FOMC Damages Dollar, RBNZ Dovish, Yen Vulnerable

No fireworks emerged from Bernanke's first press conference but a somewhat dovish Fed gave traders the green light to continue selling dollars as gold, EUR and GBP hit fresh highs. The kiwi is falling after a dovish RBNZ statement while the remainder of the Asia-Pacific session will feature Japanese CPI, industrial production and the BOJ decision. Gold hit new high of $1529.90/oz.

Key takeaways from the FOMC/Bernanke:

1) The Fed will continue to re-invest maturing mortgage-backed and Treasury securities. This is what hurt the U.S. dollar most on the day and led to a stock-market rally. Although it was generally expected, it further pushes out the date for asset selling/rate hikes.

2) QE3 is off the table for now. The Fed hiked its inflation forecasts (even though it maintained inflation will be transitory) and Bernanke said the risk of QE-induced inflation is greater than the potential benefits of QE3. That said, Bernanke did not completely rule out further action saying that going forward officials will need to make judgments if additional easing steps are warranted.

3) Q1 is increasingly looking like a weak quarter. Bernanke said the economy likely grew at a rate at or below 2% in the quarter. The consensus is for a 2.0% reading in Thursdays report. His comments point to a downside miss. This wasnt the focus of todays trade but it may materialize into CAD weakness in the days to come.

4) Growth forecasts downgraded. The Fed now sees the U.S. economy growing between 3.1% and 3.3% this year, down from a prior projection of 3.4% to 3.9% but above the consensus economist view at 2.9%. The Fed has tended to overestimate growth, so this brings them into line with the consensus.

EUR, GBP and AUD were the big winners each climbing around 100 pips since the statement. The Canadian dollar fell in step with the USD due to continental ties, and that may continue through next week. The yen was unable to join in the rout due to the lowered outlook from S&P and nervousness ahead of todays data slate.

The New Zealand dollar has fallen 60 pips since the RBNZ headlines crossed. Interest rates were left at 2.50%, as expected. Bollard said rates are likely to remain appropriate for some time and that the outlook is very uncertain. He also talked down the NZD. A fall below 80.00 in NZD/USD will trigger further selling (spot at 0.8019).

ASIA-PACIFIC PREVIEW

A busy day lies ahead in Japan with reports upcoming on CPI, unemployment, industrial production and the BOJ decision. The data will start to paint a clearer picture of the impacts from the disaster. We warn, however, that economist estimates around disasters are guesses at best. Even the official statistics will be highly prone to revision and interpretation because of difficulties getting complete data and the uneven nature of the recovery.

For CPI, the national core figure is expected down 0.2% y/y. Unemployment is expected to rise to 4.8% from 4.6%. The most noteworthy number may be industrial production, which is expected to fall 10.6% in March due to the earthquake. Given the miss on retail sales yesterday and talk of large declines in automotive production, we see a scope for a much greater decline. A fall of around 12% or more may spark yen selling but a larger fall could trigger risk aversion, leading to a yen rally, especially against AUD as the carry trade unwinds.

The session builds up toward the Bank of Japan decision. There is no fixed time but its usually released around 0300 GMT. No action is expected but the risk stems in economic growth downgrades and strong fx intervention threats. Either would prompt yen selling.

By AB AshrafLaidi.com Staff