Daily Market Commentary 28th January 2022

More extreme volatility engulfs markets over the last 24 hours, dominated by the Federal reserve, interest rates and inflation. The Fed finally recognised the serious nature of runaway inflation and is taking steps to address it. The markets are now pricing in 4 to5 interest rate hikes in the coming year. The Fed also will end QE, which is now a matter of timing and finally look at reducing the massive expansion of the balance sheet. US Bond Yields continued to surge, as did the now mighty US Dollar. The EUR collapsed to 1.1130, while the GBP crashed to 1.3370, reflecting the surging US Dollar.

The spiralling reserve blasted the commodity currencies, with the AUD falling to 0.7030, while he NZD fell all the way back to 0.6570. These commodity currencies are being destroyed by risk sentiment. The NZ inflation rate hit a 30 year high, when released yesterday, rising to 5.9%. The surging inflation rate, is despite efforts by the RBNZ to curb rising cost/price pressures, by raising interest rates. The RBNZ and the Fed both have the same problem, but the NZD is falling in the opposite direction, despite rising interest rates. The difference is that the US Dollar is the reserve currency of the world and the NZ Dollar is not. Closing off your country for two years and borrowing to pay for it is probably not the smartest economic strategy?

US GDP growth for Q4 surged to 6.9% annualised, but this is not the final figure and expectations are for a collapse in Q1 due to omicron, so the economic narrative has not changed a great deal.