Wealthy Nations Daily Update - FOMC

Talk this fine morning is all about the Federal Reserve and the outcome of their two day meeting. Previously the Fed were worried about global developments, which they dropped from last night’s statement, and of course were data dependent, now they appear to be “Weather” dependent.

That does not mean to say on page five of the Committee member’s manual to central bank protocol it reads “and members should suck on their index finger of the right hand and then point to the sky, if there is a north easterly blowing raise interest rates by 25 basis points”. Of course you get strong north easterlies in December.

Joking apart the Fed added a line to their statement “whether it will be appropriate to raise the target range at its next meeting” which brought back into play a December hike and resulted in a flattening of the US Treasury curve and a move higher in both the stock market and the US dollar. So we have two months of inflation and employment data before their next meeting on December 16th, which we believe will remain the major determinants of their “lift off” timing, although the forecast is for a mild winter.

Elsewhere the New Zealand dollar has fallen 13.36% this year against the US dollar, although it is up month to date over 4%, slightly less than the Australian dollar which is down 12.41%, (a Rugby World Cup final omen, maybe).

The Kiwi as the New Zealand dollar is fondly known has a turnover in currency markets of USD 105 billion equivalent per day, which is 56% of New Zealand’s GDP. This makes the Kiwi the most active currency in the world when measured against GDP. Other scores on a GDP basis are Switzerland at 40%, Australian dollar at 32% and the US dollar at 27% of GDP. This could explain the volatility we see in the kiwi and begs the question can a currency get too big for its own economy.

However, with China dropping the “one child per family” announced today New Zealand should be a big beneficiary as they supply 40% of the powdered milk market through their dominant company Fonterra.