FXStreet (Delhi) – Marc Chandler, SVP at BBH, suggests that with the Fed’s rate hike at the end of 2015, a new phase of divergence is at hand which will be characterized by the Fed becoming less accommodative while other central banks maintain or extend current easing policies. Key Quotes “Some central banks may have reached the end of their easing cycles, but it is possible that the door is not completely closed. We expect the Obama dollar rally to continue in 2016. The premium one earns in US dollars will continue to attract capital flows into the US. Because of the wide, and widening interest rate differentials, one is paid to be long dollars. This has powerful implications for hedging. Dollar-based investors paid to hedge exposure (receivables) in euros, Swiss franc, and Japanese yen for example. Our assessment of indicative market prices suggests that the divergence meme, as much as it may be discussed, has not been discounted. By the time the European Central Bank (ECB) met in early December when it decided to cut the deposit rate 10 bp to minus 30 bp and expand its program by six months (through March 2017), the premium the US offered over Germany for two-year borrowing had increased to nearly 140 bp. It was around 85 bp when the euro bottomed in March 2015. The Fed funds futures strip suggests that the participants are skeptical about a second Fed rate hike in Q1 16. The Fed’s dot-plots suggest a majority of Fed officials think it would be appropriate. Several large investment houses, and Fitch, the rating agency, forecast a hike every quarter. We recognize that the market is a great discounting mechanism. Arguably it has no rival for its ruthless ability to aggregate vast quantities of information. We have found helpful in navigating the markets to appreciate that events can be anticipated and discounted. Buying rumors, selling facts is standard fare in the capital markets. However, conceptually, we think that the widening interest rate differentials cannot be fully discounted. The interest rate differentials, including the slopes of yield curves, provide powerful incentives driving new flows, influencing investment, hedging and liquidity decisions.” For more information, read our latest forex news.