FOMC Doubles Speed of Tapering, Rates Unchanged
AUD
AUD is higher across the board this morning, after a lackluster couple days in the market, trading currently at its strongest point for the week so far. This is despite poor data out of China yesterday, with Retail Sales recording a disappointing 3.9% growth compared to expectations of a 4.8% improvement. As a result, Asian equities were were off the mark with Shanghai Comp down 0.4%, the ASX down 0.7% with only the Nikkei up 0.1%. In commodities we saw Gold increase 0.4% and Iron Ore up 0.3% which helped support the resurgent AUD. Yesterday’s Westpac-Melbourne Institute Index of Consumer Sentiment fell by 1.0% to 104.3 in December from 105.3 in November, yet the index remains comfortably in positive territory where optimists outnumber pessimists. In early local data today, Flash Services and Manufacturing data showed a slight slow down from previous months, however remains firmly in expansionary territory. The big data happens at 11.30am with Aussie Unemployment Rate and Employment Change data. Markets are expecting a big improvement in labor force figures considering the lifting of restrictions in Sydney and Melbourne, over 200k new jobs expected and an improvement in the Unemployment Rate to 5.0%. RBA's Phil Lowe is also speaking this morning in what is due to be his last speech for the year.
USD
The Aussie Dollar surged early this morning against the USD after this morning's important FOMC meeting, opening just off the highs at 0.7173. Overnight the Fed's Jay Powell’s comments on the decision to keep the policy rate unchanged as was expected, and announced the Fed had not made any decisions about the timing of taper and there being a range of views on the FOMC on when tapering is appropriate. Although on a more encouraging note it was insinuated that it will be not at all likely that there will be the same length of time between the end of taper and rate hikes as in the last cycle. The committee said it will keep interest rates low until labor market conditions improve further, but in forecasts published alongside the FOMC statement, central bankers signalled they expect as many as three rate hikes next year. The committee announced an increase to the pace of tapering, doubling the monthly reduction starting in February from $15bio to $30bio, ending the program two months earlier and putting the Fed in a position to raise the benchmark interest rate off zero. Whilst USD strengthened in the initial aftermath of the statement, this swung heavily in the opposite direction allowing AUD to take advantage of the weaker than expected US Retail Sales data released prior to the FOMC. Wall Street rebounded overnight despite the hawkish rhetoric from the FOMC with the NASDAQ up 1.6%, the S&P 500 up 1.2% and the Dow Jones up 0.8 US 2 Year Bond yields up 0.69% and US 10 Year Bond yields up 1.47%, while Crude Oil increased 0.5%. Looking ahead, and tonight's US Flash Manufacturing and Services data is likely to be overlooked in favour of other Central Bank meetings from Europe and the UK (see below).
EUR
AUDEUR recovers closer to last week's 3 week high, now sitting at 0.6354 at time of writing. European equities rose, with Euro Stoxx 50 0.5% higher with markets waiting for the Fed to accelerate its tapering of monetary stimulus. Euro zone data was few and far between with only the French Final CPI m/m released the other day meeting expectations of projected 0.4% matching the previous months data. Looking ahead we will have Flash Services and Manufacturing PMI data to look out for before the main event in the ECB’s Monetary policy Statement. ECB’s Lagarde has promised to clarify precisely what will happen when the pandemic bond purchase programme ends in March. To avoid a cliff-edge and to preserve favourable financial conditions, the ECB is likely to beef up the original PSPP which still is still running parallel in the background. Potential for volatility here tonight.
GBP
The Aussie dollar climbs higher here as well, now sitting at 0.5408. Last night the UK saw a number of positive data releases: CPI data demonstrated a 5.1% rise against projected 4.8% and up against the previous months 4.2%. Similarly Core CPI y/y saw a 4.0% increase against expected 3.7% and previous 3.4% and PPI Input and Output data for the month also up against projections, both roughly around 1.0% against projected 0.5% and 0.6% respectively yet a little lower the previous month's 1.6% and 1.5%. Meanwhile in equities we saw the FTSE lose a little ground by -0.7%. Tonight the Bank of England delivers it's last monetary policy guidance for the year. Only a month ago it was all but certain that interest rates would be going higher tonight, however with the resurgence of Omicron in the UK markets now expect rates to remain unchanged. In fact, UK PM Johnson has refused to rule out reintroduction of certain restrictions before Xmas.
NZD
Aussie on a steady crawl up against the NZD, peaking just shy of 1.06 and now settling around 1.0568. This morning's Kiwi GDP data showed a contraction of 3.7% for Q3, however markets were actually expecting a deeper decline of 4.1%, so AUDNZD now off the highs from early morning. No more important data from across the ditch this week, AUD likely to live just shy of 1.06 for now.