FX market implications - TDS
|Analysts at TD Securities explained that despite the indication that a September hike appears likely, FX markets may be more interested in the acknowledgement that interest rates are approaching neutral.
Key Quotes:
"This is not an immediate tradable event, however, but rather a process."
"The implication here is obvious; the Fed's runway has become shorter in comparison to its other central bank peers and that could eventually eat at the "divergence" narrative that has been so robust through Q2/Q3 and helped to support the USD."
"This, we think, is particularly relevant for USDJPY, where recent yield curve flexibility (and prospective changes down the road in this regard for various reasons related to output gap, JGB functioning, etc.) will help to create a more balanced influence in rate differentials. This will allow more room for idiosyncratic JPY factors to become relevant in the spread (as opposed to be just driven by the TSY leg)."
"Outside of the Fed, markets will need to contend with policy inertia for at least the next couple of months as the ECB has is waiting for taper to end but Italy budget deliberations will likely prevent EURUSD from achieving escape velocity. This to us, suggests that EURUSD is broadly still a "range-trade.""
"Interestingly enough, USDCAD dropped after the release of the minutes, which we find interesting because if the Fed is beginning to acknowledge that monetary policy is nearing neutral/becoming less accommodative (hence implying less room to hike), then that could extend — at least from a market pricing point of view — to the BoC curve going forward. With that in mind, would view dips below 1.30 in USDCAD as difficult to sustain and hence, opportunities to be bought into."
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.