From Washington to Rome

Markets were busy digesting the aftermath of the Fed's rate hike during Thursday's Asian trade until a new twist emerged in Italy's budget negotiations with the EU. CAD fell further as Trump played hard ball with Canada over NAFTA. The RBNZ held rates at 1.75% as expected, with US rates finally rising above those of New Zealand.

درج اليورو بعد الفدرالي (فيديو للمشتركين فقط)

The Fed hiked rates to a range of 2.00%-2.25% on Wednesday but sent mixed messages about the path of rates ahead. In the bond market, US 10s are also yielding 40 basis points more than kiwi bonds. It's rare to have the US as the high yielder in developed markets and those spreads are likely to widen.

As for the Fed, the statement removed a reference to 'accommodative' in what was initially seen as a sign that rates are near neutral and that hikes will soon slow. That move reversed in the press conference when Powell indicated the shift in wording didn't signal anything.

In comments on the path of rates, Powell sounded like he'd just spent two days of FOMC meetings listening to academics debate where neutral is, without getting any answers. Instead he said the Fed will stay on its path and judge what to do next based on incoming data. As for the path, it's not entirely clear but he said the lowest estimations of neutral are 3% so hiking every second meeting in 2019, barring any surprises, is a solid baseline.

Salvini Flirts with Budget

The euro fell anew alongside Italian bonds after Matteo Salvini, Italy's co-deputy prime minister and League party leader stated that raising govt expenditure and driving the budget deficit above 2% of GDP would be “worth the effort” if it resulted in economic growth. The comments were at odds with Economy minister Tria who had been supporting the reduction of the budget deficit below the 2% level. Brussels requires EU nations to keep the budget deficit below 3% of GDP. The matter will resurface again next week when Italy's leadwers back from the UN conference in NY.

Separately, the Canadian dollar swooned Wednesday as NAFTA negotiations sour. First, the White House leaked that it's planning to publish the text of a bilateral US-Mexico trade deal on Friday. Trump has long threatened to exclude Canada but that was mostly through to be bluster. Trump doubled down later saying he rejected a one-on-one meeting with Trudeau and that the US doesn't like Canada's main negotiator, Chrystia Freeland.

Still, Trump conceded there was a “good chance” of a deal with Canada but that chance has certainly dwindled. That was reflected in a rally in USD/CAD to 1.3040 from 1.2950.