All to Play For

The US Federal Reserve (Fed) has cried wolf many times in the past nine months, preparing the market for a rate hike only to then back down and further cut its estimate of the appropriate policy rate. As a result, the sceptical US rates and FX markets’ natural tendency is to look at US and global data and events through decidedly dovish-tinted spectacles, giving weight to “negatives” while seemingly discounting all but the most compelling evidence pointing to a December hike. The past eight days are a case in point.

Fed funds futures show that market pricing for a rate hike at the Fed’s 14th December meeting has actually fallen to around 13bp from 16bp in the wake of the Fed’s 21st September meeting. This is in line with my view, expressed in Federal Reserve – the Father Christmas of central banks (23 September 2016), that volatility in Fed fund futures will remain fluid in coming weeks.

This dovish repricing and grind lower in the US dollar (see Figure 3) has occurred despite a consensus view that presidential candidate Hilary Clinton comfortably won Monday’s presidential debate with Donald Trump, a jump in international oil prices since OPEC’s mid-week meeting, decent US data in the past week and stable global equities. It is clear that the rates and FX markets remain somewhat unimpressed, with some justification.

Read the full article on my website.