Commodity currencies gain but Fed and RBNZ will set tone and determine whether the rally can be sustained

By Jason Wong

Overnight market action has been modest by recent standards, as traders await the FOMC statement this morning.

The S&P500 continues to move lock-step with oil prices.

A nice rally in oil prices from early this morning has driven the S&P500 into positive territory (+0.4%), following earlier losses.

It looked like we were heading for another risk-off day when American Petroleum Institute (API) inventory data were released yesterday morning, showing that crude inventories rose by 11.4m barrels last week.  But additional inventory data published by the US Energy Information Administration (EIA) this morning were seen in a more positive light, with a more modest increase in inventories than expected.  US crude stockpiles climbed to 494.9m, the highest since November 1930, which sounds horrific, but stockpiles at the largest hub Cushing, Oklahoma fell and US crude output dropped for the first time in six weeks.  WTI oil prices have risen from a low of $30.14 last night to be trading close to the highs of the session at present at $32.60, up 3.6% for the day.

Some earnings announcements weighed on US equities, including a poor forecast of sales by Boeing and disappointing earnings from Apple.  US new home sales rose by 10.8% in December to a 10-month high, which was a nice positive economic surprise.

The FX leaderboard shows the Australian dollar as the strongest currency for the day, with AUD up 0.9% to 0.7065.  The currency was boosted by slightly stronger CPI data than expected.  Traders were geared up for a weak outcome, like NZ last week, but this didn’t happen.  The average of two core measures showed annual inflation of 2%, at the bottom of the RBA’s target range, but not weak enough to prompt the central bank into any immediate further policy easing.

The stronger AUD had a positive flow-on impact for the NZD, although commodity currencies have been supported by stronger oil prices anyway, with the CAD performing well too.  NZD/USD is up 0.4% to 0.6520, just off its peak of 0.6531.  The outcome of the FOMC and RBNZ meetings will determine if this higher level is sustained.  On the stronger Australia CPI result, NZD/AUD fell to a low of 0.9199, its lowest level in six weeks, but there has since been a modest recovery to 0.9230.  Our two short-term models put fair value at between 0.90 and 0.915, so we’ll be looking for further downside potential over coming weeks.

Elsewhere, GBP was the weakest of the majors, falling 0.6% to 1.4270.  Weaker house price and loans for house purchase data added to the negative sentiment.  USD/JPY is back up to just under the 119 handle, while EUR/USD is flat at 1.0870.

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