Top 5 Takeaways from April Fed Meeting

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Daily FX Market Roundup 04-30-14

Top 5 Takeaways from April Fed Meeting

Sterling Hits Fresh 4.5-Year Highs Ahead of PMI

4 Reasons for the Rally in EUR

Sharp Rebound in New Zealand Dollar

CAD: GDP Growth Slows to 0.2% in Feb

AUD: All Eyes on AU and Chinese PMIs

JPY Rallies, BoJ Leaves Policy Unchanged

Top 5 Takeaways from April Fed Meeting

To the frustrations of forex traders and the delight of policymakers, today’s Federal Reserve’s monetary policy announcement proved to be a real bore. The initial reaction to their decision to taper asset purchases by another $10 billion was limited to 22 pips in EUR/USD and 20 pips in USD/JPY. Both currency pairs had a stronger reaction to the stale first quarter GDP report than to the FOMC rate decision. This lackluster reaction should not surprise our readers as we have outlined in our FOMC preview, all of the reasons why the central bank would want to keep their statement virtually unchanged. While there was no major shift in policy, the Fed made a few changes in the wording in the statement. They no longer view the economy as having slowed and instead with the brutal winter behind us, they feel that economic activity has picked up with consumer spending rising more quickly. Their view on the labor market remained unchanged and Kocherlakota who felt that it was not a good idea to switch to qualitative guidance in March voted with the majority this month.

Not only is the central bank unconcerned about the slowdown in GDP growth in the first quarter but they anticipate to a continued recovery. This leaves bond tapering on track and for the time being, rate hikes are still a long ways away. However come September or October the Fed will need to make their plans for tightening clear because by that time, monthly bond purchases will be nearing zero.

In short, here are the Top 5 Takeaways from the April Fed meeting:

1. Fed Tapers by Another $10B ($5B MBS, $5B Treasuries)

2. Decision was Unanimous – No Dissent from Kocherlakota

3. Fed says “Economy Picked Up, after having slowed sharply during the winter”

4. Fed sees “Consumer Demand Rising More Quickly”

5. Fed says “Labor Market Indicators Mixed but on Balance Show Further Improvement”

The next big focus will be on Friday’s non-farm payrolls report. Tomorrow’s personal income, spending and jobless claims reports are not expected to have a significant impact on the greenback.

Sterling Hits Fresh 4.5-Year Highs Ahead of PMI

Slowly but surely, the British pound continues to hit fresh highs against the U.S. dollar. Sterling touched 1.6900 intraday, rising to its strongest level since August 2009. As April draws to a close, we look back and see that it has been a great month for the British pound, which strengthened against all of the major currencies. Although the gains were small with the largest move being its 1.7% appreciation versus the New Zealand dollar, the consistent trend has been driven by speculation, M&A flow and positive economic data. The sustainability of sterling’s rally will be tested by tomorrow’s PMI manufacturing report. In Europe, the PMIs are extremely important because they provide an up to date assessment of economic activity. Acceleration in manufacturing activity could push GBP/USD beyond 1.69 but the risk is to the downside given the huge decline in the Confederation of British Industry’s Total Trends survey, another measure of manufacturing activity. However even then the impact on sterling may be limited by the overall momentum in the currency.

4 Reasons for the Rally in EUR

The euro traded higher against the U.S. dollar today for a number of different reasons. First and foremost, Spanish GDP growth rose 0.4%, the fastest pace in 6 years. Then German unemployment surprised to the upside with the number of people filing for unemployment benefits in the month of April dropping 25k versus a forecast of 10k. Then we learned that Eurozone consumer prices grew 0.7% the same month and while this was slightly slower than expected, it was still higher than March, making low inflation less of a risk for the ECB. A few hours later, U.S. GDP growth missed expectations in a massive way, sending the dollar lower and the euro higher. There were a few pieces of weak data including German retail sales, which fell 0.7% and French consumer spending which dropped 1.2% in March. These reports shouldn’t be ignored because without a pickup in demand, a recovery in the Eurozone will be difficult. With that in mind, EUR/USD may not comedown from its lofty levels unless an ECB official expresses concern about the high level of the currency. There are no major Eurozone economic reports scheduled for release tomorrow.

Sharp Rebound in New Zealand Dollar

The best performing currency today was the New Zealand dollar, which is surprising considering that last night’s economic reports from New Zealand were mixed. Building permits jumped 8.3% but the business confidence index dropped to 64.8 from 67.3. The decline in commodity prices also provided no support to the currency, which rose approximately 0.8% against the U.S. dollar. While this could be a delayed reaction to this week’s trade numbers, we suspect that the currency is benefitting more from the hunt for yields. Although New Zealand rates declined overnight, the drop was small compared to the slide in Treasuries. The Australian dollar also rebounded against the greenback but compared to NZD, the 0.2% increase was nominal. Manufacturing PMI numbers are scheduled for release from Australia and China this evening. Given the RBA’s neutral monetary policy stance and the recent trend of Chinese data surprises, investors are positioned for stronger data. However if manufacturing activity slowed, the Australian dollar could resume its downtrend. The Canadian dollar on the other hand weakened on the back of slower GDP growth and dovish comments from Bank of Canada Governor Poloz. Canada’s economy expanded by 0.2% in the month of February after growing 0.5% the previous month.

JPY Rallies, BoJ Leaves Policy Unchanged

The Japanese Yen traded higher against all of the major currencies today except for the New Zealand dollar. As expected, the Bank of Japan left monetary policy unchanged last night. Although GDP growth was downgraded to 1.1% from 1.4% for 2014, the impact on the Nikkei and the Yen was limited. According to the report, the revision was driven by expectations for a delayed recovery in exports. The central bank still expects core CPI growth to hit 1.9% in the 2015 fiscal year and 2.1% in 2016. This keeps the central bank on track to meet their 2% inflation target. Central Bank Governor Kuroda delivered a press conference where he continued to sound optimistic – he said he expects consumer spending to remain solid even after the consumption tax hike. So for the time being, it is the central bank’s view that additional easing is not needed until there are more obvious signs that the tax is having a larger than expected drag on the economy.

Kathy Lien
Managing Director

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