This morning, the Fed tried to have its cake and eat it, too, leaving markets slightly confused, if not in outright pain. Markets have been whipsawed since the release of the statement, with AUD snapping from 0.8180 to 0.8230, and then slammed to 0.8130, where it sits now.

News wires were initially awash with headlines that the FOMC had dropped the “considerable time” phrase with respect to its guidance on interest rates. Instead, the FOMC decided it could be “patient in beginning to normalise” policy. But (and here’s the kicker), the Committee saw the new language as “consistent” with old language. This messy compromise saw markets sell the USD in the first instance.

Other parts of the statement and the updated economic projections were construed as slightly dovish. The inflation forecasts (both headline and core) were dropped, and the median of the infamous ‘dot points’ was lower for the coming three years. That Fisher and Plosser (hawks) moved out of the majority and dissented, suggesting they were dissatisfied with the cautiousness of their peers.

However, Fed Chair Yellen delivered comments in her press conference that saw the initial reaction more than reversed. Most importantly, she noted that normalisation is unlikely to begin in the next couple of meetings (i.e. Jan and Mar), which suggests that April is on the table for the first rate rise. Indeed, Yellen also emphasised that a number of participants indicated that lift-off in the middle of 2015 could be appropriate. Of course, she made sure to stress the data-dependent nature of such an assessment. But with November’s bumper labour market report in mind, we imagine FOMC members will remain on this course.

As a result, US 10-year bonds now sit 7bps higher at 2.13%, and the USD is stronger across the board. The Bloomberg Dollar Spot Index is 1.0% higher

Separately, the Chair (unsurprisingly) confirmed that the Fed view the fall in oil prices a positive for the US economy, and that the Fed will look through the dampening impact on inflation.

NAB’s forecast for the first Fed Funds Rate hike has been at June 2015 for some time, and from today’s events, there appears little reason to push that later into the year (which is where market pricing remains). The Chair’s comments today support our long-held and unabashed USD bullishness. We remain short EUR/USD and NZD/USD heading into 2015.

Ahead of the FOMC meeting, the USD was already gaining ground, with some investors likely positioning themselves for an upbeat tone from the Fed today. Some sharp moves lower among the majors helped. For example, AUD snapped through strong technical support at 0.8200 yesterday afternoon on no news or data. That led to a 50pt collapse from which AUD/USD has struggled to recover.

The EUR also suffered separately overnight, thanks to an interview that Benoit Couere, an ECB Board member, gave to the WSJ. It contained some of the strongest hints to date that the Bank has already decided to ease policy further, and has moved on to designing that policy. Couere noted a “broad consensus” among policymakers of a “need to do more”, with purchases of government bonds “the baseline option”. We remain short EUR/USD on the expectation that policy will be eased in Q1 2015.

For completeness, we note that the Russian ruble has strengthened by 12% overnight, with central bank intervention evident. Other major emerging-market currencies have also gained against the USD, albeit much more modestly.

Coming Up

We expect liquidity in markets to deteriorate heading into the year’s end, with investors having just cleared the last big event risk. With that, price action could remain volatile.

On the data front, we have NZ’s Q3 GDP this morning. Our BNZ colleagues expect a very healthy 0.9% q/q gain (the market picks +0.7%). Tonight, we will be watching Germany’s IFO survey, UK retail sales, and the Philly Fed survey.

Overnight

On global stock markets, the S&P 500 was +1.60%. Bond markets saw US 10-years +7.48bp to 2.13%. On commodity markets, Brent crude oil +0.80% to $60.52, gold was -0.8% to $1,184, iron ore -0.8% to $68.05. AUD is at 0.8122.

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarket

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