By Raiko Shareef
The big miss in the US GDP report saw recent USD weakness, in large part via EUR, which surged above 1.10.
The FOMC statement had little real impact, leaving the Bloomberg Dollar Spot Index 0.6% lower for the day.
The details of the GDP report did the show the widely expected softness in investment, centred on mining investment (the impact of lower oil prices). Exports were also a drag, thanks to a higher USD.
But the subdued consumption growth was the major source of surprise, given the effective tax cut US consumers received as gas prices fell.
Ostensibly a significant miss relative to market expectations, we were less surprised by the soft GDP outturn, given the 0.1% outcome being signalled by the Atlanta Fed’s GDPNow model. We imagine this measure will be getting a bit more attention, from here on.
The FOMC statement proved to be one of the quietest of such affairs, at least in terms of market reaction. The market clearly saw little reason to take back any of the USD’s post-GDP losses. We agree with that assessment.
The salient point was that, despite the slowdown in the economy and the labour market seen over Q1, the FOMC continues to expect this weakness to be transitory. In itself, that would have been a USD-positive signal. But the acknowledgements of a slower economy checked any nascent USD recovery.
Notably, household spending has now "declined" instead of "rising moderately", business investment "softened" instead of "is advancing".
Last, they've introduced an acknowledgement to low inflation overseas that has been imported into the US. Of course, the two components of "decreasing prices of non-energy imports" (i.e. tradables inflation ex energy) is (1) falling prices in the originating country, and (2) a strengthening USD. It could be perceived a stealth admonishment of USD strength.
For markets, the message is to sit back and observe whether or not the tone of US data improves materially through Q2. In FX specifically, the concentrated nature of USD weakness against European currencies overnight suggest we should be cautious in extrapolating large-scale and broad-based USD weakness from these levels.
NZD/USD once more tried and failed to break above that 0.7750 level, which has become an important line of resistance.
Looking to the RBNZ this morning, we would be inclined to position for NZD to move toward 0.76.
While the market seems well aware the RBNZ is likely to add some dovish tinges to its statement, it is less prepared for an uptick in NZD vitriol.
Assistant Governor McDermott’s speech last week noted NZD’s strength was “unwelcome”, an upgrade in angst from March’s missive.
We’d be surprised not to see a similar sentiment expressed in today’s statement.
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