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USD: Gradual tightening reassurance to boost risk sentiment - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 19, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has weakened modestly overnight giving back some of its recent strong gains following the release of the latest FOMC minutes from their meeting on the 28th October.

    Key Quotes

    “The reaction in the US fixed income market has been more limited and US equities rallied following the minutes. The minutes clearly signalled that most Fed officials thought that the conditions for lift off “could well be met by the time of the next meeting”. The minutes revealed as well that most participants judged that downside risks from overseas economies and markets had diminished.”

    “The signal from the minutes was consistent with the accompanying policy statement and subsequent Fed rhetoric that a rate hike will be delivered in December unless there is a negative economic shock in the interim. The market continues to attach around a two thirds probability to a 0.25 percentage point rate hike in December.”

    “By raising rates earlier FOMC participants noted that it “would make it more likely that the policy trajectory after lift-off could be shallow”. It was backed up by a discussion of staff presentations on the concept of the equilibrium real interest rates. Staff presentations estimated that the short-run equilibrium real rate was currently around zero which FOMC participants expect to rise only gradually overtime.”

    “The comments regarding gradual tightening while not entirely new have weighed on the US dollar. For the US interest rate market which is discounting less than two rate hikes next year after assuming a hike in December the comments are broadly in line with expectations providing reassurance for investors and boosting risk sentiment.”

    “We expect US dollar weakness following the minutes to prove short-lived. Our short-term valuation model which is driven by key fundamental drivers such as yield spreads is currently signalling downside risks for EUR/USD estimating that it could test the cyclical lows from earlier this year. It supports our view that the potential impact from the well telegraphed first Fed rate hike is not yet fully priced in. We also continue to see scope for the Fed to raise rates by more than the market is currently expecting in 2016 which could provide further support for a stronger US dollar.”
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