Big Moves After a Short, Sweet FOMC Statement

• Big Moves After a Short, Sweet FOMC Statement
• New Zealand Dollar Crashes after RBNZ
• USD/CAD Hits Fresh 5 Year High on Lower Oil Prices
• AUD: Saved by CPI
• Round Turn for Euro
• GBP: More Rate Hike Talk by BoE

Big Moves After a Short, Sweet FOMC Statement

The short and sweet monetary policy statement from the Federal Reserve indicates that the central bank did not want to send any new signals to the market.  In fewer than 600 words, the Fed expressed their satisfaction with the improvements in the labor market and the "solid pace" of expansion in the U.S. economy.  In their shortest FOMC statement since 2012, the Fed made no changes to forward guidance. While they acknowledged that inflation declined and could probably fall further in the near term, they still feel that long term inflation expectations are stable and expected to improve as the labor market and the transitory effects of lower energy prices dissipate. Furthermore they continue to see lower energy prices as positive for consumption. The only wrinkle was their comment that international developments could affect their policy decisions but we don't think this affects their plans for 2015 tightening. Between elections in Europe, the political upset in Greece and unexpected easing in many parts of the world, there are a lot of moving parts for the Fed to consider and this comment is their way of telling us that they aren't blind to what is happening abroad. However right now there are no immediate implications for the U.S. economy or monetary policy.  This should not be much of a surprise considering that the Fed changed forward guidance only a few weeks ago. 

Instead the big surprise were the moves in currencies, equities and Treasuries.  The dollar soared to multiyear highs versus the Canadian and New Zealand dollars and rose strongly versus the euro.  Ten year Treasury yields dropped more than 10bp as money flooded into U.S. assets while U.S. equities reversed earlier gains to end the day deep in negative territory.  The Fed's unwavering commitment to raise interest rates contributed to the big moves today but the 4% drop in oil prices also triggered risk aversion across the financial markets and prevented USD/JPY from participating in the dollar rally.  However when the dust settles we believe that investors will drive USD/JPY higher once again after they realize that it remains the most attractive bet.

New Zealand Dollar Crashes after RBNZ

A surprisingly dovish monetary policy statement from the Reserve Bank of New Zealand sent the New Zealand dollar sharply lower against all of the major currencies.  While the biggest losses were seen versus the yen, kiwi also fell to its lowest level versus the dollar in 3 years. The decline in oil prices was too much for the RBNZ to bear. According to the central bank, "falling oil prices is causing tradable goods inflation to be very weak."  They also fear that headline annual inflation could turn negative for a period before moving back towards 2%.  Combined with an unjustifiably high exchange rate, fiscal consolidation, reduced dairy payout and the risk of draught, the outlook for growth has now changed.  Most importantly, they removed the statement about expecting more tightening and replaced it with the comment that rates could move up OR down depending on data.  In other words, the RBNZ has shifted from a tightening to neutral monetary policy bias and the New Zealand dollar collapsed in response.  At this point, there is no major support in NZD/USD until the 2011 low of 0.7118.  Meanwhile falling oil prices drove USD/CAD to a fresh 5 year high. The next level of resistance for USD/CAD is the January 2004 low of 1.2685.  Of the 3 commodity currencies, the Australian dollar experienced the shallowest decline thanks in part to the better than expected consumer price report.  While annualized CPI growth slowed, on a trimmed mean basis, the increase was strong quarter to quarter.

Round Turn for Euro

The relatively unchanged monetary policy statement from the Federal Reserve sent the euro sharply lower against the U.S. dollar.  Easy monetary policy in the Eurozone and the prospect of tighter policy in the U.S. is extremely bearish for euro.  As we mentioned in our recent notes, the EUR/USD could fall much further and is poised to break 1.10. The victory by the Syriza party in Greece creates ongoing uncertainty for the Eurozone. Elections in Italy are next. Furthermore, Quantitative Easing can mean even greater losses for a currency.  Remember, the first round of QE from the Fed led to a 900 pip decline in USD/JPY over the course of 3 weeks and the QE announcement from the BoJ last year drove USD/JPY from a low of 109 to a high just shy of 120 in 6 weeks time.  This means there is additional room for the EUR/USD to fall.  If 1.1200 is breached again, 1.10 is next for EUR/USD.  Eurozone confidence, German unemployment and consumer prices are scheduled for release on Thursday. 

GBP: More Rate Hike Talk by BoE

The rally in the U.S. dollar drove the British pound lower but sterling remains in control versus the euro and other major currencies. GBP/CAD rose to its strongest level in 5 years. Although no economic reports were released from the U.K. today, policymakers continued to talk about tightening. According to Chief Economist Haldane, the U.K. economic recovery is taking hold nicely. The central bank is in no rush to raise interest rates but they will be gradual when they come. He believes that the "new normal" for rates will be between 2 and 4 percent and when rates rise, they should do so at approximately half a percent a year.  While these comments do not indicate that the BoE is ready to raise rates, the fact that the conversation centers on tightening shows which way policymakers in the U.K. are leaning.  The BoE is still poised to be the next major central bank to raise interest rates and this prospect should help sterling outperform other many currencies. GBP/CAD climbed to its strongest level since 2009 this morning.  Nationwide house prices and the Confederation of British Industry's Report Sales Index are scheduled for release on Thursday.