USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
At their March meeting the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%-3.0% in 2023 before falling in 2024. The Fed did however lower their neutral rate from 2.5% to 2.4% which were a bit of a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were definitely hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows a Fed that expects their actions to impact demand and could also be incorporating some of the recent geopolitical uncertainties. The Fed didn’t provide any new details on QT but did note that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) but did add that the FOMC made good progress in their QT discussion with a May announcement very likely. During the presser the Chair expressed his view that the economy is doing really well and, in his view, will be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was
hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
Overall net-long positioning was a risk for the USD going into the FOMC, where due to very strong performance in recent weeks, it was a very high bar for a hawkish Fed to see a sustained move higher in the USD before seeing a bit of a correction. Leveraged funds now hold a net-short in the USD, but unless geopolitics offer meaningful safe haven inflows or stagflation fears jump higher, some short-term downside is possible.
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
At their March meeting the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%-3.0% in 2023 before falling in 2024. The Fed did however lower their neutral rate from 2.5% to 2.4% which were a bit of a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were definitely hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows a Fed that expects their actions to impact demand and could also be incorporating some of the recent geopolitical uncertainties. The Fed didn’t provide any new details on QT but did note that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) but did add that the FOMC made good progress in their QT discussion with a May announcement very likely. During the presser the Chair expressed his view that the economy is doing really well and, in his view, will be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was
hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
Overall net-long positioning was a risk for the USD going into the FOMC, where due to very strong performance in recent weeks, it was a very high bar for a hawkish Fed to see a sustained move higher in the USD before seeing a bit of a correction. Leveraged funds now hold a net-short in the USD, but unless geopolitics offer meaningful safe haven inflows or stagflation fears jump higher, some short-term downside is possible.