Client note being published by our good friends at efxnews.com
Expectations leading into the FOMC and RBNZ later today
Say CA:
When it comes to the Fed a more dovish assessment seems to be expected when considering increased global growth uncertainty to the detriment of investors' central bank rate expectations. Even if inflation expectations close to multiyear lows suggest that a more cautious stance may be on the cards, we believe that the main focus will remain on still constructive growth prospects. As such the Fed may reiterate that weak inflation is regarded to be transitory. If anything it may prove difficult to exceed already dovish expectations as only one 25bp hike is priced in for the reminder of the year.
Accordingly we do not anticipate further falling Fed rate expectations to the detriment of the USD. Elsewhere, we believe that such an outcome does not dependently need to weigh on investors' appetite for risk assets, especially if the Fed manages to keep confidence in the economy intact. It must be noted too that investors' focus may swiftly shift to Friday's BoJ announcement, which may keep liquidity expectations supported.
In New Zealand, we expect the RBNZ to remain on hold even if weaker price developments and more muted external demand expectations have increased the risk of the central bank easing monetary policy further. Nevertheless, we believe that the central bank will maintain its easing bias. In the December MPR, the RBNZ indicated risks of a further rate cut in the second half of this year, this has been somewhat reflected in current market pricing. The next MPR is not due until the March meeting.
Strongly capped central bank rate expectations should keep any NZD upside limited from the current levels.
