By Danica Hampton The US Dollar index (DXY) was slaughtered last night, in direct response to the adoption of Quantitative Easing (QE) by the US Federal Reserve's FOMC. The daily decline in the DXY is the third largest since it was introduced in 1970 and it's the biggest one day decline since the heady days of 1985 & the Plaza Accord. The stand out point from yesterdays FOMC statement was that the Federal Reserve will purchase up to US$300 billion of "longer-term" Treasury securities over the next six months. In addition, the Fed announced plans to purchase a further US$750 billion of agency mortgage-backed securities and up to US$100 billion of agency debt (Fannie Mae, Freddie Mac mortgage bonds), taking the total purchases of these securities to US$1.45 trillion this year. The target range for the federal funds rate was maintained at 0-0.25% and the Fed noted that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period". The NZD/USD chased the broad USD weakness, and buoyed by a mix of technical funds, proprietary traders and some real money appetite has traded above the US56 cent level overnight. Risk currencies continuing their renaissance that yesterdays game changing move by the Federal Reserve encouraged, as they seek to expand their balance sheet and the monetary base. The total new amount of liquidity becoming available is around 8% of GDP, similar to the moves the BOE made which correspond to nearly 10% of UK GDP.
Analysts and Investors fear the increase in US money supply will erode the purchasing power of the USD. While their concerns have so far been expressed with widespread selling of the USD we should note that the link between whether or not quantitative easing undermines the USD is inflation. Only if quantitative easing stokes inflation will it erode the purchasing power of US dollars and in the longer term weigh on the USD. The speed and magnitude of the recent ascent in NZD/USD isn't likely to be sustainable, but traders will need a cast iron stomach to fight or fade it in the short term. Exhaustion of the move could come only after we have challenged the US 0.5700/0.5750 level, while the immediate base for the coming days is likely to be around yesterday's Asian session levels of 0.5400/0.5450. Mixed in the FX outcome has been a run higher for NZDAUD, the NZD recovery lifting the cross through technical stops at the 0.8065 level. The swing in favour for the Kiwi has been unfolding since the start of the month and the last 24 hours encourages those looking for a test of 0.8150/0.8200 resistance area (the 200 day moving average is at 0.8193). The local calendar serves up some tasty treats next week. Woeful manufacturing sales volumes for the December quarter had us, and most other forecasters, revise down Q4 GDP expectations for release next Friday. We now expect -1.1% q/q, a touch weaker than the market. Notably, that's considerably worse than the -0.8% anticipated by the RBNZ in its March Monetary Policy Statement. Although GDP is a lagged indicator, a result on the softer side of the Bank's expectations will add further support to the view that the OCR will push down to an eventual trough of 2.00% (rather than the 2.50% foreseen by the RBNZ). Released the previous day, Q4's balance of payments deficit will likely push wider, but as much due to the pattern of external flows earlier in the year as anything. Monthly consumer sentiment polls point to a slide in Westpac's quarterly index - something down in the mid-90s region looks most likely - while February's trade flows will likely show further moderation, albeit nothing like the recent collapses seen in many other countries. To finish the week, we expect any challenge of the 0.5625/0.5650 level to meet strong resistance, with traders keen to be part of the USD weakening looking to buy a pullback in front of the 0.5500 area. For the economists the week finishes with two series updates, another net influx of permanent migrants, and further tourism weakness, could be revealed in February's external migration data, while higher petrol prices during the month of February will likely support a lift in credit card spending. Later today in New Zealand, we'll see migration numbers due at 1045am and Credit Card Billings at 3.00 pm. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.