Fed’s policy U-turn to cement the recent trend of USD weakness - Westpac

Richard Franulovich, head of FX strategy at Westpac, points out that the US Fed has marked a shift in its policy from just six weeks ago, though in keeping with the recent more cautious and flexible messaging from Fed officials.

Key Quotes

“The Fed stuck to its guns regarding the “solid” picture for activity and the labour market but nevertheless tacked strongly in a dovish direction, explicitly adopting "patience" as its new mantra and ditching the commitment to, "some further gradual increases".”

“The clear signal for a sooner end to the run-off in the balance sheet completes the Fed’s policy U-turn. That will cement the recent trend of USD weakness, though the green light for risk appetite will have USD weakness concentrated primarily against the relatively higher yielding currencies. The USD will stabilise when the Fed resumes hikes but that is not a story until mid-2019 at the earliest.”

“Prospects for another shutdown in three weeks and US-China trade talk progress muddy the USD picture but any risk-aversion inspired USD gains likely to be prove short-lived now that the Fed has heavily undercut the USD’s appeal. Against that the global data flow is not inspiring, arguing for modest rather than openended USD downside.”