by Raiko Shareef
NZ Dollar
The NZD is significantly weaker following yesterday’s policy announcement by the Federal Reserve.
The NZD/USD is 1.2% off its pre-Fed level, sitting at 0.8540 this morning. The currency had retraced about one-third of its immediate losses following the Fed meeting, but the NZ GDP result saw the resumption of NZD selling.
NZ grew at a 0.9% q/q pace in Q4 2013, right on the median market expectation. While the Q3 reading was revised downwards from 1.4% to 1.2%, there were compensatory upward revisions further back, meaning that the cumulative annual increase printed at 3.1%, as expected.
Part of the market’s reaction to the release might have been due to some investors seeing the Q3 revision and misinterpreting it as weakness. But we suspect there were also investors positioned for a stronger Q4 result, and the in-line result saw those positions unwound.
For us, the outturn simply confirmed that the economic expansion is gaining momentum, and that inflationary pressures are rising.
Today sees a swathe of indicators that should add further evidence to that story. For one, we anticipate that net immigration will continue at a solid pace. ANZ job ads, ANZ Roy-Morgan consumer confidence, and credit card billings are also due.
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Majors
The USD strengthened across the board following the Federal Reserve’s policy announcement yesterday morning.
The Fed was more hawkish than expected in three important ways. Firstly, despite the unusually harsh winter (which has dampened US economic indicators), the Fed still sees growth of at least 2.8% y/y over 2014, with this bottom-end estimate unchanged from the December projections. Secondly, the median policy rate expectation track of FOMC board members was upgraded by the tune of 25bp by end-2014 and 50bp by end-2015.
Last, during her press conference, Fed Chair Yellen was asked how long the period between the end of asset purchases and the first rate hike would be. Her answer (“six months or that type of thing”) implied that the first rate hike could be in April 2015 (assuming an October 2014 end to tapering), earlier than the mid-2015 point the market had been coalescing upon.
The first two points were enough to cause the US Dollar Index to pop 0.5% higher, and it ground higher over the course of the press conference. Overnight, US economic data helped to support the USD bid tone.
Jobless claims and existing home sales printed as expected, but the Philadelphia Fed Business Outlook trounced expectations, rising to +9.0 against the median analyst pick of +3.2. Continued momentum in the US economy should see the USD strengthen through the year, a dynamic that many forecasters (including ourselves) have been expecting.
Major currencies are down significantly against the USD from their pre-FOMC levels, with the EUR and the JPY both weaker by 1.0%, and the GBP by 0.9%.
There was little else to move markets over the day, and the day ahead looks similarly quiet. Some second-tier data are due, including euro-zone consumer confidence and Canadian inflation numbers.
We’re still keeping an eye out for headlines regarding Ukraine. While the market has been remarkably calm through the saga, we remain somewhat wary of adverse developments. On that front, we note that the US has placed further sanctions on a fresh set of Russian officials, as well as wealthy Russian individuals connected to the Russian President Putin.
US President Obama also signed an executive order that would allow him to impose economic sanctions on Russia. Separately, the credit rating agency S&P put Russia’s BBB rating on negative watch, citing heightened geopolitical risk and the prospect of US and EU economic sanctions.
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