- Fed is in no hurry to raise rates
- We believe that the unemployment rate has been underestimated and that the Fed is holding out for some improvement
- A December move appears increasingly likely, especially if the US economy maintains its current pace
- Single currency rally may further strengthen with EUR/USD hitting 1.1228 in the late Asian session and 1.15 level now not far from reach
- NZ: The RBNZ decided to maintain the official cash rate at a record low of 2% despite the institution warning markets that further policy easing will be required to reach inflation target
- We do not expect the WTI to move above the $50 threshold as the lack of understanding amongst OPEC members would make any agreement about a potential output freeze impossible
- Norges Bank: Norwegian fundamentals are holding up, suggesting that rates will be held at 0.5% and its dovish stance will be softened somewhat
- With economic and macro conditions becoming more favorable for Norway, expectations for a rate cut should further fall, aided by a less dovish-neutral monetary policy stance. We remain bearish on EURNOK and suggest traders should focus on 9.00 handle
As expected, the Federal Open Market Committee decided to leave rates unchanged at between 0.25% and 0.50%, preferring “to wait for further evidence of continued progress toward its objectives”. Only three members voted for a lift at the September meeting, while both the chairman and vice-chairman opted for patience. As usual, the Fed reiterated its view that “the case for an increase in the federal funds rate has strengthened”, but both the statement and the tone of the press conference suggest that the Fed is in no hurry to raise rates. Regarding the three dissenters, Yellen will likely keep them under control until the moment she judges it appropriate to hike. We do not expect the Fed to hike rate in November as it would be a very bad timing with respect to the US election. However, a December move appears more and more likely, especially if the US economy maintains its current pace. At some point, the Fed will also have to progress from words to deeds and prove to the market that the US economy can handle a 25bps increase - just like it did last year. After some wild swings, the single currency initiated a rally against the US dollar with EUR/USD hitting 1.1228 in the late Asian session. The bias is definitely on the upside, especially now that the ECB has made clear its intention to stay on the sidelines for now. The 1.15 level is not far from reach now.
Yann Quelenn, market analyst: Fed Chair Yellen appears satisfied with the current state of the US economy. Yes, this satisfaction does not seem strong enough to tighten monetary policy, as officials await a pick-up in the labour market. Low unemployment rates are simply not synonymous with zero wage growth and signals a red herring. We believe that the current jobless rate is in fact underestimated and this is why the Fed is waiting for some improvement.
In the financial markets, the EURUSD has picked up and equity markets have been improved by this latest Fed decision. The likelihood of a December rate hike is now priced at 61%. There is a strong sense of déjà vu as we face a long wait for the Fed to move to save face, which is sure to have consequences for the central bank - most likely a deeper equity market correction.” ---
In New Zealand, the Reserve Bank has decided, as widely expected, to maintain the official cash rate at a record low of 2%. Nevertheless, the institution warned markets that further policy easing will be required to ensure that inflation moves closer to the target. The New Zealand dollar moved sharply between 0.7366 and 0.7292 amid the publication of the decision before stabilising at around 0.7340, down 0.13% during the Asian session. On the downside a support can be found at 0.7235 (low from September 13th, while on the upside a resistance can be found at 0.7486 (September 7th).
Crude oil prices got a fresh boost yesterday as US crude oil inventories fell 6.2mio barrel, while the market was expecting an increase of 3.25mio. The West Texas Intermediate continued its ascension and reached $45.80 in Asia, while the international gauge, the Brent crude, rose to $47.28 a barrel, up 0.90%. Even though we are not ruling out further gains, we do not expect the WTI to move above the $50 threshold as the lack of understanding amongst OPEC members would make any agreement about a potential output freeze impossible.
Peter Rosenstreich, head of market strategy: Norges Bank in the background: Financial markets remain range bound with traders unwilling to build directional positions ahead of key central bank policy decisions. Given the enormous hype surrounding the BoJ and Fed rate decision, the Norges Bank policy-setting meeting has been over-shadowed. Of course this meeting does not have the significant market moving implications that the other headline acts have yet in its own quiet way the Norges bank meeting is important. In its latest MPR in June the bank stated that further economic weakness would trigger a rate cut in September. However, the data has been surprisingly resistant, as the pace of growth and inflation above Norges’ target for over a year, has increased - driven primarily by the non-oil related sector. In addition, the housing market remains strong with prices rising 1% since June’s report and the jobless rate has fallen 0.2%. Norwegian fundamentals are holding up, suggesting that rates will be held at 0.5% and its dovish stance will be softened somewhat. This change in tone indicates that Norway will be one of the first countries outside the US to have turned the corner. This should give the NOK an edge in G10 trading. However, much of the currency’s fate is connected to oil prices. Downside pressure on crude has decreased, with global oil prices firming. Amid hints of a possible production agreement and the coming winter in the northern hemisphere, NOK is less likely to be dragged down by the commodity. With economic and macro conditions becoming more favorable for Norway, expectations for a rate cut should further fall, aided by a less dovish-neutral monetary policy stance. We remain bearish on EURNOK and suggest traders should focus on 9.00 handle” ---
Today traders will be watching the Norges Bank interest rate decision; interest rate decision from Turkey; mid-month inflation report from Brazil; initial jobless claims, FHFA house price, existing home sales and leading index from the US; interest rate decision from South Africa.