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FOMC Surprises With Hawkish Narrative

Federal Reserve Leaves Fed Funds Rate Unchanged But Signals Potential for December Hike

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Diminished concerns of global economic weakness combined with more focus on the pickup in domestic demand and little reference to the US labour markets saw the Federal Reserve strike a more hawkish tone yesterday, signaling that the Federal Reserve is still considering a December rate hike.

Sweden RiksBank Expands QE

The Swedish Riksbank kept the benchmark interest rate unchanged at -0.35% during its decision yesterday, deciding instead to expand its quantitative easing program by SEK65 billion through June of 2016. The markets were expecting to see the asset purchase program being extended but widely underestimated the size. While the repo rates were left untouched, it is anticipated that there could further rate cuts bringing rates towards -0.40% in 2016. The Swedish Central bank also struck a dovish tone by revising its forecasts lower in light of the risks to the outlook. EURSEK declined -0.57% for the session to close at 9.338, posting an 8-day low. The dovish tone came as a surprise considering that macroeconomic conditions in Sweden were so far posting strong fundamental growth.  However, the asset purchase expansion was seen as a move to frontrun speculation of the ECB's own asset purchase expansion in December.

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Hawkish FOMC Statement

The October Federal Open Markets Committee statement struck a surprisingly hawkish tone yesterday. While the Fed Funds Rate was left unchanged as widely expected, the Fed's statement signaled that the Federal Reserve was still considering a rate hike in December. The sharp turn in sentiment and language saw the Fed Funds Futures shoot higher on the statement, now pricing in a probability of 47% for a Fed rate hike in December. While 9 members voted in favor of keeping rates steady, Richmond Federal Reserve President Lacker voted in favor of a rate hike during yesterday's meeting. The US Dollar surged on the news as the markets were caught off guard after largely expecting to see a dovish tone emanate from the FOMC Statement. The EURUSD currency pair declined -1.15% for the session, closing at 1.0921 while precious metals also sank.

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RBNZ Strikes Dovish Tone

In following with global developments, the Reserve Bank of New Zealand opted to leave its own benchmark interest rate unchanged at 2.75% during its policy meeting overnight in a widely expected move, citing improved consumer and business confidence led by the gains in global dairy trade. The Central Bank however signaled that it was willing to cut rates further in light of the stronger New Zealand dollar and the uncertainty surrounding growth which could threaten the Central Bank's inflation forecasts. RBNZ Governor Wheeler noted that the recent surge in the Kiwi dollar could dampen trade and medium term inflation, justifying the need for further rate cuts down the road. For the moment, the recent modest rebound in commodity prices was enough to justify a pause in accommodation, but expectations of further rate cut slashing have not diminished.  The Kiwi dollar trended -0.90% lower yesterday, closing at 0.6690.

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Third Quarter US GDP

The preliminary estimate of third quarter US GDP is due later today in what will be one of the bigger announcements of the session. Expectations are for quarterly GDP to have expanded by 1.60%, a subdued pace after posting stunningly strong second quarter GDP growth of 3.90%. Nevertheless, the latest forecasts from the Atlanta Federal Reserve model points to third quarter growth around 1.1%, a far cry from estimates while other institutions are more optimistic, estimating third quarter GDP growth at around 1.40%. The US Dollar is likely to come under pressure on the data especially after posting strong gains yesterday. USDJPY closed at 121.09 yesterday posting a strong reversal after briefly trading near the lows of 120.04.  An upcoming Bank of Japan meeting could see the Yen appreciate further especially if no expansion to QQE measures is announced.

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