If FOMC language fails to soften, risk assets would likely be adversely affected; NZD/USD just keeps head above water; NZD/AUD should be at 0.89 on fair value modelling

By Raiko Shareef

Looking across markets this morning, and it seems there’s more than a dash of risk aversion afoot, ahead of key central bank decisions over the next couple of days.

Equities and commodity prices are lower, and the USD is a touch stronger, despite US data disappointments.

Equity markets continued to modestly retrace their post-ECB sugar rush, a function of profit-taking ahead of the FOMC decision early tomorrow morning and the Bank of Japan decision on Friday.

While it is extremely unlikely that the Fed raises rates tomorrow, should its language fail to soften, risk assets would likely be adversely affected.

Natural gas continues to lead commodity prices lower, with front-end end futures extending a three-day loss to nearly 18% before recovering.

Oil prices are trading heavily, too, with WTI down another 2% to $43. These moves bear primary responsibility for the fact that today’s biggest major currency losers are NOK, CAD, and AUD.

NZD/USD kept its head above water, despite the retreat in risk appetite, and sizeable declines in its peers. That comes courtesy of the updraft in NZD/AUD, where investors are looking to once again test critical resistance at 0.9470.

Our fair-value model suggests the cross should be trading nearer to 0.89, consistent with rate differentials.

A cut from the RBNZ tomorrow morning, coupled with an on-hold decision from the RBA next week, would likely provide the cross an express ticket back to fundamentals.

One piece of positive news overnight: in the US, Republicans and Democrats look to have agreed upon a budget deal that will see the debt ceiling raised until March 2017, and the government funded until September 2017. If passed (as is likely), it would avert the threat of debt default that was due to plague markets next week.

Today’s main event is the Australian Q3 CPI report. It certainly has the potential to be market moving, but our NAB colleagues note that the RBA appears very comfortable that inflation will remain within the target band over the next couple of years.

And at 7am tomorrow, the Fed. We’d play it cautiously – there is always something for everyone in those statements, especially without the (dubious) benefit of a press conference afterward.

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Raiko Shareef is on the BNZ Research team. All its research is available here.