USD: And now it’s over to the Fed - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that with one key monetary policy announcement now behind us, the focus will quickly shift to the Fed announcement this evening.

Key Quotes

“Indeed, this evening’s announcement may well be a factor in limiting USD/JPY selling in the wake of the BoJ announcement. 

Like the Fed itself perhaps, we admit we have flip-flopped a bit on our call on this, changing to a 25bp rate hike in our September Foreign Exchange Outlook. However, economic data since (in particular the non-Manufacturing ISM report) and the speech from Governor Brainard have made us doubt that call of a hike this evening. We perhaps shouldn’t place too much importance on Brainard’s speech. She is an ultra-dove and was unlikely to be the senior FOMC member to signal a rate hike. Indeed, if Yellen, Fischer and Dudley are united and want to hike this evening, they could probably muster a 7-2 majority with Brainard and Tarullo dissenting.

However, with the probability of a rate hike so low, we fail to see the urgency in Yellen going in circumstances of causing a disruption to financial market conditions when we are now within two months of a presidential election. A 10% drop in asset prices would no doubt play into the hands of Donald Trump – so better to sit tight, stay out of the politics of the presidential race, give a message this evening of continued progress on achieving the dual mandate and wait until December.

Our sense is that the recent data may also be more of a worry than perhaps the market thinks. The annual growth in hours worked which has now dropped to just 0.2%, the weakest growth rate since the last recession. Indeed, we can see only one occasion when this measure has been this weak and not be an accurate signal of a recession just around the corner.

We also find it hard to envisage a “hawkish hold” this evening given the DOTS are likely to be cut for this year and next year and with the long-run fed funds rate probably coming down from 3.00%. Sure Yellen will signal a December rate hike with one DOT for 2016, but will the market believe it? We see downside risks for the dollar over the short-term.”