NEWS / Foreign Exchange

Strong sentiment supports AUD

NZD continues to ???March??™ higher

The NZD continued its relentless march higher yesterday as yield related buying saw stop loss orders taken out at 0.7070. However, with momentum temporarily exhausted around the same level, the NZD fell back marginally to end the day near 0.7060. In data released credit card billings rose 1.6% in February to be 8.2% higher for the year; the date serves to show that we are continuing to spend up at large and suggests that February retail sales will likely be strong. NZD strength continued overnight, this time prompted by broad based USD weakness in the wake of the US Federal Reserve keeping interest rates steady while moving away from previous suggestions of further interest rate hikes.

Strong sentiment supports AUD

The AUD struggled to make any headway from the pervious days break above 0.8000 yesterday as it drifted in a narrow range while finding good support above 0.8020. Sentiment was buoyed by data released which showed the Westpac-Melbourne Institute Leading Index of Economic Activity was at 4.8% in January, above its long-term trend of 3.9%. The AUD also benefited from USD weakness overnight and opens this morning around last nights high of 0.8080.

EUR surges to 2-year high after FOMC

The USD slumped to a two year low against the euro following the FOMC statement. Although the Fed kept US interest rates unchanged at 5.25% and reiterated that inflation remains a concern, they removed the reference to the possibility of further rate hikes, in effect removing the tightening bias. The euro surged upon the release, rushing to high of 1.3390, while USD/JPY fell to a low of 117.15. Having fallen following the release of dovish BoE MPC minutes, Sterling recovered following the FOMC release, strengthening to a high of 1.9692.

US Fed on hold but tightening bias softened. The Fed left rates unchanged at 5.25% but adjusted the press statement substantially. They downgraded their recent housing and growth assessment, but upgraded their inflation assessment. The upside risk to inflation was left in place, but most importantly, the policy outlook, previously suggesting ???additional firming??? may be required, is now neutral. In other words, the Fed is now suggesting that there are three options for future FOMC meetings: a cut, no change or a hike, whereas previously it was either on hold or a rate rise. Given the Fed??™s inflation view, that is still a very mild tightening bias, but clearly less so than previously. The near instant 90 point gain on the Dow on this news shows that equity markets believe that the ???Greenspan put??? is still Fed policy!

Solid Canadian data ??“ only a modest retail pullback of 0.2% in Jan after a strong Dec, and an accelerating leading index, up 0.7% in Feb.

The minutes to the March BoE MPC meeting showed a surprise 8:1 vote, with the dissenter to the on-hold decision, American David Blanchflower, voting for a 25bps rate cut. The two hawks who voted unsuccessfully for a 25bps hike in Feb, Andrew Sentance and Tim Besley, sided with the majority this time round.

UK Chancellor Brown??™s budget contained some surprises in the detail but the bottom line was neutral, as the headline grabbing measures were all offsetting. For example, the basic rate of tax was cut from 22p in the pound to 20p from next year, and the threshold that the top 40p rate comes in at was raised ??“ but this was offset by higher national insurance payments for wealthier taxpayers and the removal of the lowest 10p income tax rate. Lower company tax (28% from 30%) was offset by higher imposts elsewhere. The reality is that public finances are not in brilliant shape, so there wasn??™t much extra to spend. In fact spending plans already locked in from previous years imply a reducing fiscal stimulus over the next few years, and that has not changed. As such, the budget is neutral from a monetary policy perspective.