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The FOMC lent its imprimatur to the global reflation trade. For good measure, the Norges Bank also brought forward its lift-off by six months to mid-2019.
The Fed’s confidence in US inflation and the repricing of a December hike to 60% has neutralized the tactical dollar outlook, at least until the PCE data in a week’s time. It’s also spurred a rotation into alternative funding currencies (JPY and CHF).
Central bank expectations will remain centre-stage for FX, albeit policy curves are broadly consistent with inflation developments and central banks will need to re-calibrate their reaction functions to deliver re-pricings along the lines of CAD and GBP.
On flips side, European Central Bank head Mario Draghi has underlined his concern about the recent rise in the euro’s exchange rate.
Draghi said Monday that “the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring.”
The euro has risen from $1.05 at the start of the year to around $1.19. A further increase could weigh on exports from the eurozone and restrain its ongoing economic recovery.
Mr Kuroda also defended the BOJ's 2 pct inflation target, considered by many analysts as too ambitious, saying the bank can help keep long-term currency moves stable by setting its price goal at a level equivalent to other central banks.
Bank of Japan Governor Haruhiko Kuroda warned that escalating tensions in North Korea were among risks to an otherwise brightening global economic outlook, stressing that the central bank was closely watching the impact on markets and Japan's economy.
Take profits on short USDSEK given US yields and extreme Riksbank caution, but maintain a core long in EURUSD as a (slower-moving) play on a still vigorous European recovery.
JPY is the G10 currency most sensitive to US yields - we are minded to diversify EURUSD longs into EURJPY, but hold off for now amidst Korean noise and instead add exposure to EUR reflation through a very belated tactical long in EURCHF (spec outflows can drive EURCHF towards 1.20 even without the much-hyped structural outflows).
In terms of other possible reflation trades, we maintain a watching brief on CAD and GBP, but re-load NOK longs through NOKCHF.
Central bank expectations will remain centre-stage for FX in rest of the year, albeit policy curves are broadly consistent with inflation developments and central banks will need to re-calibrate their reaction functions to deliver re-pricings along the lines of CAD and GBP.
