This week’s FOMC meeting is a big one for markets across the board and FX traders, because of the US dollar, which has been rallying steadily for the past 5 months.
Indeed for Aussie dollar traders the decision, or not, to change language and the impact of any signals to tighten rates will have a huge impact on whether the Aussie heads down under the recent low at 0.8210 or it finds some support given the impact the US dollars move has had on recent Aussie trade.
It’s a huge event risk and Citibank’s Global Head of G10 FX Strategy Steven Englander reckons the balance of probability is that the market finds something to be bullish about US dollar, in the Fed’s words.
That could give the Aussie dollar another downward push into year’s end if Englander is correct.
Here’s Englander’s take on what might happen.
Given how low and flat interest rates are, we think investors will be on a hair trigger to see signals of normalization in any material change in the FOMC statement and accompanying forecasts/dots. We do not think they have to give a big nod to normalization; almost any hint will likely suffice. Relative to market pricing the Statement will be hawkish (and USD positive) if it:
1. acknowledges some acceleration in the economy,
2. labels the oil price drop as a plus for activity,
3. downplays the inflationary impact of oil shocks as temporary,
4. similarly lowballs the importance of inflation surveys,
5. characterizes labor market slack as ‘diminishing’, rather than ‘gradually diminishing’,
6. drops or heavily modifies ‘considerable period’,
7. emphasizes that the slope of rate hikes will be soft, and de-emphasizes the when of liftoff
8. lower the unemployment rate path in the projections
9. keep core inflation steady in the projections
10. waffle when asked whether ‘considerable period’ can mean less than six months
11. lower assessment of long-term potential growth
Dovish shifts would be:
1. heavy concern on the drop in inflation expectations … especially if the FOMC sees the risk of
inflation persistently below 2% as having “increased somewhat”
2. add references to downside economic risks in both the US and abroad
3. make the minimum of changes to the “To support continued progress” paragraph, keeping considerable period”