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.
“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.”