Overnight Market & Currency Developments – From Our Bankers

Overnight Developments:

  • As was widely expected and by a unanimous decision, the Federal Open Market Committee (FOMC) left the target range for the Fed Funds rate between 1.00-1.25%. The FOMC also announced that it will begin the process of reducing the size of its balance sheet in October.

USD rose sharply against most major currencies and US Treasury yields lifted by 5bps to 2.28% (a one month high) after the meeting because more Fed officials (11 versus 8 in June) expect to raise rates this year. Consequently, the probability of a 25bps December Fed funds rate hike increased to 66% from 56% yesterday. Also, the FOMC upgraded slightly their GDP growth forecasts and lowered their unemployment rate projections.

Bottom line: We still anticipate the Fed to lift the funds rate by 25bps in December. While there is room in the near-term for US interest rate futures to adjust in favour of a higher USD, USD upside will be limited. The Fed’s interest rate normalisation cycle is at a mature stage while many major central banks now appear to be moving towards less monetary policy accommodation. During her press conference, Chair Janet Yellen warned again that “the Fed Funds rate does not need to rise much to get to neutral” and that “the economic outlook is highly uncertain”.

  • AUD/USD fell after the FOMC meeting on USD strength. Today’s speech by RBA Governor Philip Lowe (3:10pm Sydney) can generate some more AUD volatility. The title of Lowe’s speech is “The Next Chapter”. Lowe may discuss what the future holds now that Australia has successfully navigated the biggest boom and bust in mining investment in the nation’s history. The risk is Lowe talks up the economy and hints that the risk of a rate hike is growing.

 

Overnight Data:

  • The US Federal Reserve maintained the target range for the federal funds rate at 1.00‑1.25% as expected.  Eleven of 16 policymakers expect one more rate hike in 2017.  Fed projections suggest three rate hikes in 2018.  Median forecasts for GDP (economic growth) were lifted in 2017 from 2.2% to 2.4% while inflation forecasts were trimmed from 1.7% to 1.5%.  The Fed will start unwinding its US$4.2 trillion holdings of securities in October by initially cutting $10 billion each month from the amount of maturing securities it reinvests.
  • In US economic data, existing home sales fell 1.7% to a 5.35 million annual rate in August (forecast 5.46 million).

 

Global Equity Markets:                                                                                                                  

  • European sharemarkets ended flat on Wednesday ahead of the US Federal Reserve interest rate decision. The STOXX 600 fell by less than 0.1%. The German Dax rose 0.1% and the UK FTSE fell by 0.1%.
  • US sharemarkets fell sharply after the Federal Reserve decision but rebounded in late afternoon trade. Financials rose on expectations of another rate hike later in the year while utilities fell. The Dow Jones swung through a near 100‑point range over the session but ended trade at the day’s highs, up 42 points or 0.2% to record highs. The S&P 500 rose by 0.1% to record highs but the Nasdaq fell by 5 points or 0.1%.

 

Commodities:                                                                                         

  • Global oil prices rose by around 2% on Wednesday after Iraq signalled a possible extension of the agreement between OPEC and non‑OPEC oil producers to limit oil supply and support prices. Brent crude rose by US$1.15 or 2.1% to US$56.29 a barrel. US Nymex rose by US93 cents or 1.9% to US$50.41 a barrel.
  • Base metal prices rose by up to 2.6% on the London Metal Exchange.  Aluminium, nickel and lead rose the most although copper and tin fell up to 0.2%.  The December Comex gold futures price rose by US$5.80 or 0.4% to US$1,316.40 per ounce.  The spot gold price was trading around US$1,301 an ounce in late US trade.  Iron ore fell by US30 cents to US$68.00 a tonne.

 

Ahead:

  • In Australia, detailed labour market data for August is released. The Reserve Bank Governor delivers a speech.
  • In the US, the leading index, home price data and the Philadelphia Federal Reserve survey are released.

 

Indicative Rates (Bank to Sell):

AUD / USD 0.7986 AUD / CAD 0.9764 USD / JPY 112.29
AUD / JPY 89.29 AUD / THB 25.70 GBP / USD 1.3499
AUD / EUR 0.6698 AUD / HKD 6.1682 NZD / USD 0.7358
AUD / GBP 0.5890 AUD / SGD 1.0760 NZD / EUR 0.6187
AUD / NZD 1.0834 AUD / FJD 1.6094 AUD / CNY 5.2483
AUD / CHF 0.7597 AUD / PGK 2.5253 All Ordinaries 5769.71
AUD / DKK 4.9741 EUR / USD 1.1742 Gold $US/oz 1301.30
AUD / SEK 6.3858 EUR / GBP 0.8810 Oil WTC $/b 50.24

 

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