USD: Managing the Risks – Rabobank
Jane Foley, Research Analyst at Rabobank, notes that the dollar index
has edged higher in response to yesterday’s remarks from the Fed’s
Lockhart and Williams that the June FOMC meeting remains a live prospect
for a rate hike.
Key Quotes
“In recent
week US economic data have been mixed to soft and this has further
weighed on market expectations for a Fed move next month. Even though
the policy statement issued by the Fed on April 27 was a little less
dovish than its March equivalent, futures are pointing to a 12% chance
of a June rate hike, down from around 20% in the middle of last week.
With
the market hugely under-priced for a June move it stands to reason that
the USD could rally hard on such an announcement. The US Treasury,
however, appear to taking action to cap USD upside.
Following the
February G20 meeting rumours circulated that the US authorities had
pushed back hard against USD strength and currency wars. The speech by
BoE Carney at that event suggested that when retail accounts are
isolated from negative interest rates then their primary effect is to
weaken the currency.
In March ECB President Draghi pushed the
discount rate further into negative territory but appeared to indicate
that the ECB was turning its attention away from further rate cuts and
back to methods aimed at stimulating domestic credit creation. At this
time this action appeared to vindicate speculation that the large
central banks were stepping away from currency wars. On Friday the US
signed into law new provisions of the 2015 Trade Facilitation and
Enforcement Act and singled out China, Japan, Korea, Taiwan and Germany
as potential currency manipulators.
These 5 countries are now
being monitored by the US government and if it is decided that they meet
two of three specified criteria this would trigger enhanced bilateral
engagement and remedial action. The criteria include a trade surplus
with the US of over USD20 bln, a material current account surplus and
persistent one-sided intervention in the foreign exchange market. The
Treasury appears to be managing upside potential for the USD and
potentially setting the stage for the Fed to hike rates without creation
a vicious upside USD reaction. On the expectations that the Fed does
hike in June, we expect EUR/USD to move towards 1.10 on a 3 mth view.”
