Fed: Maybe September? - Westpac

Robert Rennie, Research Analyst at Westpac, suggests that the Fed Vice Chair Fischer did a great job of putting rate hike(s) back on the agenda.

Key Quotes

“We went into Jackson Hole expecting a robust discussion on the “significant decline in the neutral rate of interest”. Instead it will be remembered for Yellen’s ‘hawkish’ comments that “ the case … has strengthened”, and the US$ should continue to garner near term support.

However, we find it hard to embrace outright longs. Yellen’s guidance was ‘data dependent’ and as Rich notes on page 12, its not clear that tomorrow’s NFP report will support the September case. So while Sep 20/21 looms large on the horizon, we are not convinced about a US$ breakout and see the DXY rebound stalling around 97/ 98.

September also brings with it a comprehensive review of monetary policy in Japan, a ‘live’ ECB meeting, RBA Governor Steven’s last interest rate decision and another update on RBNZ guidance. The ECB meeting Sep 8 should keep € probing back towards the 1.08/1.10 region.

The BoJ Sep 20/21 may see signs of QE exhaustion setting in. While we are neutral USD/JPY at current levels, we see increased volatility with initial downside risks over the BoJ/ FOMC meetings Sep 20/21.

Meanwhile Central Bank balance sheets are expanding strongly and demand for yield remains solid. For the A$, increased Fed pricing, a stronger US$ and slightly weaker iron ore prices has weighed on sentiment. However, the A$ looks cheap to us into the 0.7450/ 0.75 region and assuming a weak NFP print, the multi-week rally in the NZ$ should resume (we are still targeting 0.74 on a one month basis).

Having spent much of August waiting for Jackson Hole, we suspect markets will probably spend much of September waiting for the Fed and that wait will likely go unrewarded. Maybe September for a higher US$? We think not and still prefer that move to come later in the year.”