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The market is well-positioned for a hawkish message at today’s FOMC meeting. The Fed is widely anticipated to deliver a third 75 bps hike to 3.25%, into restrictive territory above the estimated 2-3% neutral range. However, the US Treasury (UST) 10Y yield, at 3.56%, is prepared for a surprise 100 bps move. The UST 2Y yield, at 3.97%, is ready to discount a peak in the Fed Funds Rate (FFR) above 4% next year. Hence, the Summary of Economic Projections and post-FOMC press conference will be important. Look for Fed Chair Jerome Powell to reinforce the message that the battle against inflation is far from won.
On the other hand, Powell may temper calls for a rise in the FFR to 5% resulting in a hard landing. At Jackson Hole, Powell did push back against rate cut bets in favour of a pause in 2023. Futures see a peak at 4.50% in 1Q23. With the market divided between those looking for more hikes and those who see the Fed nearing a pause, expect volatility at today’s FOMC. If Powell finds the right balance in his messaging, we cannot rule out the FOMC becoming a “buy the rumour, sell the fact” event.
Most currencies depreciated after the July FOMC. For many, most of the losses were incurred after the Fed’s hawkish message at the Jackson Hole. DXY has appreciated 3.5% since 27 July to 110.18, near the year’s high earlier this month. GBP suffered the heaviest losses, plunging to its lowest level since 1985. The Bank of England’s 50 bps hike expected tomorrow will be less than today’s Fed hike. Conversely, EUR has been relatively stable around parity after Jackson Hole. The European Central Bank is closer to the Fed’s commitment to inflation in narrative and action; ECB delivered a 75 bps hike last Thursday and signalled that several more hikes are needed to bring rates to neutral.
Commodity currencies were pressured by fears that concerted jumbo rate hikes would hurt global demand for commodities. NZD is below 0.60 and closest to its 0.57 Covid low. AUD has been extending its fall below the 50% Fibonacci retracement level (0.6855), on its way to the 61.8% retracement level at 0.6590. CAD broke its 50% retracement level at 1.3273 this week; the 61.8% level is at 1.3565.
In Emerging Asia, the Northeast Asian currencies – KRW, TWD, and CNH – suffered most from the Fed’s readiness to sacrifice growth to control inflation. KRW was hurt by its rate differential turning negative against the US and the CNH from rate cuts in China. PHP and VND also hit new all-time lows after the previous FOMC. Record trade deficits also made KRW the weakest currency in Northeast Asia and the PHP in Southeast Asia. THB and MYR hit their weakest levels in 2006 and 1998 respectively. Although USD/SGD is above 1.40, its losses are well below the average of the currencies in its trade partners, making SGD one of the most resilient currency this year. Interestingly, IDR and INR were remarkably stable, supported at their psychological levels at 15000 and 80 respectively. Indonesia’s growth came in stronger-than-expected in 2Q22; consensus did not downgrade this year’s outlook. Consensus lifted India’s outlook after its solid double-digit growth in the June quarter.
Quote of the day
“If history repeats itself, and the unexpected always happens, how incapable must Man be of learning from experience.”
George Bernard Shaw
21 September in history
Singapore joined the United Nations in 1965.
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