US monetary policy remains on a clear tightening path; UST 10 yr yields 3 bps higher on the announcement; USD was already on a weaker path in overnight trading and has made modest losses since the announcement; FOMC sees the NZD back above the 0.72 mark

By Jason Wong

The USD took on a softer tone ahead of the FOMC statement and has made further losses since, while UST yields have nudged higher.

The FOMC statement just released looks very close to market expectations.  The Fed hiked rates for a sixth time this cycle and continued to project a total of 3 hikes for this year.  The median Fed Funds projection for 2019 was lifted by 0.2% (so now 3 hikes) and for 2020 by 0.3% (so now 2 hikes).  The long run projection was raised by 0.125% to 2.875%. The statement acknowledged the strengthened economic outlook and left language on near-term risks as “roughly balanced”, while the central tendency for core PCE inflation forecasts was revised up a touch across the next few years.

The statement and projections reaffirm the case that US monetary policy remains on a clear tightening path and based on the Fed’s view the tightening cycle has some way to go yet.  Market reaction has been modest so far, with US 10-year Treasury yields 3bps higher to 2.93% adding to the 2bps increase seen since the NZ close.  The USD was already on a weaker path in overnight trading and has made further modest losses since the Statement.  We now await new Fed Chair Powell’s post-FOMC press conference for further colour.

In other news, the WSJ reported that China is prepared to retaliate against US import tariffs with a “measured and proportional response” depending on how broadly-based US tariffs are. According to sources, China seeks to avert tariffs by warning of possible repercussions and offering incentives to the US including better access to China’s markets, especially in the financial sector.  The White House plans to announce new tariffs against China later this week.

CAD was stronger after reports of the US backing down on a contentious NAFTA issue with regards to the auto sector – that all vehicles made in Canada and Mexico for export to the US contain at least 50% US content.  CAD was further aided by another 2½% gain in oil prices taking them to a 6-week high as reported US crude inventories were much weaker than expected.  Taking into account further losses in the USD post FOMC, USD/CAD is down over 1% to 1.2930.

UK labour market data were stronger than expected, with the unemployment rate lower, matching the lowest rate since 1975, and wages inflation picking up.  Following on from the positive news of a Brexit transitional deal earlier this week, GBP was stronger and the market became more convinced that the BoE would hike rates in May. GBP is up 0.8% to just over the 1.41 mark. Tonight, the Bank of England is expected to vote 9-0 to keep policy on hold and keep alive the possibility of a rate hike at the next meeting in May.

The NZD was on the soft side through yesterday as it hovered near key support at 0.7175 and the 200-moving average of 0.7180.  Weaker net migration data – the lowest monthly total in 3-years (sub 60k annualised rate) was the straw that broke the camel’s back that saw it breach that technical support.  In overnight trading, the NZD had a run down to as low as 0.7154 as that WSJ report on China trade retaliation came out, before a new support level emerged, bobbing around 0.7155 for over an hour before climbing back up.  A further modest gain post FOMC sees the NZD back above the 0.72 mark.

Reflecting the general underperformance of the NZD, NZD/AUD is edging down towards 0.93, NZD/GBP is down towards 0.51 and NZD/EUR is down a touch to 0.5860.  JPY has been on the soft side, seeing NZD/JPY up a touch to 76.7.

The RBNZ’s OCR Review at 9am should be a non-event for the market.  The statement is expected to show only minor tweaks from last month, leaving the final paragraph unchanged.  Being the last statement by the outgoing Spencer makes it even less relevant for the market.  Governor-in-waiting Orr soon takes over and his views on the policy outlook, which remain unknown, matter much more for the outlook of monetary policy.

Australian employment data this afternoon offer their usual chance to inject some volatility into the market. A number of PMI figures are also released tonight.


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