Markets preparing for risk of US rate hikes and renewed dollar strength - Nomura

FXStreet (Delhi) – Research Team at Nomura, notes that the dollar has posted gains against a broad range of currencies in the wake of the 28 October FOMC meeting and the October jobs report, reflecting increased speculation of a Fed rate hike.

Key Quotes

“The FOMC statement surprised market participants by hinting at a more hawkish mood among committee members. As concerns about the global economy and financial markets ease, the Fed made it clear that it would decide at the next meeting (on 15–16 December) whether a rate hike was appropriate.”

“The jobs report released on 6 November also came in substantially stronger than expected. Combined with a pick-up in wage growth and a lower unemployment rate, this contributed to a growing view that the US economy is strong enough to justify a rate hike. In response, we have moved forward our forecast for the timing of the first rate rise from March 2016 to December 2015.”

“The terrorist attacks in Paris on 13 November did not trigger panicked risk aversion in the financial markets—and as a result investors continue to expect a US rate hike and a stronger dollar. We do not anticipate a major correction in the dollar’s recent strength even if the events in Paris were to increase the risk of a European economic downturn, since the ECB would probably adopt a more accommodative stance in that event.”

“We project strong household expenditures—both personal consumption and residential investment—will keep the US economy on a recovery path, and we see the Fed continuing to raise rates at a gradual pace in 2016 and beyond. We also think Fed rate increases and a rising dollar will have only a modest adverse impact on the emerging economies.”

“Nevertheless, market participants remain concerned about the potential negative implications of Fed rate hikes and a strong dollar. In this report we prepare for this scenario by summarizing the likely risks to the Japanese economy. We focused in particular on two scenarios.”
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