Markets focussed on Fed hikes - Nomura
|Analysts at Nomura explained that the siren song in currency markets is of upcoming Fed hikes, with many investors being lured into bullish dollar positions.
Key Quotes:
"Admittedly, the dollar has bounced on yesterday’s hawkish comments from Fed Chair Yellen and today’s strong data, but short term bounces do not always translate into long-term trends. Indeed, Ms Yellen’s upbeat speech on 18 January saw a similar rally in the dollar only for it to falter some days later. The necessary “tying to the mast” or safeguards from the siren song should be the dollar’s performance so far in this current Fed tightening phase compared with other tightening phases."
"A critical point in defining the current phase is to use the Fed’s tapering of its QE programme as the start rather than the first increase in policy rates. This is simply the mirror image of the easing phase which initially saw policy rate cuts, but then QE. Taking this definition, we find that the trade-weighted dollar has already rallied by over 20%. How does this compare with other tightening phases? Six other central banks have tightened in the post-2008 period."
The largest currency gain over the duration of the tightening phase was 8% in the Australian dollar during the RBA’s 175bp of hikes starting in late 2009. The smallest change was a 1% drop in the euro during the ECB’s 50bp of hikes starting in April 2011."
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