USD pressure remains after FOMC statement

FOMC was the main course for the markets overnight as dollar pressure before and after remained heavily bearish. While many will be looking at the FOMC statement as rather neutral in terms of direction, I found it very interesting. The statement showed that the Federal Reserve is worried about the recent slowdown in the US economy with inflation remaining a concern, which is still well below its current target of 2%. The statement directed a big spotlight on inflation being the second catalyst required to lift rates in the future, with employment statistics remaining the number one catalyst.

While the markets still expect a rise in interest rates in September, and so do I, the Federal Reserve left itself some wiggle room at the bottom of its most recent statement. For example, the suggestion that further negative news would “warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run” is what I found particularly interesting about the statement. With global threats remaining in the financial system, it seems that the Fed is concerned about what impact this could have on the future of the US economy. In the short term, the USD is still vulnerable to further selling if interest rate expectations get pushed back further, but time might be provided to see if data picks up. Employment data is the obvious one to look out for, but inflation and consumer confidence figures will be closely watched as well.

The NZDUSD fell sharply after the release of the Reserve Bank of New Zealand (RBNZ) statement, as it looked to negate on the possibility of possibility of an interest rate rise and instead focus on the possibility of rate cuts if the New Zealand economic situation does not improve. The positive news is that the RBNZ expects that inflation is to likely pick up in the medium term, as the impact of the decline in the price of oil which has had a deflationary effect subsides.

While the RBNZ is hesitant to cut rates, and that can be seen from the rate statement, it is being backed into a corner where it may have little option as the currency remains quite high and export prices continue to decline at the same time. The RBNZ has the ability to intervene directly in the currency markets, but recent intervention was met with only moderate success in driving the NZD lower. I now believe that the RBNZ will likely be forced to cut interest rates if inflation fails to pick up and if the NZD continues to remain robust in currency markets.

After failing to hold ground at the 0.76 level, the NZDUSD is looking to turn very bearish in the market and is expected to test key levels as if falls down the chart on this recent statement. Certainly the market will be focused on 0.745 as the support level that the market will likely look to test as the NZDUSD drops.

Oil (WTI) saw strong bullish movements today as the weekly US Crude Oil Inventories report showed a decline in the surplus that was anticipated by the market. The surplus shrank to 1.91M barrels, much lower than the recent API estimate at 4.5M barrels. This in turn led to a sharp push on the $59.25 resistance level and a strong pullback at the same time.

While oil is still fundamentally having issues with too much supply and a lack of demand (demand could worsen further if US markets slow down) it has finally seen a slow reduction in the size of surpluses as of late. We may even see a negative balance in the next reading, something which has not seen since January, and what could certainly spur the bulls rapidly back into the market. With the cyclical nature of oil markets in recent years it could very much mean the return of a bullish market if we start seeing negative crude balances.