USD trading strategy going into next week's FOMC meeting: scenario analysis - Morgan Stanley
Morgan Stanley estimated thew probability for Fed hike in September vs December meetings, and it was stated that a 30% chance only of a hike in September, so there is more chance to expect this events in December this year. And in this case, it may be more opportunity for EUR and JPY with related to USD: those pairs may be in bullish condition during the September 17th meeting for example.
Thus, there are 3 basic scenarios concerning Fed hike:
Base-Case: December. "The Fed has entered its
pre-meeting silent period, which means there are no speakers on the
agenda to move market expectations of the first hike before the
September 17th meeting. Comments from the Fed thus far suggest the
central bank wants to make the first hike as well flagged as possible
and avoid surprising the market. With markets pricing in less
than a 30% chance of a hike in September, it therefore is unlikely that
the Fed will hike now. Indeed, our US economists have maintained their
view for a December hike."
Get It Done: "A hike next Thursday would lead to
accelerated EM weakness, in our view. Current account surplus and net
foreign asset-supported FX such as EUR and JPY may rally should the Fed
hike; these currencies have developed an increasingly tight inverse relationship with the performance of risky assets."
Or Wait: "The Fed delaying action would be in line with current market pricing. In this scenario, USD would likely soften somewhat and the Fed would remain data-dependent in the statement and in the Chair’s press conference. Nonetheless, USD dips still represent buying opportunities as the reason for USD strength is mainly USD-supportive repatriation flows."
