Major currencies are all stronger against the USD this morning, after the Fed chose to hold rates unchanged, in the face of global risks and a softer near-term inflation outlook.
The NZD outperformed, helped by stop-loss selling through important resistance at 0.6410.
The most notable change to the FOMC’s policy statement, relative to July, was the inclusion of the phrase: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” While the FOMC continues to monitor risks (as it always does), it highlighted that it was now “monitoring developments abroad”.
These changes encapsulate why the FOMC lowered its projections of where the Fed Funds Rate will be in coming years, and the modest lowering inflation and growth forecasts. On the other hand, the Chair Yellen commented that she and her colleagues had been impressed with the improvement in the US economy.
Going forward, it is clear that the focus will remain on global developments, as well as the path of the USD and oil prices (which are important for US inflation). Even with the downside risks posed by the above, Chair Yellen was quick to note that she does “not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook.”
Notably, Chair Yellen stressed that every meeting remains ‘live’ for rate hikes. We continue to expect a December lift-off, but she did not rule out October. Financial market volatility, in and of itself, will not stop the Fed from hiking. But if those ructions lead to a higher USD and lower oil prices, which would dampen inflation further, then that would stay the FOMC’s hand.
NZD had a more violent ride than most major currencies. It rose against the USD, in line with other peers, before stop-loss buying through resistance at 0.6410 induced a sharp snap to near 0.6450. That snap has since been reversed. We’d expect NZD to retain most of the gains from the 0.6320 low pre-FOMC, but suspect 0.6410 will prove resistant today.
The USD will likely leak lower heading into the weekend, but losses will be curtailed by the knowledge that the FOMC continues to assess rate hikes on a meeting-by-meeting basis. Today, RBA Governor Stevens’ testimony could be important for AUD.
Elsewhere, investors will be watching for more colour on the FOMC’s discussion, by way of speeches from the Fed’s Bullard and Williams.
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Raiko Shareef is on the BNZ Research team. All its research is available here.
9 Comments
I was reading an article about US economic policies in the 1930s. They very obviously made some big mistakes trying to manage and stimulate their way out of the great depression. There are a lot of parallels between what was happening then and now, but today we are a lot more sophisticated in controlling the economy. But this is where I see is the common problem back then Roosevelt used stimulus and job creation to try and kick start the economy. this is a quote from the article.
"when the government hires someone to catalog the many ways of cooking spinach, his tax supported paycheck can not be counted as a net increase to the economy because the wealth used to pay him was simply diverted not created. Economists today must still battle this "magical thinking every time more government spending is proposed- as if money comes not from productive citizens, but rather from the tooth fairy."
I think we criticise China's controlled economy but in the west we also have too many controls and real growth cannot happen without real productive jobs. At some point the world needs to face austerity before these real jobs can be created or our problems will drag on as they did in the thirties.
Well said Tim. I would add: Central Banks (US, UK, EU) have ended up now 'Hoist with their own Petard'.
And they have, along with their Stats Depts, been cooking the books to make themselves look clever, so they know that real interest rates will expose them for what they are: fools, crooks or both? The RBNZ seems determined to join their club.
Certainly crooks - read the time line and still money is diverted to speculative processes, while Yellen prevaricates over what constitutes inflation.
the markets are not happy, yellen is like a surfer waiting for that one big perfect wave rather than have a quick ride then sitting back to wait.
the signal she has sent is the USA (and the world) can not handle any increase in interest rates.
watching her speak I was surprised when she commented on china in paticular
I personally think that we shouldn't continue on the path of lowering. We must "face the music" where we are, if that means some dairy farm mortgage sales so be it. But by lowering we are encouraging borrowing and spending on a property bubble. This surely can't get us out of trouble , only more deeply in it. Isn't it time the banking system incurred some controlled losses to try and dismantle the bubble damage caused by low interest rates. They been making huge profits while the real world economy is stalling.
It's not just some dairy farms it's a failed model, systemic failure. It was ok when farmers could control costs but years of inflation compounding at %8, have changed' the game'.
They have pulled a few leavers and lifted auction prices but that will only encourage production.
After a bumper year last year the EU in on track for another %3 increase in production, while the USA is humming along.
Are you a bull beef farmer if so have a read.http://www.agcenter.com/newcattlereport.aspx
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Milk continues to gush in the Northern Plains and Midwest. Production rose 13.3% in South Dakota, 4.8% in
Wisconsin, 4.7% in Minnesota, and 4.1% in Michigan. The year-over-year increase in Wisconsin was nearly
large enough to offset the 3.4% decline in milk output in California.
As the Daily Dairy Report noted
Friday, “Dairy producers in the
traditional cheese states could
become victims of their own
ambitions.” Since January, milk
production in the major dairy
states stretching from South
Dakota to Ohio has climbed
nearly 2 billion pounds relative
to the first eight months of 2014.
The flush overwhelmed capacity
this spring, and milk had to be
dumped in some Great Lakes
states. Capacity constraints
might limit regional expansion
going forward. The region is
brimming with milk, which
could continue to erode the
premium the Class III market holds over Class IV.
Over the past year, dairy producers have enjoyed a sustained rise in the value of their most fundamental assets –
their cows, heifers and calves. Springers represent three forms of potential income: a few years of milk
production, the value of the calf they carry today and those they’ll deliver in the future, and a beef cull check. The values of springers and heifer calves, of course, climbed along with the milk price last year. But quality springers continue to fetch more than $2,000 per head, even as
milk prices have plunged more than $8/cwt. from
their peak last fall. This is largely due to persistently
high beef prices, which have bolstered the salvage
value of dairy cows and the price of bull calves.
Since last July, lean beef prices have hovered near
record highs at $3/lb. Heavy dairy cull cows have
easily garnered $1,500 or more per head. Today, dayold
bull calves are worth around $475, up from
roughly $300 a year ago and $150 in late 2013. But
the bulls are no longer running wild in the cattle
market. Since peaking in June, feeder cattle futures
have fallen more than $35/cwt., a decline of 15.8%.
Calf values have fallen along with them. Live cattle
futures have dropped 12.3% in the past three months, and after holding steady for more than a year, lean beef prices have started to slip. Unless milk prices rally, dairy producers should brace themselves for erosion in their beef checks and their balance sheets. For the week ending September 5, dairy
Southland, especially Central Southland, is a pretty difficult place to be farming - dairy or sheep, for many at present. Some dairy are on once a day, some sheep farmers are struggling to feed their sheep and can't get works space.
Sheep shagger - how is it in your neck of the woods?
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