Hawks rule the roost.
As widely expected, the Fed has hiked rates by 25bps, but with the Fed revision to three rate hikes in 2017 vs. the previous two, it opened the door for USDJPY as the pair hurtled through 117.00 on its way to 118.00
Let’s not confuse this Fed lean with a modest shift in language, this is flat out hawkish, and the US dollar is reacting accordingly.
I thought we would be calling the Dr Yellen Bluff this morning, as the market had expected at most a subtle shift in Fed language. However, the Feds forward guidance is in reaction to Trumpflation as Dr Yellen did little to quell the markets pent up the view that both growth and inflation will accelerate in 2017. However, more staggering was the fact the Fed did not hedge their opinion by making any direct reference to data dependency in their call.
In fact, this is a Federal Reserve board that is quite confident full employment is achievable without a massive infrastructure spend,”I would judge that the degree of slack has diminished. I would say at this point that fiscal policy is not needed to help the US economy reach full employment,” These comments are extremely hawkish and suggests this mornings adjustment in the Dot Plot median to 3 is merely a pre-emptive strike and there will likely be some upward revision to this view in 2017.
The great thing is we do not even need to read between the lines. Without question, today’s rate hike has not only reshaped the near term STIRT outlook but has set an incredibly optimistic tone for 2017 with Fed’s providing the market with their “ stamp of approval.”
The market reaction has been predominately dictated by the dot plot story line. So instead of testing the upper level of the Aussie near term range heading into this morning Australia Employment Report we find ourselves challenging the lower bounds. It is not as if the Aussie is out for the count mind you this is a broader USD move as the Aussie is holding up well vs. its G-10 counterparts, but with this aggressively hawkish lean from the Federal Reserve Board dealers will be looking to pounce on any hiccup on today’s Jobs Report.
Australian employment data surprised to the topside for November. The increase in employment is the highest in a year (+39.1k versus +17.5k consensus), and this is mostly made up of full time jobs (+39.3k versus -0.2k part-time employment). Good sign and should provide a temporary floor for the Aussie but I ‘m not sensing anyone looking to go long at these levels so I think dealers quickly pivot to the broader USD strength story line and look to sell any uptick
With the Federal Reserve Board stamp of approval on the reflationary trade, dealers are setting sights on the 120 USDJPY level. Whatever hope the market minority long JPY positions were holding out for likley evaporated after the Feds delivered a “hawkish rate hike.“
It should be an important day for Emerging markets as all eyes will be focused on how overall risk sentiment plays out. So far so good as global equities have remained on solid footing despite the steepening revision to the Feds outlook.
However, with the USD on a tear across G-10, we should expect the current Yaun depreciation trend to pick up some steam heading into year-end