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.
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