The USD was stronger across the board following the release of the nearly unchanged statement. The usual suspects were the notable undeperformers – namely, AUD, NZD, BRL and ZAR. These include a mix of currencies that remain fundamentally overvalued and vulnerable to a rise in US rates. Moreover, USD/JPY hit a multi-year high near 108.40 while EUR/USD failed to hold the 1.29 level.
The interesting part when looking at the price action is that the FOMC statement and broader message was largely unchanged from the July statement. Indeed, the Fed reiterated that “significant” slack in the labour market persists. It also decided to retain the “considerable time” language, suggesting little change in the overall message. By the same token, it only made minor tweaks to the overall economic assessment.
Together, despite the evidence from the price action, we read this statement a bit more dovish than expected. In fact, the market (again) is focused on the ‘dots.’ The median dot rose 25bp to 1.375% at end 2015 and rose 37.5bp to 2.875% at end 2016. (It is also worth noting that the meaning of the dots was clarified to suggest the midpoint of the fed funds target rate.)
The market, in turn, ignored the message from the statement, instead focusing on the uptick in the interest rate path. We suspect that the market continues to place too much emphasis on the dots as a policy tool, increasing the risks of a mild pullback in USD.
Most of the indicators (positioning and technical) we track for short-term swings suggest risks of a USD correction are rising. DXY failed to break 84.93 on multiple occasions since 2010. Our FX Scorecard suggests that EUR and JPY have the highest upside correction riks but it remains cautious on AUD and GBP.
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