By Raiko Shareef
The USD sold off ahead of this morning’s FOMC meeting, as those holding USD long positions continue to waver. This inclination was vindicated as the statement was released. The keyword ‘patient’ was dropped, but other parts of the policy missive were more dovish than the market had expected.
The Bloomberg Dollar Spot Index is 1.2% weaker for the day, having been 0.4% softer before the statement was released.
Most importantly, the FOMC wants to be “reasonably confident that inflation will move back to its 2 percent objective over the medium term” before lifting rates. It also effectively ruled out an early move in April. Elsewhere in the statement, there was acknowledgement in the US economic slowdown outside of employment: “economic growth has moderation somewhat.” In a nod toward the impact of USD strength, the Committee acknowledged that “export growth has weakened”.
In terms of the formal forecasts, the FOMC’s median expectations for interest rates have been lowered across the horizon. In 2015, it expects 0.625%, from 1.125 previously. In 2016, it expects 1.1875% from 2.500% previously. In the new 2017 projection, it sees 3.125%. The long-run view is unchanged at 3.75%. Inflation and growth forecasts were also lowered.
In all, this was a more cautious missive than the market had expected, and should see the excessive USD long positions, built over the past few weeks, pared even further. A June lift-off in rates certainly remains a possibility, but in the context of the series of a US data slowdown, it seems much more unlikely.
NZD/USD was an outperformer ahead of the FOMC, hovering near the top of the G10 leaderboard. The rally took NZD/USD just short of 0.7400 before fading. It is unclear why NZD should have bested its peers against the USD, aside from the fact it was the biggest loser the night before. Post-FOMC, it extended its gains to be up 2.0% for the session.
Today, the Q4 GDP report will likely be the last, serious event risk for NZD before the weekend. The market expects a 0.8% q/q gain. We are in the same ballpark, picking 0.7%. The question is whether the market will focus on the slowdown in quarterly growth (from 1.0%), or the rise in the annual pace (from 3.2% y/y to 3.3%). We would pick the former, but NZD is unlikely to suffer too much.
The aftermath of the FOMC will still be the dominant factor.
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