- Dovish Fed weighs on dollar…
- …but this decision does not alter our high conviction views
Financial turmoil puts FOMC on hold
After two days of meetings, the Fed kept rates on hold. The FOMC statement showed that policymakers are concerned about recent global developments and the tightening of financial conditions and their impact on economic activity. However, the door was left open for a rate hike this year. We expect a rate hike in December as global risks should ease and the US economy should continue to recover.
Dovish Fed weighs on dollar
Markets were volatile following the decision, but overall outcomes were supportive for bonds and gold, but negative for the dollar, as markets scaled back rate hike expectations. Gold prices moved higher, while the US dollar and 10y US Treasury yields fell. At the end of the session US equities gave up their gains and closed down for the day.
Did the FOMC decision alter our views?
We are negative about emerging markets currencies, some more than others, depending on their commodity exposure, economic growth outlook, and political situation. Moreover, we are positive on the US dollar, negative on the euro, negative on the yen and negative on commodity currencies. Is today’s FOMC meeting resulting in a change our view. In short “no”. Because today’s FOMC decision is not changing the overall picture that the Fed will start its tightening cycle this year or early next year. If the Fed eventually hikes in December as we expect, then the US dollar and yields should move up. The EUR/USD should also be pushed down by a stepping up of ECB QE. Monetary policy divergence will remain a crucial driver going forward favouring the US dollar versus a large number of currencies including the euro, the yen, commodity and emerging market currencies. We judge that any move higher in the euro, the yen, commodity and emerging market currencies is temporary and an opportunity to position for weakness afterwards.
Commodity currencies recover
During the past week, commodity currencies recovered, in line with underlying physical commodity prices. Since August, dairy auction prices have rebounded by almost 50%, providing some support to the New Zealand dollar. Similarly, the Australian dollar was supported as iron ore prices remained firm and on domestic optimism that the new Prime Minister in Australia will implement business friendly reform measures to stimulate the economy. We do not think recent gains will be sustained as we expect both the Reserve Bank of Australia and the Reserve Bank of New Zealand to maintain an easing bias.