FOMC: Dots dash dollar hopes - Westpac

Sean Callow, Research Analyst at Westpac, explains that the Fed delivered on its clearly flagged March rate hike and maintained its projections for 3 rate rises this year plus another 3 in 2018, after just 1 in both 2015 and 2016 but the slide in the US dollar against all major currencies occurred not in response to Chair Yellen’s press conference but on the release of the statement and quarterly projections.

Key Quotes

“In a world where the ECB, BoJ and BoE are still printing money, Canada is not ruling out another rate cut, the Swiss benchmark rate is -0.75% and even Australia and New Zealand aren’t likely to raise rates this year, surely the March FOMC decision was a positive for the US dollar. But apparently not today.”

“Once again there was intense interest in the FOMC’s “dot plots”: the median “projected appropriate monetary policy”. As noted above, the Fed is confident that another 2 rate hikes are likely to be needed this year, compared to market pricing which was between 1 and 2 further hikes.”

“Yet while the Fed gave economists no real cause to doubt their projections, positioning appears to have been for a more hawkish outlook. The projected rates for 2017 and 2018 (and long term) were unchanged, while 2019 rose only marginally. It seems a market firmly long USD on many crosses needed to see another step higher in the “dots”.”

“This is likely to reverberate near term. Westpac continues to expect the next Fed hike to be in September, so there is scope for markets to reduce the risk of a June move, currently around 45%. In the week ahead, that points to further USD declines against most currencies, including across Asia.”

“But while AUD outperformed in the wake of the Fed meeting, consistent with its role as a high beta USD play, we look for AUD/USD to continue to find the 0.7740/50 region difficult.”