RBNZ leave rates on hold

Today's Highlights

Us Dollar gains after hawkish FOMC

RBNZ leave rates on hold

US GDP the focus this afternoon

FX Market Overview

Yesterday the Federal Reserves surprised the market somewhat with a more hawkish stance on the economy. They decided to conclude the tapering of asset purchases and also commented that they see solid job gains and a gradual diminishing of the underutilisation of labour resources. They also seemed less concerned about falling inflation and the outlook for global growth. The dollar has been bought aggressively as analysts bring forward rate hike expectations from the end of next year to the middle of 2015. The divergent path of relative central banks looks likely to drive exchange rates in the medium term and the dollar will almost certainly strengthen as it becomes one of the first major central banks to tighten policy.

Overnight the RBNZ left interest rates on hold and dropped the language in its policy statement which made reference to further tightening. They did , however continue to signal that they expect inflation to recover which would suggest that they are not considering easing any time soon. Additionally they reiterated expectations of further weakening of the New Zealand dollar from current levels. The kiwi which was already under pressure after the hawkish FOMC lost more ground and in the current environment will struggle to make significant gains.

Looking ahead macro data from Germany will be the focus this morning. Perhaps the most important of the announcements will be the inflation rate as markets gauge the possibility of the European Central Bank upping the ante at next week's policy meeting. German inflation may fall back to 0.7% y/y which would be the lowest release since May and would confirm that tomorrows Eurozone inflation data will remain around 0.3%. With inflation remaining stubbornly low the ECB will be under enormous pressure to do more to stimulate growth I the region despite only commencing asset purchases this month. Expect the Euro to remain under pressure.

This afternoon we get the prelimanary estimate of third quarter GDP from the United States which will , of course , be very closely watched. Annualised growth of around 3.0% is expected and as they have just finished tapering and expressed little concern over the global economy the surprise would be if the reality was a little lower than expected.