Fed minutes more cautious than anticipated causing sell off in USD; NZDUSD up nearly 1% to 79c; Chinese PMI slips

By Raiko Shareef

NZ Dollar

The NZD/USD has hit 0.7900 in the wake of the Fed minutes this morning, up 0.9% for the day. This reverses earlier losses, which had NZD/USD dragging its feet near 0.7780.

The NZD simply washed around with the rest of the majors in a fairly quiet evening, as investors sat on their hands ahead of the Fed. The cautious tone set there pushed NZD to the top of the G10 leader-board.

On the crosses, this pushed NZD back into the middle of recent ranges, having sat precariously at the bottom end, particularly against the AUD and JPY. NZD is between 0.3% and 0.9% stronger against the major TWI crosses.

We suspect the squeeze in NZD will run out of steam ahead of the 0.8000 big figure, as investors have little reason to support NZD/USD above 0.80 on a sustainable basis. We see initial support at 0.7850.
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Majors

The USD drifted higher in the overnight session, as the market positioned itself for a set of Fed minutes that would vindicate a long USD stance. As it happened, the minutes were perceived as more cautious than anticipated, causing the USD to more than reverse its gains. Having been 0.3% higher pre-FOMC, the Bloomberg Dollar Spot Index is now 0.2% weaker.

The Fed’s September minutes generally exuded a cautiousness that surprised investors. To be fair, the market had its blinkers on when it chased the USD higher after the ‘dot points’ were raised at the policy meeting itself.

The Fed’s policymakers have not suddenly become concerned about downside risks to the economic outlook.  It’s that investors are now paying attention to the discussion of risks.

In particular, the financial media have picked up on comments around the risk that a stronger USD poses to US exports, as well as a heightened sense that a global slowdown (see Europe, Japan) could present challenges for US growth. Neither of these points are surprising.

Investors looking for a clear-cut signal about an impending change to Fed forward guidance were also disappointing. Heading into the September meeting, the market was watchful that a reference to the “considerable period” between the end of QE and rate hikes could be dropped. In the minutes released today, the Fed called for “patience” on changing forward guidance.

In all, this is a Fed keen to communicate that future policy will be driven by incoming data, and is not on any pre-set path. For a market that has pushed the USD significantly higher in a short space of time, this presents an excuse to square up, and consider the outlook from here. We’ve been flagging the risk of a modest corrective/consolidative phase, and this could be it. We retain a bullish USD view over the medium term.

Elsewhere, it was a fairly quiet evening, with no significant data releases. Yesterday, the HSBC services PMI for China showed a slip from 54.1 to 53.5 in September, adding to a slowing data pulse in that country.

Ahead of today’s employment report, the Australian Bureau of Statistics announced that it would revise the July and August jobs data, having decided that the seasonality normally present for July, August and September has not occurred in 2014. Taking out the seasonal adjustment, August’s eye-popping 121k jobs gain moderates to a more believable +32k.

As a result, economists have revised their expectations for today’s number from a median -30k to something like +20k to +30k. Whether the market pays much attention, now that the survey’s reputation is in tatters, is another question entirely.

Apart from that, we will be keeping an eye on ECB President Draghi, who will make some remarks at a panel discussion. Tonight, the ranking Fed official on the wires is Vice Chair Fischer, who has been relatively quiet. We would watch his words for a fair gauge of the overall committee’s thoughts, rather than the natural doves and hawks of recent days.

All its research is available here.