Posted on: 28 January 2016, by: Pepperstone Support, category: Market Review
The key sentence of the FOMC statement signals greater concerns about global developments: "The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook." Previously the Fed said it would it would be "taking into account domestic and international developments."
Additionally, the Fed:
Downgraded language on growth. Growth “slowed late last year,” versus expanded at a moderate pace. “Consumer spending and business investment grew at a moderate pace;” in December growth was at a solid pace.
Downgraded inflation language. Continued to characterize oil prices as a transitory factor but omitted “reasonably confident” language regarding achieving its inflation target.
Seemingly no longer sees risks to the US economy as balanced. Instead of referring to the risks to the outlook for both economic activity and the labor market as "balanced" they declined to say where they thought the risks lie. That was replaced by a statement that the Committee was "assessing their implications for the labor market and inflation and for the balance of risks to the outlook."
It’s not that these decisions were major surprises to the market – but the Fed’s message was more dovish than many expected. Clearly, US data and Fedspeak should carry more weight looking ahead; especially amid China and oil developments.
Reaction to the FOMC statement showed the characteristics of recent “risk-off” trading. USD lost ground in G5 but advanced against risk currencies amid falling equities. Flow-wise, we saw very choppy interest and relatively light volume. To be specific, the initial response in terms of market volumes was around -40% versus December FOMC and -60% relative to September FOMC meetings.
Before the Fed, the market appeared to be positioning for an unchanged statement and at times, following WTI’s rally back towards 33.0. WTI settled near 32.0.
USDCAD first made an aggressive push lower in early NY as WTI showed signs of firming. GBPUSD followed down to the 1.4230s and EUR found a bid across the board. As the oil rally continued, we saw AUDUSD rally towards 0.7080 and USDMXN, as low as 18.35.
Release of the DoE Crude Oil Inventory particularly generated flow interest. This rose 8.38mn, which was clearly bearish for the supply outlook at roughly double the consensus estimate. However, a “buy the rumor, sell the fact” mentality followed DoE. API data on Tuesday already signalled disappointment with an even larger build of 11.4mn.
Various headlines continued to hit the wires arguing if Opec countries will or won’t coordinate a production cut. Those taken most seriously came from Russia – Transneft’s CEO said that cuts will be discussed and Opec. Still, many traders are sceptical since there continues to be no firm indication from Saudi that it would support such action.
Speaking of commodities, gold was a clear signal of investor uncertainty. The metal remained well above prior resistance of 1113 and has rallied towards 1128.
The RBNZ held rates as widely expected but hit two dovish points, which sent NZDUSD to fresh session lows around 0.6420. To be specific:
It suggests that inflation will take longer to move back to the target band.
It added back a more explicit easing bias. The guidance now reads, 'Some further policy easing may be required over the coming year,' which is a clear upgrade versus the last statements 'the Bank will reduce rates if circumstances warrant'.
It likely didn’t help NZD either than the RBNZ meeting followed the Fed and a lower Fonterra payout announcement. It has cut its 2015-2016 Farmgate Milk Price forecast to from NZD$4.60 per kgms to NZD$4.15 kgms.
Since the FOMC and RBNZ, the NZD was somewhat mixed, with NZDUSD selling on the initial release and generally light buying on the move lower.