Market Was Caught Off Guard by Hawkish FOMC Minutes - TDS
Cristian Maggio, Head of Emerging Markets Strategy at TD Securities,
suggests that the market was caught off guard by hawkish minutes from
the 27 April FOMC meeting and is all of a sudden reassessing its views
on US monetary policy.
Key Quotes
“Following the release of the minutes, as the committee expressed
support for a possible (data dependent) hike in June, the market
implied-odds of a June hike jumped from roughly 15% to 35%; the odds
stood at just 7.4% two-days ago before a number of hawkish Fed speakers.
This doesn't change our call for a September hike, but steers the market
away—at least for now—from overly dovish US rate expectations that have
largely dominated over other themes this year. This also means that the
great support that EM assets have received since after the January
selloff—which may not be entirely due to, but definitely is rooted in
such implied odds—may start to falter, in the same way as oil prices are
immediately feeling the heat of a stronger dollar.
European currency markets are trailing behind with the high yielders
(TRY, ZAR and RUB) skewed towards weakness vs the CEE currencies flat or
slightly positive. It’s still too early to say which direction may
prevail, but we suspect that correlations with equities will continue to
hold, and stock markets are currently in the red. So if the equity
slump advances, there will be little in the way of further EM FX
corrections. This is in line with our medium term view, but doesn’t
reconcile with our more optimistic short-term one that is based on the
assumption that the market would remain dovish on implied US rate
expectations until the end of Q2.
If we are wrong on this assumption, however, we may see the majority of
EM FX we are covering rapidly bridging the gap between our short term
and medium term forecasts; in other words, we could see our Q3/Q4
forecasts materializing a lot faster than we thought.”
