Ahead of the US FOMC meeting this morning the USD softened, the US Treasury curve flattened and equity markets were higher. After the widely anticipated 25bps increase in the Fed funds range, the USD weakened further, while rates fell across the curve.
The key takeouts from the FOMC release were (1) little change in the Fed dot plot, with the median expecting two further rates this year, and three hikes next year; while 2019 was nudged up a touch the long-run target remained at 3.0% (2) core inflation was noted to be running below 2%,and the Fed expects inflation to stabilise around the 2% mark, hardly a sign that the Fed thinks it is behind the curve (3) known dove Kashkari dissented, voting against the rate hike.
With the Fed statement and projections less hawkish than some feared, the USD major currency index fell after the announcement and is currently down 0.7% for the day.
There were a number of US economic releases ahead of the FOMC meeting but they weren’t market moving, being largely in line with expectations, including headline CPI inflation rising to a 5-year high. The UK unemployment rate was lower than expected but so too were wages. It continued a global theme of surprisingly soft wage inflation as labour markets tightened.
NZD was up to 0.6960 ahead of the Fed and broke up through the 0.70 mark in the aftermath of the release. Current account data yesterday were in line, but today we think that the risks are weighted towards Q4 GDP coming in softer than market expectations. Any NZD dip on the result wouldn’t be expected to be sustained, as the data are fairly dated and we still think that the NZ economy is in good shape.
The AUD has more or less followed the NZD, seeing NZD/AUD trading in a tight range of around 0.9145-0.9165.
GBP blipped higher on the European open, which traders put down to flows related to the fixing. It weakened after the soft earnings figures and made further gains post-Fed. A poll showed that a majority of Scottish voters back staying in the UK. GBP volatility is likely to remain higher than for other currencies as Brexit is triggered and negotiations begin.
EUR softened after ECB Board member Praet said that the pick-up in euro-area price growth isn’t yet strong enough to justify changing policy, a pushback to a report last week that the ECB had discussed raising rates ahead of ending QE. EUR managed to recover as the USD weakened. NZD/EUR is up to 0.6555, seeing a nice recovery over the past 36 hours.
Ahead of the FOMC meeting, the US Treasury curve flattened, with the 2-year rate up 1bp to 1.39% and the 10-year rate down 3bps to 2.57%. Post Fed rates fell across the curve and at the time of writing, the 2-year rate was down 5bps for the day and the 10-year rate fell a further 4bps to 2.53%. Fed Chair Yellen’s press conference will be closely monitored to see if the post Fed move in the USD and rates seems appropriate.
Local trading yesterday was subdued ahead of the Fed, with little change in rates across the curve. We’ll likely see more action today in the aftermath of the Fed and with a packed calendar. During the local session, Q4 GDP, Australian employment data and the BoJ policy meeting are scheduled, while tonight sees the BoE meeting. We expect those meetings to pass without too much fanfare, with policy remaining on hold.
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