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1 Apr 2015
Fed hikes in September, USD resumes upside – JP Morgan
FXStreet (Edinburgh) - According to analysts at JP Morgan, their base case contemplates a stronger greenback and the Fed delivering in September.
Key Quotes
“For now our base case is the following: US activity data revive this spring as weather-related drags fade; the Fed probably tightens in September and delivers about 100bp in the first year of the cycle; this lift in rates renews dollar strength even from overvalued levels because investors consider so few countries’ assets to be worth owning; and liquidity conditions worsen during Fed tightening, potentially reinforcing the initial USD move through deleveraging”.
“Since the Fed has simply been delaying rather than cancelling its tightening cycle for some time and since liquidity issues could make rate normalisation disorderly, we continue to avoid earning FX carry whenever the Fed sounds dovish and US yields stabilize”.
“The investment thesis for carry is poor in this unpredictable policy environment, and the risk-reward isn't compelling based on measures like volatility-adjusted carry on G10 and EM currency baskets”.
Key Quotes
“For now our base case is the following: US activity data revive this spring as weather-related drags fade; the Fed probably tightens in September and delivers about 100bp in the first year of the cycle; this lift in rates renews dollar strength even from overvalued levels because investors consider so few countries’ assets to be worth owning; and liquidity conditions worsen during Fed tightening, potentially reinforcing the initial USD move through deleveraging”.
“Since the Fed has simply been delaying rather than cancelling its tightening cycle for some time and since liquidity issues could make rate normalisation disorderly, we continue to avoid earning FX carry whenever the Fed sounds dovish and US yields stabilize”.
“The investment thesis for carry is poor in this unpredictable policy environment, and the risk-reward isn't compelling based on measures like volatility-adjusted carry on G10 and EM currency baskets”.