Doves of a feathers

Two clear camps are forming at the Federal Open Market Committee (FOMC).

Source: Bloomberg

There are the hawks – Jamie Bullard, John Williams and Denis Lockhart. All have said over the last two week that rate rises in 2016 remain on track.

Bullard went as far as time lining possible hikes, suggesting April would be a debated event to lay groundwork for a rise in June.

The hawks caused:

  • DXY to touch the March high
  • Risk currencies to be shed as the USD repriced hikes – with AUD, CAD and NZD being the most notable losers over the period
  • The bond and swap markets scrambling to reprice possible risk hikes. June became a 50/50 event, with December seen as a near certainty

Then there are the doves – Lael Brainard, Bill Dudley (both voting members) and finally, the one that really matters, Janet Yellen.

Her speech this morning has painted a very dovish picture for the inflation outlook in 2016 and although she did not directly use this term, she clearly sees the US economy as two-speed.

Employment and net wealth have been positives over the past seven years, yet net exports and manufacturing are shrinking and dragging on growth, which is causing a mixed picture.

The reactions to the Chief Dove

  • Futures markets are now only pricing in one rate hike in 2016, at best
    • June expectations have fallen to 25% from over 50%
    • September was always seen as a non-event due to the Presidential Election in November
    • December is the only remaining press conference Fed meeting that is a variable possibility and the Fed funds futures is only pricing in a December hike at 50%
  • DXY lost 0.8% on the back of Yellen’s speech, and USD expectations in 2016 will further unwind the more we see a two-speed economic read. There are growing forecasts that there will be no rate hikes in 2016
  • US equity markets have seen the comments as positive as the prospect of a tighter monetary policy US diminishes
  • The US bond market jumped at the comments with the ten-year yield falling nine basis points

Reactions closer to home

  • AUD has been given clear air to retest the year high of 76.8c as the Fed backs out of hikes
Click to enlarge
  • JPY now has to contend with negative rates not having the desired effect, the Bank of Japan assessing other unconventional monetary policy options, and a US central bank unlikely to raise rates. JPY is likely to test 2014 highs
  • The big unknown is how China will fix RMB and how it will react over the coming months. USD/CNY should fall in theory; however, if the Chinese slow the rate at which the CNY appreciates, Asia (and particularly Australia) would be put in a bind

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