USD gives back Trump bump despite two more Fed rate hikes - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that the Fed has delivered what may be described as a dovish hike; a hike that resulted is a significant fall in US yields and USD has fallen as well.

Key Quotes

“The principle reason is that the FOMC median forecasts for rate increases over the next three years (in their ‘dot-plot’) were unchanged from its December forecasts. And Yellen emphasized in her press conference that the decision to hike was “in line” with the “gradual” rate increase projected for “some time” and “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy.”  In essence, Yellen dressed this rate hike in the clothes of no change in the policy path and outlook.”

“One interesting fact is that the USD is below the levels prevailing before the Fed’s last two rate hikes (on 14 December and 15 March), even though US yields are significantly higher. This applies in particular to the 2-year swap rate that has risen from 1.39 to 1.65% (+26bp).  Few other countries have seen their 2-year rates rise much, so this represents a significant boost in the USD yield advantage that has failed to boost the USD.”

“The 10-year yield is up by 6bp since the day before the Dec FOMC, but the Bloomberg USD index against ten leading currencies has fallen by 1.4% despite the two rate hikes.  The decline in the USD is broad-based; it is lower against EUR, JPY, AUD and an index of 20 emerging market currencies.”

“USD index is above levels that prevailed before the election of Trump on 8 November.  Since the election, US yields are more markedly higher.  However, since the peak in the USD around the turn of the year, (also near the first peak in 10-year yields), the USD has retraced more than half of its gains since the Trump election.”

“Against the index of 20 emerging currencies, the USD has fully retraced its gains since the Trump election.  Most of the strength in the USD since the election is against the JPY, and to some extend the EUR.  The AUD is now little changed since the Trump election, and many emerging market currencies are significantly stronger.”

“The USD, on the whole, is struggling, failing to receive a Trump bump and faltering even as the Fed has sped up its rate hikes.”

“It appears to be the case that the market has built-in much of the anticipated USA rate tightening cycle, and has in its sights the eventual policy normalization elsewhere in the world, no matter if that still appears some time away.”