USD Succumbs To Fed Stimulus, Kiwi Leads The Charge

As widely anticipated, overnight the Federal Reserve announced a further $U.S.45 billion in asset purchases per month from 2013, in addition to the existing stimulus programme (QE3) which buys US$40 billion in asset purchases per month. The decision also marks a significant change in the Fed’s forward guidance, with the bank now linking explicit targets for unemployment and inflation before policy tightening occurs. Before today, the Fed’s official line was exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015, however the bank has now adopted what’s been dubbed the ‘Evans Rule’ after Chicago Fed governor Charles Evans, who has in the past advocated a need for monetary policy to remain accommodative until the unemployment rate is below 6.5% and/or inflation is above 2.5%.

The decision saw the greenbacks innate aversion to stimulus kick into gear, with significant losses noted against major counterparts with the exception of the Japanese Yen. The Swissie, Kiwi and Euro led the charge higher with the Aussie, CAD and Sterling trailing behind.

Yen Bears Cheer As USD/JPY Snaps ¥83
The USDJPY pair broke through key pockets of resistance, forging new 8-month highs above 83-figure. It’s been a solid run for the pair since early October, up over 7% with a key inflection point noted after Prime Minister Yoshihiko Noda declared his intent to dissolve parliament in mid November, making way for former Prime Minister Shinzo Abe to stake his claim.

Abe has made clear his intention to reinvigorate the Japanese economy with “unlimited” quantitative easing in an effort to counter Japan’s deflationary malaise. If Abe should succeed, his intentions are quiet clear -- print Yen until inflation is above a target of 2%.

Markets will now be focused on Sunday’s elections with polls suggesting Abe’s Liberal Democratic Party will take the reins, rendering the ‘Abe trade’ a winner...for now. The Yen suffered the deepest losses against the in-form Euro and Kiwi in recent sessions. At the time of writing the USD/JPY is trading at Y83.20 with 84-figure the next logical technical milestone, nonetheless, we expect the wave of selling to slow ahead of the elections with at the very least a period of consolidation likely.

Kiwi Leads Commodity Bloc Offensive; Aussie Follows Suit
True to recent form the Kiwi led the commodity bloc offensive against the greenback, making a material break to the upside of 84-figure for the first time since March this year. With the Fed revitalising their ‘weak dollar policy’ by unleashing further stimulus, the Kiwi was primed to lead the charge higher. Last week, the RBNZ made the bullish case for the Kiwi all the more compelling by flagging higher inflation expectations. A slightly hawkish central bank should act as a relative floor for the kiwi in the near-term, combine this with stimulus-inflicted greenback and the case for further upside is strong.

The Aussie dollar rose to fresh three-month highs against the out-of-form greenback with price action rising to 105.87 U.S. cents and remains well supported at current levels of 105.55 U.S. cents. Like the kiwi, the Aussie stands the benefit from Fed’s new asset purchases, given the greenback natural inverse relationship to stimulus. This suggests beyond 106 U.S. cents carries a high probability; followed by a more pronounced period of buying towards 108 U.S. cents, should we see a sustained break above the figure and the post-fed momentum continues to work in favour of risk barometers such as U.S. equities. Local data today includes consumer inflation expectations at 11am followed by new vehicle sales at 11.30 AEDT.