By Mike Jones*
A bout of broad-based USD weakness, triggered by this morning’s FOMC statement, has propelled the NZD/USD to highs for the week around 0.7340.
On the face of it, the FOMC statement contained little new information for markets. As expected, the Fed toned down its assessment of the US economy, and noted US inflation pressures are dead and buried for now.
However, while no new quantitative easing (QE) measures were announced, the door was left open for further stimulus measures down the track.
Indeed, the Fed’s pledge to “provide additional accommodation if needed” is what really caught markets’ eye.
After a knee-jerk push higher, US bond yields dived and the USD was shunned as investors factored in a higher chance of additional easing from the Fed.
Most of the major currencies were jerked higher as a result. EUR/USD climbed from 1.3150 to around 1.3250, AUD/USD scaled fresh 25-month highs above 0.9550, and NZD/USD jumped from below 0.7300 to around 0.7340. Nevertheless, the NZD has been one of the weakest performing currencies over the past 24 hours.
Ongoing interest from short-term speculative players to add to NZD/AUD short positions provided a drag for the NZD/USD as markets across the Tasman prepare for a resumption of RBA rate hikes.
Looking ahead, we’re bracing for an increase in the Q2 current account deficit (to about 2.8% for the year to June 2010, from 2.4%) when June balance of payments figures are released today.
Current account figures have had relatively little bearing on the currency of late. But we’d expect a clear worsening in NZ’s external accounts to begin to undermine the NZD over the next 6-12 months.
For today, a push above the overnight high of 0.7350 may be a bridge too far for the NZD/USD in the absence of a surge in Asian equity markets.
Initial support is eyed towards 0.7245.
Broad-based USD weakness was the major theme in currency markets overnight. Indeed, the USD index slumped around 1%, to be down almost 3.2% for the month to date. As expected, the Fed toned down its assessment of the US economy in this morning’s FOMC statement, noting “the pace of economic recovery is likely to be modest in the near-term”. Importantly, the Fed didn’t announce any new quantitative easing (QE) measures, spurring a knee-jerk 3-4bps increase in US bond yields.
However, this move was quickly reversed as markets digested the Fed’s pledge to “provide additional accommodation if needed”. With the door being left open for further QE down the track, US bond yields tumbled, triggering a bout of broad-based USD weakness. US 10-year Treasury yields finished the night 10bps lower at around 2.6% while 2-year yields slipped about 3bps to a fresh record low of 0.42%.
Against the broadly weaker USD, EUR/USD was propelled from below 1.3150 to almost 1.3300, GBP/USD jumped to 1.5640, from closer to 1.5540 before the Fed statement, and AUD/USD scaled fresh 25-month highs above 0.9550. USD/JPY fell to 85.10, the lowest since the Bank of Japan intervened on 15 September. Prior to the FOMC announcement, the EUR was already on the front foot. European sovereign bond auctions drew stronger-than-expected demand overnight, easing concerns about European sovereigns’ access to funding markets.
Greece issued €390m worth of debt, Spain raised a total of €14b, and Ireland issued €1.5b.
European sovereign credit spreads fell across the board. Indicative of such, the 10-year Greek-German government bond spread edged 15bps lower to 885bps – the lowest since August 23.
Figures on UK public sector borrowing were a little disappointing (£15.3b vs. £12.5b expected), providing a temporary set-back for the GBP.
Still, over the fiscal year as a whole, the Chancellor remains on track to meet the Office for Budget Responsibility’s projections in 2010/11.
US equity indices ended the night in the red, despite the Fed’s hint further stimulus could be in the offing, and some fairly encouraging housing market data.
US housing starts jumped 10.5%m/m in August to a 4-month high (0.7% expected) and building permits rose 1.8% (0.2% expected).
* Mike Jones is part of the BNZ research team.