Fed Tapers, RBNZ Holds, Markets Worried

Emerging market fears and economic worries overshadowed a busy day for central bankers. The yen was the top performer while NZD lagged after the central bank held rates. Japanese retail sales and the final Chinese PMI from HSBC are due.  Today's Pre-FOMC Premium Insights on USDCAD and USDJPY are in progress as are EURUSD, GBPUSD, NZDUSD, AUDJPY and gold. 1 of 2 NZDUSD was stopped out. Full access in the Premium Insights.

The Federal Reserve tapered another $10 billion but the biggest surprise was that officials offered nearly nothing to the doves. The key parts of the statement were unchanged but slightly more hawkish was introduced with officials saying risks to the growth and employment outlook were 'more nearly balanced.'

The takeaway is that conditions will need to deteriorate significantly for the Fed to reconsider the taper. That's good news for the US dollar but takes away a source of support risk assets. That's a double-dose of good news for USD/CAD.

The loonie's commodity cousin in New Zealand also had a dose of negative news when the RBNZ decided to wait before raising rates. Wheeler said a hike will come 'soon' but NZD/USD fell a half cent to 0.8180 before rebounding to 0.8216. The central bank will almost certainly hike rates at the next meeting in March as it embarks on a hiking cycle.

Aside from central banks the market focus was on emerging problems in the developing world. Turkey's dazzling effort to halt the lira's decline failed within hours. The South African rand also hit a four-year low despite a rate hike. The problems have exposed doubts in developed markets and sparked demand for yen.

Technically, USD/JPY held the short-term support zone from 102.00 to 101.77 but only barely and bounces have been thin. In addition, stocks broke down and USD/JPY fell below the 2.70% support level. Unless sentiment quickly turns, it's tough to envision yen crosses remaining buoyant.

The worries in emerging markets can be traced back to the China manufacturing PMI from HSBC. The flash reading was 49.6 for January and at 0145 GMT the final revision will be announced.

But first, at 2350 GMT, Japan will release retail sales for December. The consensus is for a healthy 3.9% y/y increase.