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16 Dec 2015
Short GBP/USD and short NZD/USD as we bump into Fed hike - RBS
FXStreet (Delhi) – Research Team at RBS, looks at three scenarios for the December meeting and their preferred trades though the meeting.
Key Quotes
“In each of the scenarios below, we assume the FOMC hikes the Fed Funds rate by 25bp. To be sure, a surprise decision not to raise the Fed Funds rate would fall to the dovish side of the dovish scenario listed below.
House View
Statement and Guidance: Statement language on growth revised up, particularly on employment, but a “nearly balanced” outlook is still cited, consistent with Chair Yellen’s December speech. Even so, the Fed notes it is still monitoring international developments. Statement signalling about the timing of future rate hikes is vague, stressing data dependence and the importance of actual progress on inflation.
SEP and Dot Plot: Growth and Inflation forecasts little changed. Dot point medians unchanged vs. September across the forecast horizon, reflecting no obvious forecast change.
Press Conference: Chair Yellen, in representing the FOMC in her press conference, stresses the Fed’s long-held view that the likely path of the Fed Funds rate will be both data dependent and gradual. But her ability to sound exceedingly dovish may be limited by the lack of outright changes in the forecasts for growth and inflation. Outright dovish commentary could be seen as inconsistent with a rate rise.
Trade: Short GBP/USD, short NZD/USD – Our base case is an FOMC “dovish hike” in theory that simply isn’t dovish enough in practice to match expectations in the market. The Bank of England’s willingness to “follow” the Fed has come under pressure amid a clear dovish turn from the MPC on inflation pressure, including wage inflation. In New Zealand, the RBNZ took on a more neutral stance at its own December meeting and the NZD has rallied against the USD despite lower dairy prices and a drop in short-term rate spreads, favouring the USD – we see downside risks for this pair.”
Key Quotes
“In each of the scenarios below, we assume the FOMC hikes the Fed Funds rate by 25bp. To be sure, a surprise decision not to raise the Fed Funds rate would fall to the dovish side of the dovish scenario listed below.
House View
Statement and Guidance: Statement language on growth revised up, particularly on employment, but a “nearly balanced” outlook is still cited, consistent with Chair Yellen’s December speech. Even so, the Fed notes it is still monitoring international developments. Statement signalling about the timing of future rate hikes is vague, stressing data dependence and the importance of actual progress on inflation.
SEP and Dot Plot: Growth and Inflation forecasts little changed. Dot point medians unchanged vs. September across the forecast horizon, reflecting no obvious forecast change.
Press Conference: Chair Yellen, in representing the FOMC in her press conference, stresses the Fed’s long-held view that the likely path of the Fed Funds rate will be both data dependent and gradual. But her ability to sound exceedingly dovish may be limited by the lack of outright changes in the forecasts for growth and inflation. Outright dovish commentary could be seen as inconsistent with a rate rise.
Trade: Short GBP/USD, short NZD/USD – Our base case is an FOMC “dovish hike” in theory that simply isn’t dovish enough in practice to match expectations in the market. The Bank of England’s willingness to “follow” the Fed has come under pressure amid a clear dovish turn from the MPC on inflation pressure, including wage inflation. In New Zealand, the RBNZ took on a more neutral stance at its own December meeting and the NZD has rallied against the USD despite lower dairy prices and a drop in short-term rate spreads, favouring the USD – we see downside risks for this pair.”