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Fed December hike: Moving off zero – BofAML

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 20, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at BofAML, suggests that with market pricing assigning high odds to a rate hike in December, we shift discussion to how the Fed will lift off as opposed to when.

    Key Quotes

    “When they increase rates, we expect the Fed to: (1) raise the interest rate on excess reserves (IOER) to 50bp, (2) move the overnight reverse repo (ON RRP) rate to 25bp, (3) provide details on if or how they expect to use term tools in the normalization process, and (4) continue reinvesting proceeds from their Treasury and agency debt and MBS holdings.”

    “Short-term money market rates should shift higher in response to the first rate hike though there will likely be a fair amount of variation amongst them. We expect that the fed funds effective and Treasury general collateral repo rates will trade in the lower half of the IOER to ON RRP band. Short-dated bills and agency discount notes will trade near or below the ON RRP level while three-month LIBOR will likely settle at or slightly above the IOER rate. Given the Fed has not raised interest rates since 2006, there is a fair amount of uncertainty around these forecasts and it may take money markets some time to settle into their new trading levels. Year-end liquidity dynamics may also add volatility to the front end after the first Fed move.”
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