According to analysts at ING, it now seems the market is convinced that the Federal Reserve has to act after all the discussion about whether the flat/inverted US yield curve portends the next US recession.
Key Quotes
“Beyond the aggressive pricing of Fed cuts (67bps by the end of 2019 and another 33bp by end 2020), we are starting to see a clear, bullish re-steepening of the US 2-10 year Treasury curve.”
“During the last three major Fed rate cutting cycles this curve steepened around 250bp as reflationary Fed policy filtered through the market. Typically a weaker dollar plays a role in reflationary US policy, but its decline is not always immediate.”
“What will it take to sink the dollar now? We think a dollar decline will have to come through two clear, but related channels: i) interest differentials and ii) growth differentials. The former drives fundamental FX hedging (corporates) and investment (FX reserve manager) decisions. The latter drives broader portfolio (debt and equity) allocations and at some point will pressure-test widening US deficits, commonly seen as the Achilles heel of the dollar.”
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