Fed leaves rates unchanged, US dollar weakens, ASX futures flat

There was a lot of action in equity futures and foreign exchange markets this morning after the US Federal Reserve announced it would leave the US cash rate where it is. The decision to leave the target rate at between 0% and 0.25%, which was 75% priced into the market already, was accompanied by a statement that incorporated new language about recent global economic headwinds putting further short-term downward pressure on inflation - see the comparison between this mornings and the last statement by clicking here. So overall, one would conclude that this morning's statement was fairly 'dovish', with the US Federal Reserve Chairwoman Janet Yellen making it very clear that--irrespective of when the first rate rise comes--rates in the US will remain 'accommodative' for a long time to come.

So what was the market's response to these unchanged interest rates?

  • Equity market futures were propelled higher by a mix of short-covering (by bearish traders reversing their bets) and bulls who were looking for an 'unchanged' announcement before buying
  • This rally was short-lived - as you can see in today's first chart, the excitement was withdrawn just as quickly as it emerged, with the S&P 500 erasing gains and finishing down 5 points
  • The US dollar weakened (second chart), which goes to show that even with a minority pricing in a hike, there were still plenty of risk-takers placing outside bets on that outcome
  • The Aussie dollar, after initially receiving a push well over a cent to the US$0.7275 level on the back of a weaker US dollar, came back to earth as traders implemented their views that if the US Federal Reserve is happy with low interest rates, then the Reserve Bank of Australia will probably be happy with low (or lower) rates too

There will be a lot of commentary around about what the Fed should or shouldn't have done this morning, but I for one am quite happy. The US doesn't need higher short-term bond yields (which would increase the cost of short-term funding and put upward pressure on US public debt servicing costs) and none of us want more currency games from China, given what happened in August. The Chinese want the US dollar to cool off for a while so it doesn't hamper its export volumes given that the Chinese yuan is pegged to the US dollar, and if rates had have increased last night and the US dollar had have strengthened, then we would have seen fresh speculation of more currency valuation changes out of China. That wouldn't have helped the US economy, emerging markets or Australia - so again, I'm happy.

As stated recently, one shouldn't expect too much from the Fed in terms of economic forecasting or shaping the future of global financial markets. Their crystal ball is no more accurate than anyone else's - so I do not read too much into what unchanged interest rates means for all of us. I don't think that the US economy is suddenly worse than I thought it was because the Fed is not willing to raise rates. We're living in a new world since the GFC and if emergency rates have to remain in place for a lot longer than most economist think is 'normal,' then so be it.

Gold strengthened as the US dollar fell and traders speculated that the extension of these emergency rates might last longer than the market expected. Rivkin Global traders are benefiting from a long US dollar spot gold (XAUUSD) position this morning.

All in all, this morning was a good outcome from my perspective and is--tactically--what the world needs right now. I'm feeling good as we come closer to the Rivkin Local October Blue Chip Strategy release. Get in touch with us if you're not a Rivkin Local member and would like to get involved in this.

Source: Rivkin, Saxo Bank

To view the Rivkin economic calendar and Global Markets matrix, members can click here.

This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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This article contains information about foreign exchange contracts, which are considered complex financial products. Please click here to read ASIC's foreign exchange trading article before considering an investment in foreign exchange contracts. 

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