Ahead of the FOMC meeting this morning, the USD continued to track lower, reflecting a rising chance of a Trump victory and investors taking profit after a strong October.
A risk-off mood has been prevalent, resulting in lower equity prices, a stronger Yen and the commodity currencies – AUD and CAD underperforming.
The FOMC statement was very similar to the previous one, with only minor tweaks to the language. These tweaks conveyed a sense that the Fed was closer to pulling the trigger for a rate hike in December. As we go to press, 15 minutes after the release of the Statement, there has been little movement in currency markets.
Despite the risk-off mood the NZD has been the best performer, up 1.6% to break 0.73. NZ employment data surprised strongly on the upside, taking the unemployment rate down to its lowest level since 2008. This gave the NZD a 40pip boost and it has continued to steadily climb thereafter, reflecting the weaker USD. There might have been some added boost in the form of a delayed reaction from the earlier, stronger GDT dairy auction. Strangely the NZD fell in the hours after that announcement, but as local investors started the trading day the NZD immediately recovered. BNZ raised Fonterra’s projected milk payout for the current season by 14% to $6.00 per kg/milk solids.
The currency is now at the top of the rough 0.70-0.73 range we expected it to trade into year-end. Our fair value estimate of the NZD has dropped to around the USD0.70-0.71 mark, driven by the chunky fall in global risk appetite, which offsets the rise in NZ commodity prices. A Clinton victory would likely see a jump up in risk appetite and a stronger USD, closing the gap between actual and fair value.
USD/JPY has headed steadily lower, supported by the risk-off mood and earlier this morning approached 103. Oil prices fell by over 3% as inventory data revealed a much larger than expected increase in crude oil stockpiles. This held back performance of the AUD and CAD in a weak USD environment.
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