FxWirePro: Deferment of Fed hiking cycle to dampen dollar growth pace

The Fed should hike rates “fairly soon”, the language reflecting the lack of urgency. The dollar is likely to rise even more gradually than the fed funds rate.

The political uncertainty could undermine the euro, the BOJ could anchor the yen and the pound will struggle with Brexit ahead, but the lure of higher real yields than any of these currencies offer is proving irresistible to many investors. The delay in Fed’s rate hikes has been an adverse impact on the dollar growth of late.

The fortunes of the dollar has been the dominant focal point of FX markets, with the dollar index down 2.2% over the past month, retracing nearly half of the post-election dollar rally into the end of last year on a reassessment of Trump policy expectations. 

The dollar weakness in the past month has not been solely attributable to this. Positive data surprises and economic forecast revisions in the rest of the world make the US less exceptional and thus justify less strength in the USD, simply based on contemporaneous cyclical data.

The unwind of post-election dollar strength is now mature, judging from positioning indicators, short-term valuation models, and the price action itself.  This suggests that while incoming information from Washington will continue to drive near-term broad dollar outcomes, that it may be less of a singular dominant driver, and that other macro developments outside Washington may take greater focus.  One of these focal points is the incremental approach of major political events in Europe this year.

US 10yr treasury yields fell from 2.45% to 2.38%, while the 2yr fell from 1.22% to 1.19%. US Fed fund futures implied rates were mixed, the April contract at 0.72%, implying around a 40% chance of a rate hike in March. FOMC member Lockhart, who retires soon, said the data supports 2-3 hikes this year. Kapaln said the Fed should move sooner than later.