Rate-Hike Odds Whipsaw USD
The latest “saber rattling” surrounding nuclear tensions between the US and North Korea continues to dominate the headlines and some level of concern about the situation is certainly justified. While we still expect cooler heads to prevail, there’s certainly an elevated risk that a miscalculation or miscommunication on either side could lead to disaster.
That said, when it comes to nuclear war, there’s only one move for longer-term investors: bet against it. After all, if the worst should happen, the last thing most people will be worrying about is the value of their investments. In the meantime, there are plenty of themes and trends to capitalize on over the rest of the year, assuming we’re not all irradiated by then.
One key storyline that FX traders have been focusing on is the ever-shifting odds of another rate hike from the Federal Reserve later this year. While hardly anyone expects a change to interest rates next month or in the FOMC’s November meeting, December is still very much in play. At the start of July, the market-implied odds of a interest rate increase had peeked above 50%, according to the CME’s FedWatch tool, and fully 75% of the FOMC members (12/16) expected at least one more hike.
After a run of weaker-than-expected data, especially on the inflation front, over the last six weeks, those odds have fallen notably. Early Monday, fed funds futures traders were only pricing in about a 38% chance of a rate hike.
Just when doves were taking a victory lap, though, the influential head of the New York Fed, William Dudley, expressed support for another rate increase. The endorsement from one of the three members of the FOMC’s powerful “core” has prompted a big shift in expectations yet again, with traders now pricing a 50% chance of a rate hike by December.
As readers can clearly tell, these figures are highly volatile and prone to move dramatically at the slightest headline. That said, we know certain announcements will have a high impact on the odds of a December rate hike and, by extension, the price action in the US dollar. Specifically, Nonfarm Payrolls, average hourly earnings, US inflation readings and comments from core Fed members (Yellen, Fischer, Dudley and/or whomever is the frontrunner for Fed Chair under Donald Trump) are likely to lead to outsized reactions in the greenback over the next few months.
As always, we’ll be keeping a close eye on these economic announcements and looking for opportunities to take advantage of the subsequent market moves that emerge in their wake.