US Dollar, Top Currencies Shift Focus to Fed Hike Implementation

Talking Points:

Aussie, Kiwi Dollars Underperform as US Dollar Gains After Fed Rate Hike
In-Line FOMC Outcome Hints Near-Term USD Advance May Prove Fleeting
Currency Markets Set to Shift Focus to Fed Tightening Implementation Effort

The Australian and New Zealand Dollars are underperforming relative to their G10 counterparts as the US Dollar pushes broadly higher following the FOMC monetary policy announcement. Chair Yellen and company issued the first post-QE interest rate hike and signaled that subsequent tightening will be cautious and shallow.

The outcome registered broadly in line with consensus forecasts. Indeed, the breakout of risk aversion would have probably materialized if investors judged the Fed’s rhetoric as hawkish. This was clearly not the case. Indeed, Asian bourses are mostly following Wall Street upward. On balance, this means the greenback’s overnight advance may represent a surface-level reaction that ultimately struggles for follow-through, at least in the near term.

Looking ahead, a relatively quiet economic calendar on the European front will see investors focused on implementation of the Fed’s new policy regime. The Fed Funds rate (FFR) will need to be brought upward from 15bps, the Wednesday close, and into the new 25-50bps target range.

To this effect, the Fed raised the interest rate on reserves to 50bps and authorized the Open Markets Desk to conduct effectively unlimited reverse repo operations at 25bps, with the only constraint being the supply of Treasury securities that the Fed’s traders have on hand. Markets will monitor the central bank’s ability to deliver tightening through this mechanism, tracking its impact on borrowing costs around the financial markets.

If the removal of accommodation proves particularly abrupt, a latent risk-averse response to the Fed’s announcement may yet materialize. That would bode ill for the Aussie and Kiwi Dollars while boosting the anti-risk Euro and Japanese Yen. Alternatively, the opposite dynamic may materialize if the Fed struggles to bring FFR upward as intended.

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