USD weaker as Fed delivers less dovish tone; traders toss NZD around before sending it higher

by Raiko Shareef

NZ Dollar

The NZD suffered some considerable whiplash in the wake of the FOMC meeting this morning, but overall decided to storm higher. NZD/USD is 0.7% stronger at 0.8720.

For us, the major implication of today’s steady-as-she-goes FOMC meeting is that the theme of subdued US yields and ultra-low volatility looks unlikely to change in the near term. With that in mind, typical carry-trade currencies such as NZD, AUD and those in major emerging markets will continue to benefit. This has been the tone of price action since the FOMC release.

As a result, NZD is also outperforming against the likes of JPY, EUR, and GBP. Against those, NZD is pushing back up against recent highs, hit soon after the RBNZ meeting last week.

Yesterday’s Q1 current account data was ignored after printing at -2.8%, exactly as expected. Market participants (and much of NZ, we suspect) were more interested in the news that opposition leader David Cunliffe had become embroiled in a political scandal. Analysts suggest that his resignation would be mildly NZD positive, to the extent that it benefits the incumbent government’s re-election odds.

Today, we are expecting Q1 GDP to print at 1.1% q/q, but the risks appear skewed for a better result than that. If so, the current positive momentum for NZD/USD would be maintained. The first stop on the topside is the 2014-high of 0.8780, and from there, resistance would emerge at 0.8830. On the downside, bids should emerge around 0.8680.

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Majors

The USD dropped after the FOMC meeting this morning, as the Fed largely defied some expectations to strike a less dovish tone.

Today’s Statement made only modest changes to that in March. The Fed acknowledged that economic activity has “rebounded in recent months”, but downgraded this year’s GDP forecasts thanks to the -1% q/q annualised decline of Q1, as widely expected. The Fed continued to taper asset purchases at a pace of $10b.

The infamous ‘dot plot’ diagram also saw some change. But in her subsequent press conference, Fed Chair Yellen downplayed these adjustments, noting that the composition of FOMC members has changed since March.

Yesterday, we noted the uptick in almost all available US inflation measures over the past few months. When asked about whether the Fed was worried about being behind the curve on inflation, Yellen noted that recent data have been “noisy” and “a bit on the high side”, suggesting the Fed does not see itself breaching its inflation target in the near-term.

The upshot of all this was that a market positioned for a slightly more hawkish Fed was disappointed. The Statement certainly gave no indication of a change in course, and Fed Chair Yellen failed to shed any dovish feathers over the course of her press conference. As a result, the USD is weaker, with a broad measure (BBDXY) 0.4% lower. Equity markets reacted policy at the prospect of continued accommodation, with the S&P 500 up 0.7%.

In the lead up to the FOMC meeting, major currencies generally saw very little movement. One exception was the GBP, where the BoE Minutes were fairly dovish, seemingly inconsistent with Governor Carney’s recent comments. The GBP slid on the release, and is one of the weakest performing majors against the USD this morning.

Markets will continue to digest the FOMC outcome over the course of today, with data releases unlikely to trouble the scorers. UK retail sales and the US Philly Fed Index will be the highlights, if any.

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