Ahead of the US FOMC meeting the USD drifted lower, but was catapulted higher on the statement. The AUD and NZD are the weakest performers. The CAD has outperformed.
The US FOMC statement jolted the market awake this morning. It made clear that Dec is still very much a ‘live’ meeting for a potential first rate hike.
The statement pointed out indicators it would assess: "In determining whether it will be appropriate to raise the target range at its next meeting". That is the most direct indication of a specific time for a move we have had.
The statement acknowledged that the pace of job gains has slowed. But it removed the line saying; "Recent global economic and financial developments may restrain economic activity".
Unsurprisingly, the USD index surged higher on the announcement. It is 1.0% higher than its pre-statement levels, and climbing. The market now prices almost a 50% chance of a Fed hike by year-end, up from circa 30% yesterday.
All other currencies dropped like stones. The AUD had already been on the back foot. It suffered a sharp blow from the below-expectation AU Q3 CPI release yesterday afternoon. From 0.7190, the AUD/USD gapped to 0.7120, before recovering to 0.7150, pre-US FOMC. It now trades below 0.7100.
The NZD/USD also suffered by association from yesterday’s AU CPI release. It continued to drift a little lower overnight, to trade at 0.6720 ahead of the US FOMC statement. It has subsequently plummeted to 0.6650.
It is now all eyes on the RBNZ meeting. A cut today would likely sound the death-knell for the NZD near-term, given the backdrop of a broadly stronger USD.
Even if the RBNZ remains on hold today, we expect the NZD/USD will struggle to perform, as the market looks toward a first Fed hike. We continue to see the NZD/USD to trading down to 0.6000 in early 2016.
The NZD is also lower on most of the crosses. Trading in the NZD/AUD has been fairly striking over the past 24-hours.
On the AU CPI release it gapped from 0.9420 toward 0.9490. However the move was not sustained. The cross has subsequently sustained a steady path lower, back to 0.9380 currently.
Equity markets have been remarkably resilient to the USD FOMC statement. Although the S&P500 is off its intra-night highs it remains in positive territory. If risk-sensitive assets can maintain some composure in the face of an imminent Fed hike, this will likely simply encourage the Fed in its intention.
Commodities enjoyed a solid rebound overnight. This was led by a 6% rebound in the WTI oil price. This occurred after the Energy Information Administration (EIA) reported that fuel inventories declined and fuel consumption increased last week. This helped carry the ‘oil-linked’ CAD into lead position.
The CAD has gained 0.4% against the USD over the past 24-hours, though it has given up much of this gain post the Fed’s statement.
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Kymberly Martin is on the BNZ Research team. All its research is available here.