Via Marc Chandler at Brown Brothers Harriman:
Dollar Firmer after FOMC
– The FOMC meeting was a non-event
– German state CPI data started to come out
– RBNZ kept rates steady at 3.5%, as expected, but introduced possibility of rates going either up or down
– South Africa Reserve Bank meets and is expected to keep rates steady at 5.5%
– Banco de Mexico meets and is expected to keep rates steady at 3.0%
Price action: The dollar is mostly firmer against the majors in the wake of the FOMC meeting. The antipodeans are underperforming. Kiwi is sharply lower after the RBNZ moved to a more neutral stance regarding rates, trading below .7300 for the first time since March 2011. It has dragged Aussie below .7800 ahead of next week’s RBA meeting. The Scandies are outperforming. The euro is trading near $1.13, while cable is trading near $1.5150. Dollar/yen initially rose after weaker than expected Japan retail sales, but has since fallen back below 118. EM currencies are broadly weaker, with RUB, TRY, and KRW underperforming. MSCI Asia Pacific was down 1.4%, with China underperforming, weighed down by talk of further curbs to margin trading accounts. Euro Stoxx 600 is down 0.2% near midday, while S&P futures are pointing to a lower open.
- As we expected, the FOMC meeting was a non-event. Policy was kept steady, and the Fed retained “patient” with regards to starting the tightening cycle. Note that the two dissents from December (Fisher and Kocherlakota) are not on the FOMC in 2015. Thus, this vote was unanimous. Looking at the side-by-side comparisons with the December statement, economic activity was upgraded from “moderate” to “solid” while jobs growth was upgraded from “solid” to “strong.” It added a new phrase about “international developments” that suggests a possible delay to rate hikes. But short of full-blown crisis in the rest of the world, we don’t think the Fed will alter their timeline very much. If we had to characterize this statement, we’d say it leans more towards being hawkish than being dovish.
- It’s worth noting that the dollar ended Wednesday at or near the highs against most of the majors and EM, the yen being the main exception. With the dollar maintaining or extending those gains, we think our hawkish take is the right one. That is, the Fed has upgraded growth and jobs outlooks, and remains on track to hike near mid-year. US equities ended Wednesday near the lows and futures are pointing to a lower open today, also suggestive of a more hawkish Fed take.
- There was a lot out on the data front, and here is a summary. German state CPI data was on the soft side, pointing to a growing risk of deflation at a national level. Nationwide CPI is due out later today, expected at -0.1% y/y (-0.2% y/y EU harmonized). Germany also reported steady December unemployment rate at 6.5%. Eurozone M3 rose 3.6% y/y in December, slightly higher than expected and enough to bring the 3-month average to 3.1%, up from 2.7%. Of note, this was the first increase in bank lending since July 2012. Spanish retail sales for December rose sharply to 6.5% y/y from 1.9% in November, a far larger increase than expected.
- Before that, Japan released a set of very weak retail sales figures. The December readings came in at 0.2% y/y, down from 0.5% in the previous month and well below the 0.9% expected. The rate was -0.3% on a m/m basis. Dollar/yen initially rose on the weak data, but has since drifted lower. During the North American session, weekly jobless claims and December pending home sales will be reported.
- The RBNZ as widely anticipated adopted a more neutral tone. Its more aggressively hawkish comments about the currency led to a sharp drop in the New Zealand dollar. It fell below $0.7300 for the first time since March 2011. It traded just below $0.7900 on January 15, just to put the move in context. The Australian dollar was dragged lower, even though the terms of trade figures were not as poor as feared. A well-known local RBA watcher stuck with expectations for the RBA to ease next week, even though the slightly firmer than expected CPI figure Wednesday had appeared reduce the chances.
- South Africa Reserve Bank meets and is expected to keep rates steady at 5.5%. After the lower than expected CPI print for December, Governor Kganyago said the bank was assessing the impact of lower oil prices before making a call on whether to cut interest rates. This meeting seems too soon, but there is a chance of a dovish surprise. If not, we think a cut at the March 26 meeting is almost certain if current disinflation trends continue. Before the policy decision, South Africa reports December PPI, expected to rise 6.0% y/y vs. 6.5% in November. For USD/ZAR, support seen near 11.40 and then 11.20, resistance seen near 11.60 and then 11.80.
- Banco de Mexico meets and is expected to keep rates steady at 3.0%. Inflation is falling sharply, and suggests that Carstens will likely reevaluate his outlook for higher Mexico rates in 2015. Indeed, we look for a fairly dovish statement again, same as the last one. After being consistently dovish this past year, Carstens warning of higher rates really caught markets off guard. However, 1-year swap rates have moved back to the lows after a brief Carstens-related spike higher in late December/early January. We still think the risk is tilted towards lower Banxico rates, not higher. For USD/MXN, support seen near 14.50, resistance seen near 15.00.
- The Philippines Q4 GDP surprised on the upside, rising by 6.9% y/y and translating into a 6.1% growth for the year. This was the best three year expansion since the mid-1950s. It appears as if the industry-friendly policies of President Aquino are bearing fruit, but certainly lower oil prices are helping as well. For USD/PHP, support seen near 44.00 and then 43.50, resistance seen near 44.50 and then 45.00.