The big day has been and gone and markets are still left carrying the burden of uncertainty regarding the timing of a a Fed lift-off and the chance now that perhaps there will be no lift-off at all.
Despite the last minute media scramble towards favouring a hike, once again the Fed disappointed Dollar bulls by deciding to keep rates on hold, as advised by the IMF and the World Bank. With market pricing of a hike so low, the news was not received as a shock, however important changes in the Fed’s forecasts and assessments do present a different picture this morning.
Key Aspects Of The Forecasts, Rate Decision Statement & Press Conference
- The Fed sounded far less optimistic over the domestic and global economy noting that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”
- Global factors were again mentioned in the statement with the committee assessing the “risks to the outlook for economic activity and the labour market as nearly balanced but is monitoring developments abroad”.
- The Fed also referenced “the drop in equity prices, the further appreciation of the dollar, and a widening of risk spreads” as risks to achieving their objectives.
The statement declared that “net exports have been soft” and in the press conference following, Fed Chair Yellen noted concern about the impact of the firmer USD,with net exports a substantial drag on growth in the first half of the year.
- Finally, looking at the interest rate forecasts there was a big shift in yesterday’s update with four FOMC members now expecting no hikes until 2016 with one member forecasting negative interest rates in 2016. In the press conference following Yellen confirmed that “We would look at all of our available tools and evaluate it under that context” when questioned over the prospect of negative rates.
- Yellen reiterated that the Fed’s decision to lift rates will remain data dependant but will not “hinge on any particular data release or on day-to-day movements in financial markets. Instead, the decision will depend on a wide range of economic and financial indicators and our assessment of their cumulative implications for actual and expected progress toward our objectives”
Whilst continued reference to the low inflationary environment was to be expected, there was a very serious change of tone by the Fed in acknowledging risks from foreign factors, a rare admission, confirming the stature of the risks posed by the China slowdown. Continued reference to persistent Dollar strength and it’s negative impact on exports highlights the very real need for Dollar weakening in order to bring the Fed closer to achieving it’s objectives.
The move by four members to forecast no hikes until 2016 seems consistent with the inflation and global risk outlook and the appearance of negative rates in the “dot plot” provokes some interesting thought.
With many other G10 Central Banks locked in easing cycles and that interesting call from Ray Dalio a couple of weeks ago on Fed easing, it seems a possibility that should inflation remain low and global risks persist that the Fed’s next move will in fact be towards easing rather than tightening.
Given the very low expectations of a Fed hike yesterday along with the substantially diminished USD long positioning in place, the reactions were fairly subdued with spikes of around 100 pips across the majors as the Dollar weakened.
Despite some slight retracement in USD weakness during Asian market hours, the European session saw USD sold once again with the majors all trading back toward yesterday’s best prices.
General feeling seems to be that December lift off is still viable but risks are clearly skewed towards 2016 now.
Trade Ideas Update.
With the Fed deciding to keep rates on hold but the majority of participants still expecting at least one hike this year the AUDUSD trade is the one I will be focusing on. The rebound in risk sentiment coupled with USD weakness is likely to support AUD in the near term, however should further weakness in the Australian economy materialise then there is still the likelihood of another RBA cut, in the absence of a move by the Fed.
I am looking to sell a retest of those former 2015 lows and against the long term descending trendline at a retest of 0.75.