US Dollar the Currency to Beat as December Rate Hike More Assured
The US Dollar is likely to continue outperforming rivals as commentary from Chicago Federal Reserve’s Charles Evans only increases bets for a December rate hike.
Chicago Fed President Charles Evans said he would not be ‘surprised’ at a December hike, and praised the recent non-farm payrolls report saying it was a “pretty good number”.
Coming after the deputy governor of the Fed Stanley Fischer, said the employment report was “close” to ideal his comments increased expectations of a Fed rate hike before the end of the year.
US Treasury bond yields rose on the news as they indicated a more positive outlook for inflation.
Yields across the curve reached new highs, with the benchmark 10-year treasury bond yield rising to a four-month high of 1.77%, and seeming to bring to an end the era of record low, and negative yield.
The dollar also rose, with the dollar index up 0.60% at the time of writing.
Nevertheless, whether or not the rally will continue is debatable, as Evans has been seen to take a more cautious stance in interviews since his speech where he has focused on the fact that inflation still has not reached the 2.0% target and therefore the jury might still be out on whether or not it was too soon to raise rates or not.
Evans is not a voting member of the Federal Reserve’s rate-setting committee this year so his comments may have carried a disproportionate weighting.
His subsequent rescinding to a softer stance may yoke markets back, and much probably depends on what Janet Yellen says at the end of the week when she speaks on Friday.
Staying Bullish on the Dollar
Analysts at Westpac have meanwhile told clients they remain bullish on USD with their G10 currency portfolio allocation model increasing its holdings of US Dollars by 3.4% in last week, from a -2.0% setting drop previously.
They expect further outperformance from theDollar and equities in Q4 2016, as happened in Q4 of 2015.
The Fed increased interest rates in December 2015 and Westpac expect them to do the same this time around too.
Interestingly enough they do not see the rate hike as impacting severely on risk appetite as it will be a “dovish” hike, with a ‘lower for longer’ tag line.
“Equities surprisingly held up well in Q4 2015, the S&P500 rising 6.4% in the quarter and our risk appetite index signaled firmed trends for risk assets.”
“The same could happen again if the current atmospherics are anything to go by - OPEC’s commitment to cut output has put a floor under energy prices, tail risks around China have been kept at bay, the Fed is unlikely to deliver anything but a very dovish Dec hike and Trump risk is falling too.
“All told then the USD’s upside potential is probably contained to the majors with EM and dollar bloc currencies arguably trading solidly vs the likes of EUR, CHF, GBP and JPY," said Westpac's Richard Franulovich.
Nevertheless, whilst all the above reasons are valid high yield currencies such as the Aussie, New Zealand dollar and many EM currencies, could very well lose some ground due to a fall in the carry trade, if yields rise globally in line with US Treasuries.
This could result from a sea-change in monetary policy as central banks pass more of the heavy lifting work of stimulus over to governments and looser fiscal policies.
