Deutsche: US Fed to Front-Load Interest Rate Rises with 75bps in Hikes Before mid-2016

Economists at Deutsche Bank forecast the US Federal Reserve will aggressively front-load its rate hike plans, raising rates by 0.75% by the middle of 2016.

If markets fall in line with the Deutsche Bank view we believe the US dollar exchange rate complex will rise agressively while it spells for potential USD weakness from mid-2016 onwards.

“Our economists believe the Fed will hike rates by 75bps by the middle of 2016 – and then pause of the rest of the year.” Says the research note from  Deutsche. 

The bank’s view contrasts with the current market consensus that the bank will probably adopt a shallow trajectory during their tightening cycle.

It suggests a much steeper appreciation of the dollar versus other currencies, the majority of which are still suppressed by domestic monetary policies which are accommodative.

8.0% upside for the greenback

In line with the house view, Deutsche’s FX analysts are extremely bullish the dollar, expecting it appreciate by 8.0% before the end of 2016:

“Our FX Strategists see about 8.0% upside for the U.S dollar trade-weighted-index (TWI) and 9.0% downside for the euro (TWI).”

The bank’s analysts see the EUR/USD pair falling to below parity and hitting 0.90 by the end of 2016.  

Pro-Pharma equity play

The comments came in a note from Deutsche Bank’s European Equity arm, who aim to re-allocate their portfolios to be sector heavy Pharmaceuticals, as they see Pharma benefiting most from the bearish EUR/USD forecast:

“Pharma is our favourite defensive sector – (and, in fact, our only defensive overweight): with around 35% of sales coming from the U.S, pharma is long the dollar – and hence tends to benefit when the dollar rises as our FX strategists expect it to.”

Euro-zone Banks a buy

Deutsche’s European equity team are also pro-Euro-zone banks – a bold call given recent history - which they have heavily increased their portfolio allocation weighting for:

“The sector should benefit from the continued euro-area recovery: banks are one of the few domestics cyclical sectors in Europe. Hence the sector tends to outperform when the euro-area output gap closes and European Macro Uncertainty falls, both of which we expect to happen.” Said the European equities research note.