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11 Feb 2016
Relative appeal of USD still holds despite policy divergence - MUFG
Lee Hardman, Currency Analyst at MUFG, suggests that the relative appeal of USD still holds despite more cautious rate stance with G3 monetary policy divergence.
Key Quotes
“The recent stream of weaker US data looks to be bringing the USD down on the lower probability of the US policy normalisation being a smooth 4x a year pace as envisioned by the FED when they first started normalisation in December 2015. Unless we are on a cusp of the US turning drastically into recession, monetary policy divergence that had underpinned USD strength between 2013-15 is still relevant a theme into 2016 as the other G3 – EZ and Japan – continue to ensure policy accommodation even as the US turns more cautious on its hiking scedule.
ECB has signalled that it stands read to ease policy further in March, and BOJ became the fifth central bank in the world to institute negative interest rates, with hints of more if need be. The momentum of gains for the USD is, however unlikely to be as aggressive as 2015 as (1) the pace of US rate hikes does not look to be as aggressive as the FED originally anticipated - 4 based on the December dot plot looks unlikely albeit also not as low as 0 based on FED funds futures pricing; most likely either 2 or 3 hikes depending on how global growth and/oil price risk pan out.”
Key Quotes
“The recent stream of weaker US data looks to be bringing the USD down on the lower probability of the US policy normalisation being a smooth 4x a year pace as envisioned by the FED when they first started normalisation in December 2015. Unless we are on a cusp of the US turning drastically into recession, monetary policy divergence that had underpinned USD strength between 2013-15 is still relevant a theme into 2016 as the other G3 – EZ and Japan – continue to ensure policy accommodation even as the US turns more cautious on its hiking scedule.
ECB has signalled that it stands read to ease policy further in March, and BOJ became the fifth central bank in the world to institute negative interest rates, with hints of more if need be. The momentum of gains for the USD is, however unlikely to be as aggressive as 2015 as (1) the pace of US rate hikes does not look to be as aggressive as the FED originally anticipated - 4 based on the December dot plot looks unlikely albeit also not as low as 0 based on FED funds futures pricing; most likely either 2 or 3 hikes depending on how global growth and/oil price risk pan out.”