Market Reactions to FOMC Rate Decision

RATE NEWS

Perhaps the biggest news of the day was the outcome of the FOMC meeting in the United States. Federal Reserve board members on Wednesday voted to keep short-term interest rates unchanged at near zero levels, which was not surprising to market watchers. However, the main point that traders were looking out for was answered when the released statement opened the door to a possible rise of interest rates at the final FOMC 2015 meeting in December. The central bank’s statement suggested it was less concerned in recent weeks about turbulent financial markets and uncertain economic developments overseas.

The prospect of an increase in interest rates is seen as USD-positve, as higher rates make the currency more attractive for investors seeking a higher yield. Certain market watchers have indicated that the statement was more hawkish than had been anticipated. “The statement is certainly more hawkish than the market was expecting,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. Market watchers had all but foreclosed any rate increases this year as a spate of uneven U.S. economic data and Fed concerns regarding global market volatility have been the main talking points in the last one week.

However, the greenback was boosted against the euro late last week as European Central Bank President Mario Draghi hinted that the ECB was prepared to expand its quantitative easing program. The widespread expectation is for the USD to gain against the Euro. The USD gained 173 points in a spike move on the FOMC news release and is trading at 1.0922 as at the time of writing.

BONDS

Canadian bonds ended the day lower Wednesday after the U.S. Federal Reserve kept short-term interest rates the same but opened the door more explicitly than they have before to a rate hike at its meeting in December. Canada’s two-year bond yield was at 0.539% Wednesday, from 0.494% late Tuesday, according to electronic trading platform CanDeal. The 10-year bond yield was at 1.472%, from 1.419%. Bond yields move in an inverse manner to bond prices. This is coming after bonds had pushed higher in the previous two sessions after a spate of disappointing U.S. economic data had markedly reduced bias towards a rate hike by the Fed Reserve among U.S. and Canadian investors. However, the reference by the FOMC to the next meeting in determining the appropriateness of a rate hike spooked investor confidence in rates remaining unchanged for an expected period of time. Suddenly, a December rate hike seems very probable.

CURRENCIES

The FOMC is not the only central bank that has been in focus. The Reserve Bank of New Zealand is also due to meet this week with its own rate statement due on Thursday.  The market sentiment for the NZD/USD is decidedly bearish and experts are of the opinion that any rate cut would send the NZD plunging against the USD near-term, given the backdrop of a broadly stronger USD. The Kiwi is expected to remain under pressure even if the RBNZ dos nothing, as the fundamentals pushing USD strength will still be in effect. BNZ sees the NZDUSD trading down from present levels all the way down to US$0.60 in early 2016.

The greenback’s post-FOMC gains is also pressuring the Australian Dollar as odds increase for a rate liftoff in December. The Aussie is trading presently at US$0.7104 from US$0.7157 ahead of the FOMC statement.

Emerging market currencies are expected to take a hit on Thursday and Friday as expectations of a US rate hike is fully on the cards. Already, the Mexican Peso has given back early gains and closed weaker against the U.S. dollar on Wednesday as the Federal Reserve kept the door open for an interest-rate increase at its December meeting.

The Federal Reserve kept interest rates near zero as expected and said it would continue to monitor progress toward its inflation and employment targets before deciding whether to raise rates at its next meeting. If it does raise rates in December, it would be the first time the U.S. central bank made such a move in almost a decade.

“The Mexican peso’s initial reaction is negative toward 16.60 because the statement is interpreted to be less pessimistic about the global and U.S. economic performance, which is fuelling bets the Fed could raise interest rates at its December meeting,” CI Banco said in a report.

It remains to be seen how the Brazilian Real, South African Rand and other emerging market currencies will react. A rate hike in the US will see investment money move from the emerging markets into the US economy, weakening the emerging market currencies and strengthening the US Dollar.

STOCKS

In early Thursday trading, the Nikkei 225 has started the market on a bullish note, buoyed by the prospect of a U.S. rate hike in December. Market participants are now focusing on the Bank of Japan’s policy meeting on Friday. Japan’s better-than-expected industrial output data earlier trimmed expectations for additional easing. The Nikkei is up 0.7% at 19039.37.