NZD buoyed as Fed misses on hawkish expectations
Thursday 16 June, 2022
Daily Currency UpdateFinally some respite for the NZD as commodity currencies and risk assets rally in the wake of the FOMC rate update and statement. Having tested a break below critical supports at US$0.6220, the NZD slowly edged back toward US$0.6250 through the domestic session continuing the upturn through offshore trade and into the all-important US Federal Reserve policy meeting. The NZD then lurched higher after voting members within the Federal Open Market Committee offered a statement that failed to meet markets' hawkish expectations. Policymakers opted to raise the Fed Funds rate a staggering 0.75% in a move that would ordinarily send shockwaves through the market. Instead, investors having priced in the move following last week’s shockingly robust CPI print and key media analysis throughout the week shifted their focus to the accompanying policy statement. The statement showed the Fed adjusted its median estimates for rates into the end of the year to 3.375% meaning they anticipate only a further 150 basis point adjustment through the next 4 meetings. When coupled with comments from Fed Chair Jerome Powell wherein he suggested policymakers “do not expect moves of this size to be common” investors were prompted to downgrade aggressively hawkish estimates. The NZD jumped through 0.63 US cents touching highs at US$0.6310 before settling lower and trading between US$0.6280 and US$0.63 into this morning’s domestic open.
Our attentions turn now to Q1 GDP data. With the market pricing a 0.6-0.7% uptick in growth through the quarter a miss to the downside wouldn’t surprise us given the negative impacts of Omicron. While we wouldn’t ordinarily expect the long-dated data set to pose a significant FX risk given the market's sensitivity to growth and inflation at present a miss to the downside poses a risk to the NZD.
Key MoversRobust price action through trade on Wednesday saw the USD fall against a basket of major counterparts as improved risk sentiment and a correction across US yields helped elevate commodity currencies and risk assets. As expected the Fed raised rates by 75 basis points at its June meeting overnight and in keeping with the recent trend of selling in the aftermath of a rate hike, markets forced the dollar off multi-year highs as Fed officials failed to offer an accompanying statement that met investors hawkish expectations. Having aggressively lifted rates markets immediately began pricing in a second 75 basis point adjustment in July but were forced to quickly unwind moves as policymakers suggested such a move would not be commonplace while setting medium estimates for the Federal fund rate at 3.375% at the end of 2022. Markets were forced to downgrade estimates for peak interest rates and dial back expectations for future interest rate adjustments. Two and Ten-year yields fell forcing the dollar index lower.
The euro failed to take advantage of the US D downturn closing flat on the day. The single currency poked its head above US$1.05 after the ECB called an emergency meeting to discuss market conditions and the sharp correction in peripheral bond spreads after Greek and Italian bonds plunged 45 and 46 basis points respectively. The ECB elected to employ tools and act against defragmentation risks as it unwinds its QE program and begins raising interest rates. The announcement helped bolster risk demand.
Our attentions turn now to the Bank of England policy update. We expect only a 25 basis point hike as policymakers attempt to tread a fine line between controlling inflationary pressures and avoiding recession. Having recovered back above US$1.2150 a dovish policy update could drive the GBP back below US$1.20.
- NZD/USD: 0.6220 - 0.6380 ▲
- NZD/EUR: 0.5930 - 0.6080 ▲
- GBP/NZD: 1.9280 - 1.9480 ▼
- NZD/AUD: 0.8930 - 0.9080 ▼
- NZD/CAD: 0.8050 - 0.8180 ▲