A slightly less dovish Fed

The Fed statement was incrementally more hawkish than its March statement, removing its concerns about “global and financial developments”.

This caused a brief rally in the US dollar although it ended the session largely unchanged. Nonetheless, the removal of uncertainty now that the Fed meeting has passed is likely to be taken as a positive for Asian markets today.

The other major positive for equity markets was the further decline in oil production in the Energy Information Administration’s (EIA) weekly report, which helped WTI oil gain 3% and close above US$45. US crude oil production fell to 8.94 million barrels per day, and is now down about 650,000 barrels per day from its peak.

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The Reserve Bank of New Zealand (RBNZ) left rates on hold as expected today, but this has prompted quite a rally in the Kiwi dollar. The combination of unchanged US rates, a continued rally in crude oil and the prospect of further easing by the Bank of Japan at their meeting today is fuelling a bullish move in Asian futures markets. The ASX is set to open 0.9% higher, with the Nikkei to open 0.7% higher.

The Fed statement seems highly appropriate. Global concerns, specifically around a potential Chinese yuan devaluation, have ebbed considerably, but at the same time US economic data continues to be very weak. Currently, the Atlanta Fed’s GDPNow estimate for the first quarter is sitting at 0.6%, and a June rate hike does seem unwise. The WIRP bond-market implied probability still only has December as the first date with an above 50% probability for a rate hike. Although more hawkish language from the Fed in June seems likely should they want to start signalling the potential of a rate hike in 3Q, with September the most likely date if such a path is taken.

After cutting rates at their previous meeting the RBNZ left rates on hold today, although they left a strong easing bias in the statement and another rate cut in June is highly likely. The RBNZ statement also noted their concerns that Auckland house prices may be on the rise again, possibly another reason behind the temporary rates pause. But the ongoing strength in the Kiwi dollar is clearly causing trouble, which was evident in yesterday’s trade data as exports declined 14.3% from a year ago.

The Aussie dollar looks on the verge of a major capitulation as expectations for rate cuts by the RBA have increased significantly after yesterday’s weak CPI numbers. Alongside this, the Qingdao iron ore price has fallen 13.3% over the past week as China seeks to rein in retail trader speculation in its commodities futures markets. Nonetheless, the RBA is  unlikely to cut rates at their meeting next week and the Aussie is likely to pull back a bit in the short-term, but sentiment does seem to have dramatically changed in the currency. And rate cuts in the second half the year look increasingly likely if GDP and employment growth begin to wilt alongside inflation.

The AUD/NZD has bounced off its key support of A$1.0940, and one should be looking for a break of this level before a reversal is confirmed.

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