News and views
Government stimulus was the focus last night, investors buying equities on the US Governments plan to mop up toxic assets and centralise them in a newly created ‘bad bank’. Also fuelling the positive tone was an expectation of supportive measures from the Fed’s FOMC meeting. The S&P500 is up over 3% as we write, the banks’ subindex a massive 20%. European equities were driven by similar expectations, and closed +5%. Commodities followed suit, despite further inventory warnings, WTI oil rallying 3%, copper 2%, and gold, reflecting little need for risk-protection last night, fell 2%. Risk currencies were generally bid, until a few minutes ago, perhaps disappointed by FOMC comments regarding treasury purchases.
NZD attempted the upside of the 7-day range pre-FOMC, reaching 0.5375, but then was quickly sold on once the details started emerging. The market is a tad nervy ahead of the RBNZ meeting this morning.
AUD/USD also attempted an upside breach at 0.6730, but failed for the same reason as the NZD. AUD/NZD did reach a new 2009 high, at 1.2680, and then pulled back for a breather to 1.25. There is talk of option barriers at 1.26 being triggered.
EUR’s fall, post FOMC, took it from 1.33 to 1.31in less than an hour. GBP’s 3-day rally is slowing, and last night’s 1.42 to 1.44 range may have marked a short-term top. Safe-haven JPY unsurprisingly behaved in reverse to the above, weakening from 89 to almost 91.
US FOMC maintained rates at 0-0.25%. The statement noted once again that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time”. But it provided a little more colour around that view. They went on to say that “a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant”. There was no such growth forecast in the last statement on December 16. On inflation, “the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” In Dec, the FOMC said that it expected “inflation to moderate further in coming quarters.” Re long term Treasury purchases, “the Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.” That falls short of a commitment to do so, which markets may have been looking for.
German CPI eases from 1.1% yr to 0.9% yr in Jan, the lowest rate for almost five years. That compares to the CPI peak at 3.3% yr just six months ago. Other German data included steady consumer confidence at 2.2 in the GfK survey, labelled Feb but conducted earlier this month.
IMF slashes global growth view. In November the IMF was forecasting 2.2% global growth; that has been cut to 0.5%, matching Westpac’s latest global growth forecast of 0.5%, published last week. 2009 is shaping up to be the weakest year for global growth in living memory.
Outlook
Today’s RBNZ meeting to announce the new OCR level will likely set the tone for NZD for some time. The 7-day old range of 0.5250 to 0.5370 will likely fail today, given the spread of expectations for the rate cut (100bp to 150bp). Westpac’s forecast is a 150bp cut, which would likely see NZD sold once the knee-jerk euphoria has subsided
