According to Sean Callow, Research Analyst at Westpac, the US dollar continues to lose yield support as the equity turbulence does not seem to be upsetting Fed officials and remains unlikely to be a key factor at the 18-19 December FOMC meeting.
Key Quotes
“Market pricing for the December rate rise Westpac continues to expect is little changed over the week, around 70%. Nevertheless, doubts over 2019 have grown.”
“The implied yield on the January 2020 Fed funds futures contract is 2.74%, down from 2.81% a week ago and 2.94% on October 5th. There has been renewed market discussion about the Fed delivering less than the 3 hikes projected for 2019 in the Fed’s September forecasts. Markets now price just 54bp of tightening by end-2019.”
“Supporting the dovish case has been a deceleration in US economic momentum. The closely-watched Atlanta Fed “nowcast” of Q4 GDP has slipped to 2.5%. The quiet US data calendar in the week ahead leaves plenty of scope for markets to keep running on the notion of an early 2019 Fed pause, weighing on yields and USD.”
“The US dollar’s best hope near term might be speeches by Fed vice chairman Clarida on Tuesday and especially Chairman Powell on Wednesday. Unless they are emphatic that softer data momentum, tumbling oil prices and the selloff in equities and corporate bonds are unlikely to impact on monetary policy over the year ahead, the US dollar might be on the back foot.”
“A softer US dollar would obviously be a supportive factor for the Aussie. But it has been torn between the mostly poor global risk environment and the US dollar’s loss of yield support.”
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