Fed: Dovish pivot – Westpac

Richard Franulovich, head of FX strategy at Westpac, points out that the Fed hike pricing peaks Sep 2019 at a bare +4bp, giving way to 16bp in rate cuts by mid-2020.

Key Quotes

“The Fed certainly has the luxury to wait; inflation is docile (6m ann core CPE 1.5%) and the supply side of the labour market is improving sharply (prime aged labour participation has jumped +0.8ppts in the last 4mths to a decade high 82.6%). But the case for USD weakness is not clear cut.”

“Other central banks have now adopted a more cautious stance too, notable examples include the RBA and the ECB. Reflecting that, USD yield support has not faded much lately; the 2yr DXY weighted swap differential is +244bp, exactly where it was a month ago.”

“Trade frictions continue to percolate. Some agreement/de-escalation that placates President Trump seems likely, though remaining thorny issues mean any announcement may well take the form of a “framework agreement”, laying out a specific timeline and benchmark for solving some of the more ambitious US demands. Overall USD atmospherics are more neutral here; a trade deal of sorts is priced in and other central banks are catching up to the Fed’s dovish pivot.”