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22 Dec 2015
US Dollar’s fate hanging in-between risk-on and risk-off – Goldman Sachs
FXStreet (Delhi) – Research Team at Goldman Sachs, notes that since mid2014 the Dollar has risen almost continuously, but underlying that trend have been two very different regimes.
Key Quotes
“The first has been a “riskon” rally against the G10, when hawkish shifts from the Fed coincided with easing from other central banks. The second has been a “riskoff” Dollar rise against emerging markets, with USD actually down versus G10 as growth fears delay expectations for Fed liftoff.”
“This happened over the summer, when the selloff in Chinese equities and subsequent devaluation of the RMB weighed on risk sentiment. At the start of December, our baseline was for a "riskon" Dollar rally, with substantial additional easing from the ECB buffering risk appetite, smoothing the way for Fed liftoff. But a disappointing performance from the ECB and mounting uncertainty over RMB direction have torn up that playbook. With risk markets wobbling, this FX Views discusses potential scenarios for tomorrow.”
“On the spectrum for liftoff, we think a more hawkish “hike it and like it” is better for risk, and the Dollar, than something more dovish, like “one and done.” That is because markets have recently looked to the Fed for leadership during heightened uncertainty, like in September when a dovish Fed caused risk to sell off, while a hawkish FOMC statement in October caused risk to rally. In fact, back in September the dovish Fed seemed to validate market worries over China. The SPX fell and EM sold off further, thereby tightening US financial conditions. With markets wobbling, better to hike and like.”
Key Quotes
“The first has been a “riskon” rally against the G10, when hawkish shifts from the Fed coincided with easing from other central banks. The second has been a “riskoff” Dollar rise against emerging markets, with USD actually down versus G10 as growth fears delay expectations for Fed liftoff.”
“This happened over the summer, when the selloff in Chinese equities and subsequent devaluation of the RMB weighed on risk sentiment. At the start of December, our baseline was for a "riskon" Dollar rally, with substantial additional easing from the ECB buffering risk appetite, smoothing the way for Fed liftoff. But a disappointing performance from the ECB and mounting uncertainty over RMB direction have torn up that playbook. With risk markets wobbling, this FX Views discusses potential scenarios for tomorrow.”
“On the spectrum for liftoff, we think a more hawkish “hike it and like it” is better for risk, and the Dollar, than something more dovish, like “one and done.” That is because markets have recently looked to the Fed for leadership during heightened uncertainty, like in September when a dovish Fed caused risk to sell off, while a hawkish FOMC statement in October caused risk to rally. In fact, back in September the dovish Fed seemed to validate market worries over China. The SPX fell and EM sold off further, thereby tightening US financial conditions. With markets wobbling, better to hike and like.”