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11 Dec 2015
Constructive on USD as we head towards the Fed lift-off – Westpac
FXStreet (Delhi) – Richard Franulovich, Research Analyst at Westpac, suggests that the Fed meet is going to be a momentous day certainly but few surprises likely, OIS pricing for at 82% while the forecasting community is nearly unanimous, 92% of analysts expect a hike.
Key Quotes
“Parts of the statement will be moot after lift-off and need reworking, i.e., “…whether it will be appropriate to raise the target range at its next meeting“, and, “…the committee reaffirmed its view the current 0 to 1/4% target range remains appropriate…”.
“Risks may be upgraded from “nearly balanced”. Gradualism will no doubt be stressed and the statement may be tweaked to note further hikes will depend on “actual progress” on inflation vs “expected” progress toward 2%, a subtle but significant shift noted by Yellen recently. Yellen likely to strike a cautious tone on subsequent hikes, repeating the view that the long run neutral Funds rate has fallen and that rates will remain accommodative for a long time.”
“The infamous dot plot should convey much the same, the long run neutral rate (3.5%), likely to fall again, probably 25bp. A median 4 hikes next year (to 1.375%) and 5 in 2017 probably do not change much. Far less consequential but not to be totally ignored either, the first of the Dec surveys (Empire, Philly and the NAHB surveys) and Nov CPI, housing starts and IP will be released too.”
“We have trimmed our USD outlook as a result and adopt a neutral outlook on the week ahead. A follow up Fed hike however could come as soon as March, yet markets do not discount a second move until July 2016. That should be aided and abetted partly by very favourable oil price base effects that will lift inflation a good percentage point (headline more so than core) and a probable mild winter based on El Nino patterns, potentially flattering Q1 growth. We thus stick with a constructive 3 month outlook.”
Key Quotes
“Parts of the statement will be moot after lift-off and need reworking, i.e., “…whether it will be appropriate to raise the target range at its next meeting“, and, “…the committee reaffirmed its view the current 0 to 1/4% target range remains appropriate…”.
“Risks may be upgraded from “nearly balanced”. Gradualism will no doubt be stressed and the statement may be tweaked to note further hikes will depend on “actual progress” on inflation vs “expected” progress toward 2%, a subtle but significant shift noted by Yellen recently. Yellen likely to strike a cautious tone on subsequent hikes, repeating the view that the long run neutral Funds rate has fallen and that rates will remain accommodative for a long time.”
“The infamous dot plot should convey much the same, the long run neutral rate (3.5%), likely to fall again, probably 25bp. A median 4 hikes next year (to 1.375%) and 5 in 2017 probably do not change much. Far less consequential but not to be totally ignored either, the first of the Dec surveys (Empire, Philly and the NAHB surveys) and Nov CPI, housing starts and IP will be released too.”
“We have trimmed our USD outlook as a result and adopt a neutral outlook on the week ahead. A follow up Fed hike however could come as soon as March, yet markets do not discount a second move until July 2016. That should be aided and abetted partly by very favourable oil price base effects that will lift inflation a good percentage point (headline more so than core) and a probable mild winter based on El Nino patterns, potentially flattering Q1 growth. We thus stick with a constructive 3 month outlook.”