USD on standby for now - Natixis
|Nordine NAAM, Research Analyst at Natixis, notes that the US dollar stabilised during the week ended, especially against G10 currencies (notably low yielders), whereas it continued to fritter away against emerging currencies.
Key Quotes
“The markets expect the US dollar and US long interest rates to strengthen gradually, and therefore as unlikely to fuel risk aversion.”
“Yet, the Federal Reserve seems more hawkish given the stronger growth and higher inflation in the US. Several FOMC members have indicated that a hike in the Fed Funds rate remains on the table at the 15 March FOMC meeting. In this respect, the minutes of the last FOMC meeting showed that the Federal Reserve wanted to prepare the market for a further normalisation of monetary policy. Although FOMC members are divided over the timeliness of an interest rate hike next month, many are of the view that a gesture will be needed rather soon given the improvement in growth and the inflation risk. Some FOMC prefer to err on the side of caution until more is known about Donald Trump’s fiscal policy. Will the policy change extend the US economic cycle or bring it to a premature end by driving up inflation and long interest rates? Treasury Secretary Steven Mnuchin expects the impact of the fiscal reform to be felt mainly in 2018.”
“Whatever the risks associated with Donald Trump’s economic programme, what is already clear to see is that the US economy has reached full employment and that inflation has accelerated sharply on the back of energy prices. The economic surprise index tower on high by past standards, while financial and monetary conditions are very favourable, all of which ought to stoke expectations of a hike in the Fed Funds rate before the June meeting. Next week, watch out for speeches by several FOMC members and by Donald Trump as well as a batch of macroeconomic indicators (including the PMI and durable goods orders). We expect the DXY dollar index to appreciate further, especially if, as we anticipate, inflation continues to rise.”
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