Fed set to remain on hold
The FOMC meeting is clearly the key FX event of the day. The market is not pricing a rate hike, the likelihood of which is estimated at below 15%. Markets already feel more confident for a rate hike at the next meeting in June and today’s meeting is unlikely to change anything. The Fed should likely show its optimism in its statements. The inflation target of 2% was beaten in February before falling again below this level.
We expect a clearer assessment of the US economic situation after the recent lacklustre data (GDP and personal consumption in particular). The non-farm payroll employment for March disappointed (98k new jobs) after strong data in February (220k). In March, industrial production also saw its biggest decline for the last two years. We remain suspicious on Fed rate tightening as we believe that the state of the US economy is overestimated. For example, the number of bankruptcies in the US in 2017 is already higher than all bankruptcies in 2016.
On top of that, the second-hand car market is collapsing as the losses on auto credit subprime have reached their highest level. Last but not least, 60% of Americans – according to a CNN poll – do not have a $500 emergency fund. This is why we maintain our bullish position on the EURUSD, despite political uncertainties in Europe.
NZD holds ground amid strong job report
The USD extended gains against most of its peers ahead of today’s FOMC meeting and ADP job report. The New Zealand dollar was among the few that was able to resist against the increasing demand for the greenback. NZD/USD rose to 0.6969 this morning amid a solid job report. The unemployment rate fell to 4.9% in the March quarter, widely beating market expectation of 5.1% and previous reading of 5.2%. The surprise increase in the participation (70.6% versus 70.5%), together with a solid growth in employment (+5.7%y/y versus 5.3% expected).
However, the tightening of the job market failed translate into wage growth. Indeed, average hourly earnings rose only 0.3%q/q, while market participants were expecting a reading of 0.7%. This weak reading should keep the RBNZ on the back foot at its next meeting on May 11th as it gives Governor Wheeler an excuse to stay on the dovish side for another round. The Aussie was heavily sold against the Kiwi this morning with AUD/NZD sliding 0.50% to 1.0795. The closest support can be found at 1.0755 (Fibonacci 38.2% on January-March rally). If broken, the door is wide open towards 1.07, then 1.06.
