USD: Fed Has Not Created Ructions Yet – ANZ

USD: Fed Has Not Created Ructions Yet – ANZ

27 May 2016, 09:58
Roberto Jacobs

USD: Fed Has Not Created Ructions Yet – ANZ

Daniel Been, Senior FX Strategist at ANZ, suggests that one of the drivers of the more stable reaction to a stronger USD has been the Fed.

Key Quotes

“While it does look like recent Fed communication is slowly corralling the market towards a rate hike sooner than previously expected, the shift in tone from Fed officials following the market sell-off in January, as well as subsequent communication, suggests it has become more attuned to both the international impacts of its actions and to a framework of financial conditions.

This has also been demonstrated in Fed communication of the balance of risks – ie that “with the target range for the federal funds rate only slightly above zero, the FOMC continued to have little room to ease monetary policy through conventional means if economic activity or inflation turned out to be materially weaker than anticipated, but could raise rates quickly if the economy appeared to be overheating or if inflation was to increase significantly more rapidly than anticipated”.

Given that we think the Fed will hike cautiously while much of the world is on hold (as the oil price stabilises), policy divergence for the USD will become much more one-sided and slow moving. This points to a less abrupt path for USD appreciation.

The key risk to this view would be that if inflation starts to look more entrenched than expected, then the Fed would be in danger of becoming too hawkish for the market. But for now inflation suggests a more stable path, and one that continues to favour the USD.”


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