FX Daily: Fed pulled no punches at FOMC
Markets did not like the FOMC meeting. The Fed delivered the expected 75 bps hike to 3.25%. The Summary of Economic Projections sees the Fed Funds Rate ending the year at 4.5% and peaking at 4.6% in 2023, assuming core PCE inflation returns to 3.1% next year. Fed Chair Jerome Powell did not rule out a hard landing during press conference, emphasizing that monetary policy needed to be “more restrictive or restrictive for longer” to bring inflation back to its 2% target. Recession fears hammered the major US stock indices. Dow, S&P 500 and Nasdaq Composite fell by 1.7-1.8% each. The US Treasury yield curve inverted further by 11.5 bps to -52 bps, on a 3.3 bps fall in the 10Y yield to 3.53% and an 8.2 bps increase in the 2Y yield to 4.05%.
USD became a haven, with the DXY rising 0.4% for a second day to a fresh 20-year high of 110.64. European currencies in the DXY suffered the most. EUR depreciated 1.3% to a new year’s low of 0.9837. SEK fell more by 1.6% despite the Riksbank’s 100 bps hike a day earlier. Today, it is doubtful that the hikes at the Bank of England (50 bps consensus) and the Swiss National Bank (75 bps consensus) meetings would help to support the CHF and GBP. Markets are looking to take USD/JPY above 145 if the Bank of Japan meeting disappoints, a move that might invite direct interventions.
Commodity currencies are pressured by weaker growth prospects weighing on risk appetite. AUD, CAD and NZD depreciated by 0.9%, 0.8%, and 0.7% respectively. Using daily closing levels, NZD is about 2.2% from its 2020 Covid-low (0.57) compared to 7.6% in the CAD (1.45) and 15% in the AUD (0.5740). USD/CAD will be pressured higher if it takes out the major resistance at 1.35. AUD/USD is looking to push below 0.66 to test the critical support at 0.65. AUD and NZD are also likely to be weighed by currency pressures in East Asia, their largest export destination. CNY cannot shake off pressures from monetary policy divergences. Today, we don’t expect the 25 bps hike in Indonesia to prevent USD/IDR from testing 15000, and the 50 bps hike in the Philippines from holding USD/PHP back from taking a shot at 58.
Quote of the day
“The chances of a soft landing are likely to diminish.”
Fed Chair Jerome Powell
22 September in history
The Plaza Accord was signed in 1985.
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