The Fed to the Rescue

US Fed chair Janet Yellen played the perfect central bank game overnight, fine tuning the Fed’s stance, preparing the markets for higher interest rates and simultaneously weakening the US dollar and producing a significant rally in bonds, shares and commodities. The positive impulse may be moderated in the Asia Pacific region where markets have been buoyed over the last week by a stronger USD.

In a balanced statement, the Fed board removed the forward guidance that has featured in every statement since 2008. While clearly flagging rate rises, the statement also hosed down forward rate expectations, painting a picture of much more gradual interest rate “normalisation”. The Board is now much more dependent on data in determining its action, potentially increasing market volatility around key releases and announcements.

In Australia the reaction is coloured by the quarterly share market futures expiry this morning. Huge volumes and the actions of fund managers as they re-shape their portfolios could determine market direction. A gain of around 0.5% is expected at the open. A further influence will be the reaction of Asian markets that have rallied strongly on a relative currency weakness and promised stimulus in China. Increased demand from the US may push back hopes of PBoC action, and result in selling.