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14 Dec 2015
Fed ready to pull the trigger… China already has - TDS
FXStreet (Delhi) – Cristian Maggio, Head of Emerging Markets Strategy at TD Securities, suggests that the focus of the week is the FOMC meeting on 16 December.
Key Quotes
“After nearly a decade, the Fed is likely to hike 25bps, a decision that the market expects with a 74% likelihood at the moment. This is a substantial rise from the ca. 30% chance that was priced in when going into the prior 28 October meeting, or the slightly higher 45% ahead of the 17 September one.”
“In this respect, one should come to the conclusion that the market reaction will be moderate, as well as specifically that of EMs. Therefore, while the market is prepared to see the lift-off, the focus will be on the tone of the Fed’s message. The overall tone of the communiqué and the accompanying SEP are likely to be relatively hawkish, reflecting the Fed’s greater confidence in the economic outlook and reinforce the path higher for rates. The tone of the post-announcement press conference, however, is likely to be balanced as Yellen delivers the more nuanced message of the “gradual” path for rates.”
“But if the market is surprised in terms of message and guidance, than we should also expect some corrections in the EMs. Currencies and stocks are more vulnerable. The 17 Sept FOMC showed us that the most reactive currencies were RUB, TRY and MXN. All three appreciated between 0.65-0.85% to the dollar within 30 minutes from the announcement, but also rapidly pared back those gains and by the next day close, they were weaker (RUB and MXN) or flat (TRY).”
“INR, IDR and MYR won’t be trading until next day, and a hawkish message from the Fed has a high chance to see them substantially weaker. In September, the next day spot performance helped Asian currencies to appreciate sharply. This time around, we may see an opposite behaviour, although this is more likely to depend on the tone of the message than the decision itself.”
“But Asian currencies will also be influenced by another relevant factor. On Friday, 11 December, the China Foreign Exchange Trading System (CFETS) released a note titled “The Launch of RMB Index Helps to Guide Public View of RMB Exchange rate.”
“The publication of a new renminbi index should be considered a refinement in China’s economic policy transparency and communication strategy, as it relates to renminbi. Ultimately this represents a formalization of a policy focus that appears to have been in effect since late 2014 / early 2015 when CNY trading against the USD became less correlated with the CFETS index.”
“We believe that a refocus on the index as a measure of renminbi valuation makes it easier for China to allow for CNY depreciation against the USD, a factor which may also negatively impact Asian currencies, particularly KRW and TWD, but won’t be indifferent to IDR and MYR, and to a lesser extent INR.”
Key Quotes
“After nearly a decade, the Fed is likely to hike 25bps, a decision that the market expects with a 74% likelihood at the moment. This is a substantial rise from the ca. 30% chance that was priced in when going into the prior 28 October meeting, or the slightly higher 45% ahead of the 17 September one.”
“In this respect, one should come to the conclusion that the market reaction will be moderate, as well as specifically that of EMs. Therefore, while the market is prepared to see the lift-off, the focus will be on the tone of the Fed’s message. The overall tone of the communiqué and the accompanying SEP are likely to be relatively hawkish, reflecting the Fed’s greater confidence in the economic outlook and reinforce the path higher for rates. The tone of the post-announcement press conference, however, is likely to be balanced as Yellen delivers the more nuanced message of the “gradual” path for rates.”
“But if the market is surprised in terms of message and guidance, than we should also expect some corrections in the EMs. Currencies and stocks are more vulnerable. The 17 Sept FOMC showed us that the most reactive currencies were RUB, TRY and MXN. All three appreciated between 0.65-0.85% to the dollar within 30 minutes from the announcement, but also rapidly pared back those gains and by the next day close, they were weaker (RUB and MXN) or flat (TRY).”
“INR, IDR and MYR won’t be trading until next day, and a hawkish message from the Fed has a high chance to see them substantially weaker. In September, the next day spot performance helped Asian currencies to appreciate sharply. This time around, we may see an opposite behaviour, although this is more likely to depend on the tone of the message than the decision itself.”
“But Asian currencies will also be influenced by another relevant factor. On Friday, 11 December, the China Foreign Exchange Trading System (CFETS) released a note titled “The Launch of RMB Index Helps to Guide Public View of RMB Exchange rate.”
“The publication of a new renminbi index should be considered a refinement in China’s economic policy transparency and communication strategy, as it relates to renminbi. Ultimately this represents a formalization of a policy focus that appears to have been in effect since late 2014 / early 2015 when CNY trading against the USD became less correlated with the CFETS index.”
“We believe that a refocus on the index as a measure of renminbi valuation makes it easier for China to allow for CNY depreciation against the USD, a factor which may also negatively impact Asian currencies, particularly KRW and TWD, but won’t be indifferent to IDR and MYR, and to a lesser extent INR.”