USD sold down after Fed funds rate forecasts lowered; NZD/USD drives back over 70c after Fed announcement; NZ GDP expected to be 0.6% for quarter

By Raiko Shareef

The USD was in vogue ahead of this morning the FOMC decision this morning.

There, policymakers marginally lowered their projections for where the Fed Funds Rate would be in 2016 and 2017, sending the USD lower across the board.

Ahead of this morning’s decision, the USD generally reflected a sharp rise in US Treasury yields.

JPY and AUD were among the biggest losers. The AUD’s weakness began in the Asian session, as Chinese iron ore futures hit the daily price change limit (4%) on the downside. Benchmark iron ore prices are down 2.2% overnight to $61.1.

Of course, everything was set to change, depending on the shift in language and forecasts from the FOMC. As it happened, the changes made were among the mildest that we’ve witnessed in recent meetings.

The most notable change was the slight shaving of the 2016 and 2017 median ‘dot plot’ forecasts. The 2016 median was lowered from 1.875% to 1.625%, and the 2017 median was lowered from 2.875% to 3.125%. The 2015 forecast was unchanged, and still implies two 25bp rate hikes by year’s end.

In the policy missive itself, there was very little change. The FOMC sounded marginally more upbeat on the labour market than in March, noting that underutilisation had “diminished somewhat”. It also noted that energy prices had stabilised, which will give the Committee confidence that inflation will return to 2% over the medium-term.

For a market that had readied itself for a constructive outlook by the Fed on the economy and its interest rate path, the lowered ‘dot plots’ came as a mild disappointment.

The AUD and JPY regained all of the ground they lost earlier. The EUR, which had held fairly steady overnight, is now up by 1.0%, near its highest level in two weeks.

We continue to expect the Fed to lift its policy rate in September, and nothing we have seen this morning materially challenges that view.

NZD suffered along with AUD against the USD overnight, and in the volatility immediately following the FOMC statement release, traded below 0.69.

However, in the broader USD sell-off since then, NZD/USD has traded above 0.70. With such a large speculative short position likely still present in NZD, we favour the squeeze to extend modestly, depending on the local GDP report due this morning. We’d expect resistance at 0.7080.

Today, the market expects NZ’s Q1 GDP to print a 0.6% quarterly gain, in line with our own forecast. Elsewhere, US inflation and the Philly Fed survey will be a focus.

Get our daily currency email by signing up here:

Raiko Shareef is on the BNZ Research team. All its research is available here.