USD Seeks Boost from Two Fed Speakers, FOMC Minutes Today
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At the time of writing, NY Fed President and FOMC voter Dudley was in the midst of giving remarks about the economy, which had yet to be made public. His speech, along with Kansas City Fed President and FOMC Voter George's later this morning should represent the hawkish side of the Fed, with both policymakers having previously suggested raising rates for financial stability reasons.
Concurrently, when the September 20-21 FOMC meeting minutes are released at 14:00 EDT/18:00 GMT today, we should expect to see calls for at least one rate hike by the end of the year. In turn, as long as December 2016 rate hike expectations remain intact (at 68% this morning, per the Fed funds futures contract), the US Dollar may not have much to worry about.
However, there is a big concern for the US Dollar that will likely be revealed in the FOMC minutes today: to what degree do policymakers feel the long-run glide path for interest rates still has to fall. Recall in November 2015, ahead of the Fed's December rate hike, we suggested that the Fed's hike cycle - due to the Fed's tendency to reduce its glide path - wouldn't necessarily bode well for the US Dollar (contrary to theory and popular opinion at the time).
Yet over the past year, we've been vindicated: the Fed has reduced its expectation for the long-run rate from 3.750% in March 2015 to just 2.900% in September 2016. Speaking of 2016, during this same time period (March 2015 to September 2016), the Fed's projection for the 2016 year-end rate has fallen from 1.875% to 0.600%. What we hypothesized in November 2015 and have thus far learned: 1) rates will stay lower for longer; 2) when the Fed raises rates to their terminal level, it will be lower than previously believed; and 3) as a result, the US Dollar's future may not be quite so bullish.
As such, while the FOMC minutes are likely to contain shades of hawkishness that keeps markets focused on a potential rate hike by December; as we stated the day after the September FOMC meeting, the doves on the FOMC continue to chip away at the US Dollar's long-run potential by reducing the projected glide path. If this divergence in opinion is on full display - and there is no reason to believe otherwise, given the vote outcome of the September meeting - then the US Dollar will be faced with a contradictory scenario, sure to result in higher volatility than recently experienced.
--- Written by Christopher Vecchio, Currency Strategist
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