By Danica Hampton The past 24 hours have been a bit of a roller coaster ride in NZD/USD. The USD started the night on a softer footing; amid expectations the FOMC statement would hose down near-term rate hike expectations by saying that rates would remain low for some time. Against a generally weaker USD, NZD/USD pushed up to nearly 0.6500. However, the NZD/USD strength was short-lived. The Swiss National Bank (SNB) reportedly intervened to weaken the CHF (USD/CHF was driven 2% higher from 1.0650-1.1000) and this quickly fed through into generalised USD strength. An IMF report highlighting the "significant" risks to the Irish economy and forecasting Ireland's GDP to drop 13.5% in 2010 also dampened sentiment. EUR/USD slipped from above 1.4100 to below 1.4000 and NZD/USD was knocked from its highs. There were no surprises in the FOMC statement and the "buy USD" theme continued in its wake. The Fed left rates unchanged at 0-0.25% and made no changes to its quantitative easing program. The Fed hosed down near-term rate hike expectations by saying that "inflation will remain subdued for some time" and that rates will likely remain "exceptionally low" for some time.
We expect to see some improvement in today's balance of payments (Q1), thanks to falling offshore debt servicing flows (courtesy of lower global interest rates), decent export volumes and weaker imports (of both the consumption and investment varieties). We look for the current account deficit to narrow to 8.2% of GDP (slightly better than market consensus of -8.4%). For today, the backdrop of a generally firmer USD should ensure bounces in NZD/USD are limited to 0.6440-0.6450. Initial support is seen around 0.6370, but a break below this level will open up the downside towards 0.6300-0.6320. It was a mixed night for the USD. Markets were forced to digest the mix of Swiss National Bank (SNB) intervention and the FOMC statement. The USD started the offshore session on a softer footing. Expectations that the FOMC statement would reaffirm the need for rates to remain low for an extended period of time encouraged investors to sell USD against a broad range of currencies. EUR/USD climbed to a high of around 1.4140 and GBP/USD rose to above 1.6600. However, the USD weakness didn't last. The Swiss National Bank (SNB) reportedly intervened by selling CHF against USD and EUR. EUR/CHF rose from 1.5000 to above 1.5350 and USD/CHF was driven 2% higher from 1.0650 to around 1.1000. The heavy CHF selling quickly transformed into generalised USD strength and EUR/USD slipped from above 1.4100 to below 1.4000. As widely expected, the FOMC left the Fed Funds rates in a 0-0.25% range and made no changes to its quantitative easing program. The Fed said the "pace of economic contraction is slowing", but hosed down near-term rate hike expectations with the phrase "the Committee expects that inflation will remain subdued for some time". The statement also reiterated that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time". While there were no obvious "buy USD" triggers in the FOMC statement, the USD buying theme continued in the wake of the decision. EUR/USD slipped from 1.4000 to below 1.3900 and the USD Index rose from 80.20 to nearly 80.80. The IMF's latest update on Ireland highlighted issues still faced in Europe. The IMF said the risks to Ireland's economy were "significant" and the economy was susceptible to further external shocks. Furthermore, it forecast Irish GDP to fall 13.5% in 2010. So what does it all mean? The FOMC statement eased concerns about rate hikes before year-end and this has the potential to weigh on the USD. However, the recent equity market wobble and the problems still present in Europe make us wary. We're not convinced the USD index is ready to take another step lower just yet. A break below the early June lows of 78.00 is needed to suggest the downtrend has become entrenched. On the topside, a break above 82.50 is needed to suggest the uptrend is gaining traction. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.
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