The NZD/USD that had been creeping gradually higher overnight, gave up all its gains after the US FOMC announcement this morning. It now trades at 0.8090.

In the absence of domestic data releases yesterday the NZD drifted higher to touch above 0.8140. The Fonterra auction early this morning was in line with our expectations. It showed a 3.5% gain in average prices. This shows some support to prices after the downward trend seen in recent months. But the real driver of the currency this morning was the US FOMC announcement. Market expectations for policy easing were not met (see Fixed Interest). The USD strengthened in response, pushing other currencies lower, including the NZD.

However, the NZD made solid headway against its key European peers overnight. The GBP was undermined by a weak UK Manufacturing PMI (see Majors). This saw the NZD/GBP rise above 0.5200, its highest level since mid- April.

The NZD/EUR was on a steady ascent, climbing to new all-time highs above 0.6610. We see room for a little further appreciation on this cross. Direction in the near-term will be taken from tonight's ECB meeting. If the ECB fails to announce any concrete measures to support the Eurozone a heavy toll will be taken on the EUR. However, the NZD as a 'risk sensitive' currency will also feel the brunt of market disappointment.

Today, also look out for the release of the ANZ commodity price index that will provide an update on the extent of commodity price softening.

Majors

The USD paddled sideways ahead of the FOMC meeting. It then surged higher, as the Fed disappointed market expectations for further easing.

Early this morning, the Fed statement highlighted loss of economic momentum, but stopped short of offering any new policy easing measures (see Fixed Interest). This spurred the USD index rapidly from around 82.70 to 83.10.

Earlier in the night the EUR had navigated PMI data that was underwhelming, but had not provided major negative surprise. The European PMI (44.0) confirmed the region's manufacturing sector remains in contraction. However, the EUR/USD plunged after the FOMC meeting. From above 1.2300 it fell to 1.2230.

The GBP however was the weakest performing currency over the past 24-hours. The UK Manufacturing PMI dashed hopes of a bounce back, as it fell to 45.4 in July, the lowest level since May 2009. Exports experienced their steepest fall since February 2009. There will now be additional pressure on the UK MPC to take action. The GBP/USD has fallen from above 1.5680 to around 1.5550.

The 'safe haven' JPY along with the 'risk sensitive' AUD and NZD were casualties of USD strength early this morning. The USD/JPY rose from below 78.10 to 78.50.

The AUD/USD had been on a gradual ascent since yesterday afternoon. The currency was underpinned by Chinese PMI data that failed to provide any nasty surprises. The HSBC Manufacturing PMI crept up to 49.3 in July from 48.2 previously. This morning, however, the AUD/USD fell from above 1.0520 to below 1.0480 after the FOMC announcement.

Today, the AUD may take some direction from AU retail sales and trade balance data to be released at 1.30pm (NZT). However, the greater driver of general market risk sentiment will be the ECB meeting this evening, where expectations are now high for some concrete announcements. In addition, the Bank of England meets tonight. Here, the market expects no change in rates or asset purchases. Then the market will look to the all important US payrolls report tomorrow night. However, last night's US ADP employment report (162k vs. 120k) lessens the risk of a significant payrolls disappointment.

Fixed Interest

It was another fairly quiet day in NZ markets. Yields further consolidated recent rises, closing up 1-3 bps.

Market pricing shows that in a year's time the OCR will be little changed from its current level. We continue to see the first RBNZ rate hike in H1 2012. 2-year swap yields closed at 2.79%. The 2s-10s swap curve has steepened a little to 96bps. We think the curve is biased to steepen in the near-term from current levels.

Overnight, as the market awaited the US FOMC meeting German 10-year bond yields drifted up from 1.30%-1.38%. Peripheral European spreads to German bonds narrowed slightly.

The Fed announcement provided very little that was different from its June statement. Referring to the economy, it gave more emphasis to decelerating activity in H1. Elsewhere the statement followed its predecessor almost word for word. Rather than offering any new initiatives, it simply said the committee stood ready to "provide additional accommodation as needed". There was also no change in rates guidance, reconfirmed as "exceptionally low levels for the Federal funds rate at least through late 2014". The vote was passed with one dissenter, Lacker.

This was a bit less from the Fed than the market had anticipated. Still, reactions were relatively modest. The S&P500 has dropped marginally into negative territory. US 10-year yields gyrated after the announcement, but are now slightly higher at 1.52%. As further Fed purchases of US Treasuries are not imminent, some release of downward pressure on long-end yields can therefore be seen.

NZ yields response to overnight developments should be relatively contained, though an upward bias to long-end yields is likely. The market now awaits the much anticipated ECB announcement tonight. Spain will also return to markets tonight to sell bonds, as a good indicator of current risk appetite.