USD's shallow rally into 2016

Beyond the September FOMC meeting, there is a widespread view that USD rallies into the turn in the US rate cycle and sells off thereafter. While this profile holds for USD performance on average over recent tightening cycles and held during the most recent tightening cycle in 2004, the degree of dispersion around the average suggests it would be unwise to read too much into it. 

"Looking beyond September, USD remains positive through the turn of the year, though the pace of gains should moderate. There is some risk that if the Fed does not hike in September, it pushes that back into 2016, which would also delay further USD gains", says RBC capital markets. 

In DXY-terms, six months after the start of the Fed tightening cycle, USD has ranged from down 9% (2004 and 1986) to up 11% (1988). In reality, every tightening cycle is different and how markets react to higher US rates depends on a host of other factors like rates in the rest of the world, the degree to which higher rates are already baked into expectations and the strength of the feedback loop from USD to Fed policy. 

"But calling for further USD gains is still comfortable, particularly against JPY. The US is well-placed to shoulder modest currency appreciation, policy in other G10 countries will lag the Fed, and a string of Fed rate hikes is expected well beyond current market pricing", added RBC Capital markets.