (as the consensus had expected). This was a sharp improvement from the 4.1% deficit in Q4, driven by booming dairy exports.
But even if the number had missed expectations significantly, the market would have been loath to move too far, ahead of the bigger risk events of the FOMC and NZ GDP this morning.
We are looking for a 0.8% q/q gain in today’s Q4 2013 GDP release, slightly below the market’s 0.9% pick. This would be a positive result after Q3’s outsized 1.4% gain.
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Majors
Currency markets were largely on hold ahead of the FOMC announcement this morning, which came in USD positive.
The Federal Reserve announced another $10bn tapering of asset purchases, taking the pace to $55bn, as widely expected. Unsurprisingly, the FOMC members also dropped the explicit link between their future policy path and an unemployment rate of 6.5%. They will be looking at a broader range of indicators in deciding when to start raising interest rates.
On that note, the members’ individual projections of rate hikes saw a slightly more aggressive rate track. 13 of 16 members now see rate rises in 2015.
All up, the assessment was slightly more positive for the US economy than in December. The market ran with this story, with the USD stronger across the board. The US Dollar Index screamed 0.6% higher immediately after the release to 79.9. We suspect that markets had been wary that Fed Chair Yellen could have been more dovish in the wake of the harsh winter, and this is now being priced out.
The GBP was the best performing currency overnight. The Bank of England minutes from the latest meeting showed that policy makers were cognisant that the GBP could appreciate further, should UK data continue to print positively. This would have a dampening impact on inflation.
We expect the first Bank Rate increase in Q3 2015. Separately, the UK’s Chancellor of the Exchequer unveiled a Budget that saw upgrades to growth forecasts, and a halving of the budget deficit since the Conservatives came to power, with an expected return to surplus by 2018/19. These positives helped the GBP/USD climb 0.3% for the session to 1.6640, before the FOMC erased those gains.
In China, the reaction to news of another corporate collapse has been relatively subdued. A Chinese property development company is reportedly unable to repay its debts of around US$569m. This follows China’s first ever onshore corporate default earlier this month. There, the magnitude was much smaller (around US$14.7m). The CSI 300 (a benchmark Chinese equity index) fell 0.8% yesterday, and the CNY weakened to less than 6.20 per USD for the first time since April 2013.
The global calendar for the day ahead is very light, with the focus likely to be on the Philadelphia Fed Business Outlook Survey as well as US existing home sales.
Other news:
*Japan trade deficit ¥800.3b vs ¥600.0b exp.
*UK unemployment rate 7.2%, as expected.
*US current account deficit $81.1b vs $88.0b exp.
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