News and views
US Fed to print money. This unexpected announcement from the FOMC meeting this morning, which will see the Fed purchase US$300b of US treasury bonds during the next 6 months, and pay for them with newly created money, sent a shock wave through currency and rates markets. US 10 year treasuries gapped higher, the yield down 50bp to 2.47%. The USD currency gapped down 2.2%, and gold put in a 5% rally after weakening during Europe’s afternoon. US equities responded too, the S&P500 jumping 2.7% on the news. While the markets focused mainly on the Fed’s planned treasuries’ purchases, also of interest is the intended expansion of their balance sheet by around 60%. Around $750b of mortgage-backed securities will also be purchased, and the TALF’s scope will be expanded to include distresses assets. The US Fed’s move today is stimulatory for risk, and the global ripple effects may persist for several weeks.
Similarly to most risk-currencies, the NZD was subdued until the Fed announcement, ambling sideways around 0.53. The news sent it soaring to 0.5460, where it sits currently.
AUD ranged around 0.66 for most of the European session, the Fed-induced spike sending it to 0.68, with that level holding. AUD/NZD, which was looking toppish from 1.2545 before the news, fell a cent to 1.2410, but couldn’t break that key support.
EUR had already rallied from around 1.30 to 1.31 on a short squeeze around noon Europe, FOMC pushing it to just under 1.35. USD/JPY fell from 98 to 95.65, and is consolidating above 96.
FOMC maintained rates at 0-0.25%, but eased monetary policy via additional credit/ quantitative easing. The Fed has massively increased the credit easing programme by announcing its intention to purchase up to an additional $750 billion of mortgage-backed securities, bringing total purchases planned for this year to $1.25trillion. They also plan to double purchases of agency debt to $200bn. Most important was the Fed’s announcement that it intends to buy up $300bn of longer-term Treasury securities over the next six months – genuine quantitative easing or printing money. On the prospects for economic recovery, the committee expected “a gradual resumption of sustainable economic growth”, significantly more downbeat than the previous statement which had pinned down the timing of recovery to the second half of 2009. 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”, a repeat from the last statement.
US CPI inflation was 0.4% in February. Higher petrol prices were the main driver of higher headline inflation, while food prices fell. Core inflation was stronger than expected at 0.2%, 1.8% yr
US Q4 current account deficit was –$133bn, a very sharp improvement over Q3 and the smallest deficit since March 2004.
UK Bank of England March MPC minutes showed unanimous decisions to cut 50bp and buy £75bn of assets. Concern that cutting rates too low could be counterproductive to the goal of expanding lending leads us to conclude that 0.50 is the BoE’s desired terminal rate.
UK unemployment claimant count jumped 134k, the most since records began in 1971 and much weaker than markets expected. Jan was revised up from 74k to 94k. The claimant-count unemployment rate rose to 4.3% in Feb, up from 2.5% a year ago. Average earnings including bonuses over the Nov-Jan period were 1.8% higher than the same period a year earlier, a spectacular decline from the 3.1% growth recorded in the Oct-Dec period, considering the overlap of two months out of three. Average earnings excluding bonuses continued their 3.5% annual pace of growth.
Outlook
We had been calling for the week-long corrective rally in NZD to extend to around 0.54 before running out of steam, and today we got that extension (although we admit to being as surprised as anyone on the catalyst). Whether it does exhaust itself here is questionable, though. Most likely, the global ripple effects of the Fed’s move will continue to support NZD in the short-term, and we will watch for signs of a turning point before adopting a negative-NZD bias again. Today’s suggested (and low-confidence) range is 0.54 to 0.55.
