The main event for the New York session turned out to be a huge downer for the dollar as bulls had been hoping to see more hawkishness. Even though the Fed did hike interest rates by 0.25%, the dot plot suggested that only three instead of four hikes are in the cards this year.
Meanwhile, the Loonie was able to pick up on optimism surrounding NAFTA talks and the Kiwi took flight during the RBNZ statement.
- U.S. existing home sales up from 5.38M to 5.54M vs. 5.41M forecast
- Fed hiked interest rates from <1.50% to <1.75% as expected
- FOMC: Economic outlook strengthened in recent months, inflation expected to move up
- Fed head Powell: Job growth ‘above pace’ needed to sustain labor force
- Powell: Hiking too slowly risks having to tighten too quickly later
- Canadian PM Trudeau: Optimistic about getting a good NAFTA deal
- U.S. NAFTA negotiator Lighthizer acknowledged progress in talks
- RBNZ kept rates on hold at 1.75% as expected
All eyes on FOMC statement, forecasts, and presser
As expected, the Fed decided to hike interest rates by 0.25% in their latest meeting, emphasizing that the “economic outlook has strengthened in recent months.”
The official statement also went on to acknowledge that job gains have been strong in recent months and that inflation on a 12-month basis is expected to move up in the coming months. However, policymakers also noted that household spending and business investment moderated from their strong Q4 readings.
Now let’s look at the numbers.
Real GDP for this year and the next enjoyed upgrades while unemployment rates were also positively revised. Inflation forecasts were mostly unchanged, although the core PCE inflation for the next couple of years were upgraded.
As for the dot plot of projected interest rate changes, it was mostly unchanged at three hikes for this year versus expectations of four:
As for new Fed head Powell’s first post-FOMC presser, there weren’t any major surprises as he repeated most of its remarks from earlier speeches. He did say that their decision marks a gradual step in normalization, adding that hiking too slowly risks having to tighten too quickly later.
In responding to questions on forward guidance, Powell mentioned that he is open to the idea of having eight press conferences but clarified that this isn’t a signal that they’d be tightening more often. The head honcho also noted that changes in trade policy so far shouldn’t affect their outlook.
Optimism on NAFTA talks
In contrast to the usual round of NAFTA jitters that previously weighed on the Loonie, the mood was a bit more positive this time around.
Canadian PM Justin Trudeau reiterated that he remains optimistic about securing a good NAFTA deal. He didn’t exactly say when this might take place, but he mentioned that a deal is “eminently possible.”
Similarly, U.S. trade negotiator Lighthizer mentioned in his speech in front of the House committee that the countries involved are “finally starting to converge” on the autos issue.
RBNZ kept rates unchanged
Before U.S. session traders were able to call it a day, the RBNZ announced their decision to keep rates on hold at 1.75% as expected. This marks the last policy announcement from Governor Grant Spencer, who will be replaced by Adrian Orr later this month.
As in their previous statement, policymakers acknowledged that the outlook for global growth continues to improve but that global inflation remains subdued.
The RBNZ noted that weather-related effects weighed on GDP in the fourth quarter. It also mentioned that domestic CPI could weaken in the near term mostly “due to softness in food and energy prices and adjustments to government charges.”
In conclusion, the central bank said that monetary policy will remain accommodative since numerous uncertainties remain. Notably for the Kiwi bulls, there was no mention of the TWI or exchange rate, which many interpreted to mean that further appreciation would no longer be an issue.
Major Market Mover(s):
The Greenback was already on shaky footing leading up to the FOMC decision as traders probably started booking profits ahead of the actual event. What drew more bears in and snuffed out the bulls was the lack of changes in the dot plot.
USD/JPY spiked up to a high of 106.65 then slid to a low of 105.88, EUR/USD dipped to 1.2251 then rallied back to 1.2350, GBP/USD is up to 1.4151, and USD/CHF is down to .9485.
The Loonie spent a rare day in the green as it drew support from positive remarks on NAFTA talks coming from both the U.S. and Canada.
USD/CAD tumbled back below the 1.2900 handle, CAD/JPY popped up to a high of 82.41, EUR/CAD retreated to 1.5937, and AUD/CAD is down to a low of .9966.
The Kiwi also caught some gains later in the day when the RBNZ made its monetary policy statement and refrained from jawboning the currency.
NZD/USD popped up to a high of .7246, NZD/JPY is up from 76.00 to a high of 76.86, EUR/NZD retreated from 1.7165 to a low of 1.7038, and GBP/NZD dipped to a low of 1.9520.
Watch Out For:
- 12:30 am GMT: Australian employment change (19.8K expected, 16K previous)
- 12:30 am GMT: Australian unemployment rate (no change from 5.5% expected)
- 12:30 am GMT: Japanese flash manufacturing PMI (gain from 54.1 to 54.3 expected)