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Bottom line for currencies on Fed - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 15, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Guatemala) - Analysts at Nomura explained that they don’t think the Fed will be able to generate a hike that is sufficiently dovish to move rate expectations down meaningfully.

    Key Quotes:

    "This is almost certainly the case for 2016 expectations, given current pricing. For 2017 and 2018 expectations, it is more tricky; median dots may move down meaningfully. But even for the out years, we do not expect a market impact similar to previous dot changes (i.e., market rates will be less sensitive to dot changes, and respond more to levels).

    What may end up being the crucial market driver is the “risk sentiment” effect. On this front, there is some evidence that risk aversion may have climaxed in the near term. We also note that there has been a pattern of relaxation around important Fed events in the past, and this could be the case again.

    If the Fed delivers a neutral hike, it may indeed be supportive for risk assets in the near term, and we could see a divergence between USD/G3 (higher) and USD/EM (lower). Going into the meeting, we have 1.13-1.10 put spread in EURUSD on (initiated 20 September 2015), which is likely to expire with max payout on December 18.

    At this point, we are inclined to add optionality in the form of short EUR/MXN to take advantage of potential divergence between various USD crosses. We invest $100K in a 1-month 25-delta EUR put/MXN call (strike at 18.30) at a spot reference of 18.79 for 0.67% EUR. A similar structure could be attractive for certain JPY crosses, too (such as TRY/JPY)."
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