NZD/USD drops back towards 0.7150 as risk appetite deteriorates post-Powell presser

• NZD/USD is dropping back towards lows of the day under 0.7150.
• A broad deterioration in risk appetite is being witnessed as stocks sell-off overvaluation concerns.
• The Fed event was closely watched but did not impact markets much.

NZD/USD has dropped back towards lows of the day in recent trade in tandem with continued pressure in US equity markets. In the immediate reaction to the release of the Fed’s monetary policy statement, the pair nearly manage to rally back above the 0.7200 level, but has since slid back into the 0.7150s and is eyeing a test of daily lows in the 0.7140s. At present, kiwi is trading lower by about 1.0% on the day versus the US dollar. The deterioration in risk appetite that has weighed on NZD on Wednesday started before the Fed event and has continued after, and has been the main driver of kiwi price action.

Kiwi turns lower again

The recent downturn in risk appetite that has pushed NZD/USD back towards 0.7150 coincided with Fed Chair Jerome Powell’s press conference, but was not as a result of anything he said or didn’t say. Indeed, he did not really say anything new on the Fed’s new Average Inflation Targeting policy, he reiterated that it is too early for the Fed to be talking about tapering its asset purchase programme, he played down the idea that the stock market was a bubble (as you would expect him to) and noted that the path of the pandemic (the spread of the virus and mass vaccination efforts) are key to the outlook (also as you would expect him too).

Though Powell played down the prospect of the stock market being in a bubble, his comments will not have eased the growing concerns of investors over the last few days. Market commentators have attributed Wednesday’s pullback from all-time high levels in the major US indices (and subsequent deterioration in risk appetite that has weighed on NZD) to “over-valuation fears”, as investors observe the circus currently in play as retail investors pump and dump all manner of small-cap stocks (just look at GameStop!).

NZD was largely unresponsive to underwhelming trade data; the country's trade surplus dropped to just NZ$ 17M in December, down from NZ$ 250M the month before and well below expectations for a drop to NZ$ 80M. The drop in the trade surplus was driven by a smaller than expected rise in exports to a total of NZ$ 5.35B on the month, up from NZ$ 5.2B the month before, and a surprise increase in imports to NZ$ 5.33B from NZ$ 4.95B the month before. 

Fed monetary policy decision & statement recap

As expected, the FOMC held rates at 0.0-0.25% and reiterated that this is where rates would stay until inflation runs moderately above 2% for some time, so that inflation averages 2% over time and longer-term inflation expectations remain well-anchored at 2%. Meanwhile, the Fed maintained the pace of their monthly asset purchases at $80B in treasuries and $40B in mortgage-backed securities and reiterated that purchases would continue at this pace until “substantial further progress” had been made towards the bank’s maximum employment and price stability goals. The Fed repeated that it remains committed to using its full range of tools to support the economy and that it remains prepared to adjust its policy settings as appropriate if risks emerge that could impede the attainment of its employment and price stability goals. The vote in favour of holding its policy-setting steady was unanimous.

On the economy, the Fed repeated that the pace of economic activity and employment had moderated in recent months, but, seemingly in acknowledgment of the recently observed weakening in economic momentum at the end of Q4 2020/early January 2021, said that noted that weakness is mostly concentrated in sectors most adversely impacted by the pandemic. The path forwards for the economy will depend significantly on the pandemic, including progress on vaccinations, said the bank. The public health crisis continues to weigh on economic activity, the bank added and still poses considerable risks to the outlook. Finally, on inflation, the Fed noted that weaker demand and earlier declines in oil prices was still holding down consumer inflation.