Friday was a day of brutal reversal for many major currencies, as investors seemingly decided that the Fed’s baulk was a sign that things are worse in the world than they actually appear.
Equities are lower and bonds are higher.
The USD has recovered most, if not all, its post-FOMC losses.
The reaction across the currency spectrum was mixed, and a little confusing. If Friday’s tumble in risk appetite were truly a result of concerns about the global outlook, one would not have expected NZD to top the major currency leaderboard, nor EUR to trail near the bottom.
To be fair, there are good reasons for EUR’s run-up to be curtailed. Throughout the run-up in EUR (and JPY) against the USD since August, we’ve pointed out that the appreciation would make the ECB (and the BoJ) anxious about low inflation, and consider easing policy further. As if on script, the ECB’s Praet and Couere stepped out on Friday to wave the QE stick. Of course, the readiness and willingness of the ECB to act has never been questioned – it’s in their official policy statements.
But we suspect the rhetoric will be stepped up in coming weeks, as it seeks to combat any EUR appreciation that might come about as a result of the Fed’s foot-dragging.
A trio of Fed speakers were also out on Friday, and banged a rather consistent drum, stressing that the FOMC was ready to move in September (a “close call”, said Williams), and intimating that a hike by year-end remains the central scenario. Lacker, Bullard, and Williams all sit to the hawkish side of neutral (with Lacker now an official dissenter, having called for a hike last week). But risk markets are unlikely to like the message that the Fed remains very ready to hike.
NZD was the best performer on Friday, which is a rather curious outcome in a relatively defensive market. We’d ascribe some of this to a strong rejection of NZD/AUD’s dip below support at 0.8840. NZD also tested important resistance at 0.6440. We’ll be carefully watching that descending trend-line. A break would open up a test of 0.6640.
The Fed’s decision to hold last week means we’re in for, at the very least, another six weeks of “will they, won’t they”. There are no fewer than eight speaking engagements by FOMC members this week, to add to the three we’ve already had since Friday. Chair Yellen is delivering a lecture on Friday, which will be the highlight. Expect an exhaustive exploration of the economics but a poker-face on policy, with the prospect of a 2015 lift-off to be strongly touted.
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Raiko Shareef is on the BNZ Research team. All its research is available here.
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