The moves seen in the aftermath of the Fed’s tightening of monetary policy yesterday have extended, with the USD finding supporting and UST yields drifting higher. US equities are softer and the VIX index is higher.
Markets are clearly still digesting the FOMC statement and Chair Yellen’s comments. The fact that the Fed stuck to its guns in the face of recent softer inflation data surprised some in the market. But continuing on its path to normalise rates makes a lot of sense considering that financial conditions are actually easier since the Fed began the tightening cycle in late 2015. With no harm done to the economy or markets, the Fed can be pleased that it now has 100bps of extra ammunition should it ever be needed in the next economic downturn.
The USD TWI majors index is up 0.5% for the day, with broadly based gains, taking the post-FOMC meeting gain to 1.0%. The only major currency the USD hasn’t been able to rise against is GBP, following the Bank of England meeting. The BoE left policy unchanged, as expected, but the 5-3 vote highlighted an unusually divided committee, with 3 members voting for a rate hike with annual CPI inflation well above target at 2.9%. UK rates lifted across the curve, but the market still believes that a rate hike remains a distant prospect, well into next year. Earlier in the session, retail sales fell by more than expected, highlighting the plight facing consumers as real incomes fall, while the inflationary impact of the plunge in GBP is expected to eventually fade. The UK 10-year rate rose by 11bps to a still-low 1.03%, while GBP rose by around 100pips from around 1.27 to 1.28, before settling around 1.2760.
AUD was well supported after a surprisingly strong labour market report, which saw the unemployment rate drop to 5.5%, its lowest level in four years. The gain to 0.7630 has now been fully unwound by a strong USD, and it currently sits at 0.7580, but the currency has outperformed on many crosses. A soft NZ Q1 GDP report did the NZD no favours and, combined with the stronger USD, it has steadily fallen back down to around the 0.72 mark. After a very strong run since mid-May, the NZD is well overdue for a consolidation phase. Following that we see downside risk as the second half of the year gets underway. NZD/AUD is down a cent off its recent highs and is probing around the 0.95 mark.
A stronger USD sees EUR down 0.6% to 1.1150 and USD/JPY up 1.2% to just under 111. The extent of yen weakness is somewhat surprising, given the mild risk-off tone. The BoJ meets today and isn’t expected to spring any surprises. Japan’s inflation rate remains well below target and all the BoJ can do is sit back and continue with its yield curve control policy to keep rates around zero and hope for the best. NZD/JPY is closing in on the 80 mark, close to a 3-month high.
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