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26 Apr 2016
Fed is not expected to rock the boat - MUFG
Lee Hardman, Currency Analyst at MUFG, suggests that the negative external risks have eased a little since the Fed’s last policy meeting.
Key Quotes
“The Chinese economy appears to have at least stabilized in the near-term and US financial conditions have become more supportive for economic growth including the sharp weakening of the US dollar so far this year although it still remains strong. Some acknowledgement that these downside risks to growth have eased is likely to result in the statement sounding less dovish than in March.
However, we doubt that the Fed will want to signal strongly that it plans to raise rates at their next meeting in June. As a result, we believe that it is unlikely that the Fed will re-introduce into the statement that it sees the risks to their outlook as balanced or more balanced which would provide more support for the US dollar in the near-term.
The Fed is likely to remain cautious about resuming rate hikes in the near-term given that the US economy got off to another weak start to the calendar year which should be confirmed late this week in the release of the preliminary Q1 GDP report. Inflation pressures also softened in March following firmer readings earlier this year providing some reassurance to the Fed that inflation will increase only gradually back towards its target.
On the other hand, the ongoing pick up in market-based measures of inflation expectations should also help to ease concerns over downside risks to the outlook for inflation. The five-year, five-year forward measure of inflation expectations is now almost back in line with its average over the last year.
Overall, we doubt that the Fed will want to rock the boat and is more likely to present a policy signal that is little changed from their last meeting in March. On balance, the statement should sound modestly less dovish but not enough to significantly lift market expectations for a rate hike as soon as at the next meeting in June. As a result it should offer little support for the US dollar in the near-term. It may even encourage some fresh US dollar selling especially against the commodity related and emerging market currencies.
However, recent price action already suggests some degree of exhaustion for the US dollar weakening trend as a lot of juice has already been squeezed out of the more dovish Fed trade. Fed rate hike expectations have already adjusted materially lower as well discounting roughly only one more hike this year and another next year which should help to dampen further USD dollar downside.
A further rise in US inflation expectations while the Fed continues to hold fire would keep the US dollar on the defensive until they become more confident about resuming rate hikes later this year. The overall mix should favour a further reduction in foreign exchange volatility in the near-term unless the Fed surprises. Recent comments from even dovish Fed members have questioned the current dovish market pricing highlighting that risks are now more skewed towards a hawkish surprise from the Fed.”
Key Quotes
“The Chinese economy appears to have at least stabilized in the near-term and US financial conditions have become more supportive for economic growth including the sharp weakening of the US dollar so far this year although it still remains strong. Some acknowledgement that these downside risks to growth have eased is likely to result in the statement sounding less dovish than in March.
However, we doubt that the Fed will want to signal strongly that it plans to raise rates at their next meeting in June. As a result, we believe that it is unlikely that the Fed will re-introduce into the statement that it sees the risks to their outlook as balanced or more balanced which would provide more support for the US dollar in the near-term.
The Fed is likely to remain cautious about resuming rate hikes in the near-term given that the US economy got off to another weak start to the calendar year which should be confirmed late this week in the release of the preliminary Q1 GDP report. Inflation pressures also softened in March following firmer readings earlier this year providing some reassurance to the Fed that inflation will increase only gradually back towards its target.
On the other hand, the ongoing pick up in market-based measures of inflation expectations should also help to ease concerns over downside risks to the outlook for inflation. The five-year, five-year forward measure of inflation expectations is now almost back in line with its average over the last year.
Overall, we doubt that the Fed will want to rock the boat and is more likely to present a policy signal that is little changed from their last meeting in March. On balance, the statement should sound modestly less dovish but not enough to significantly lift market expectations for a rate hike as soon as at the next meeting in June. As a result it should offer little support for the US dollar in the near-term. It may even encourage some fresh US dollar selling especially against the commodity related and emerging market currencies.
However, recent price action already suggests some degree of exhaustion for the US dollar weakening trend as a lot of juice has already been squeezed out of the more dovish Fed trade. Fed rate hike expectations have already adjusted materially lower as well discounting roughly only one more hike this year and another next year which should help to dampen further USD dollar downside.
A further rise in US inflation expectations while the Fed continues to hold fire would keep the US dollar on the defensive until they become more confident about resuming rate hikes later this year. The overall mix should favour a further reduction in foreign exchange volatility in the near-term unless the Fed surprises. Recent comments from even dovish Fed members have questioned the current dovish market pricing highlighting that risks are now more skewed towards a hawkish surprise from the Fed.”