USD king after Fed hawkish projections – 16 dec 2016

USD king after Fed hawkish projections – 16 dec 2016


Fed did not surprise the markets by hiking 25 basis points to 0.75%. Markets are surprised by Fed’s hawkish tone and the fact that the ‘dot plot’ of interest rates projections signaled three hikes for 2017 instead of two as was largely anticipated. Fed also projected four hikes in 2018 and four hikes in 2019 and pushed up expectations for economic growth. The president of Fed, J Yellen supported that the global economic outlook is still highly uncertain but Fed seems very confident about domestic economic expectations. Despite the hawkish tone that Yellen used during her speech she continued to support the need to keep monetary policy supportive.

Markets calmly reacted after Fed’s decision to hike. Greenback skyrocketed while the biggest loser was gold that lost nearly 3% of its value. The U.S 2 year yield jumped to the highest level since 2009 while euro hit 58 weeks low. The divergence between U.S Fed and other developed central banks continue to deepen.

We expect Fed to become more hawkish in 2017. As U.S economy has touched full employment and inflation expectations continue to rise after Trump’s victory. Thera are high probabilities that the U.S 10 yrs. yield will touch 3% during the first three months of 2017. The above scenario before U.S elections was seemed impossible but since Trump was elected everything has changed in the markets. The U.S 10 yrs. Yield from 2% before elections raised to 2,7% after elections.

Since Trump was voted as the next U.S president market has reacted with extreme confidence and trust for the political plans of the new resident of the white house. We think that market at this stage has an excessive euphoria and optimism about the new U.S president and probably overestimate his abilities.

We should not forget that despite fed’s recent optimistic predictions, Fed has a black history of failure when it projects the future of interest rates and the status of domestic and global economy.

Yesterday the BOE left its monetary policy unchanged while kepeing a neutral bias. We think that BOE will not hike the next months as there is still political uncertainty after the Brexit vote.

U.S economy continues to show significant signs of improvement and we suggest to continue buy the lows of USD while continue to sell the highs of gold.

We want to see today Down Jones Industrial average to touch the historic high of key 20,000 level. Further delay to see market to touch this level can increase speculations that market would like to get some profits from the table before the end of the year.

Daily Key points:
• Euro in the lowest level since 2003
• USD/CHF ended Thursday at the highest closing level since 23 Aug 2010.
• Mexico hikes rates by 50bps to 5.75%
• Gold slides to 10-month low as dollar, yields climb
• Theresa May urges for ‘smooth’ Brexit arriving for EU summit
• Greek assets under pressure after EU freezes debt relief plans
• European bond yields dragged higher after shift in tone from Fed

Daily Economic calendar:
Country Event Importance Previous Expectations Follow Times
Europe Final CPI y/y High 0.6 0.6 Euro 13:00
Europe Final Core CPI y/y High 0.8 0.8 Euro 13:00
USA Building Permits Medium 1.26M 1.24M USA 16:30
USA Housing Starts Medium 1.32M 1.23M USA 16:30