Foreign exchange trade reminder: Fed suggests further large-scale interest rate hikes, and Bank of Japan watches signal for foreign exchange intervention measures
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On Thursday, Beijing time (September 22), in early Asian trading, the US dollar index rose slightly and is currently trading around 114.44. The US dollar rose to a new 20-year high on Wednesday after the Federal Reserve hiked interest rates by another 75 basis points and signaled further massive hikes at its next meeting. However, the dollar’s gains were limited as the Fed’s decision was broadly anticipated. However, the trend remains positive for the dollar for a while as US rates are expected to rise longer, analysts said.
The Fed’s latest forecasts show that its policy rate will rise to 4.4% by the end of the year before hitting a peak of 4.6% in 2023 to curb excessively high inflation, with no expected rate cut. rates until 2024.
Fed Chairman Jerome Powell said in a press conference that lowering inflation is impossible without pain, reiterating his desire to act aggressively now and stick to it. He added that Fed actions could lead to slower growth and higher unemployment.
The US dollar index hit a 20-year high of 111.64 on Wednesday before closing up 1.06 percent at 111.37.
Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said:We expect the dollar to remain strong over the short term, but we are still reluctant to consider further sustained dollar gains beyond that, and we think it is pleased to ignore the downside risks now. “
The dollar has become significantly overvalued, he said. The dollar index has risen nearly 16% since the beginning of the year, the largest annual percentage increase since at least 1972, when Refinitiv started the data series.
Osborne also said that US rate hike expectations were discounted by the dollar, with the federal funds rate, the Fed’s peak policy rate, rising more than 100 basis points since August.
The euro closed 1.32% lower against the dollar on Wednesday at 0.9836.HSBC economists expect the EUR / USD to drop below new year lows in the coming weeks。
Russian President Vladimir Putin invited 300,000 reservists to fight in Ukraine on Wednesday and said Moscow would respond with what he called “nuclear blackmail” in the Ukrainian conflict with its vast arsenal.
European currencies took the brunt of selling on currency markets as Putin’s comments heightened concerns about the region’s economic outlook. Europe has already been hit by the Russian squeeze on European gas supplies.
HSBC economists pointed out that although the euro versus the dollar has found support at parity levels, but due to the strengthening of the dollar and a number of challenges facing the euro zone economy, the euro versus the dollar will fall below the new low of the year in the coming weeks. On the positive side, the risks posed by the upcoming Italian political elections on 25 September do not appear to be significant, while the market notes that the tone of the Italian elections was accommodating without a strong element of skepticism about the euro. If political developments in Italy pose downside risks to the euro, these risks are also unlikely to intensify this month.
Against other currencies, the dollar rose slightly against the yen on Wednesday, hitting a high of 144.70 and finally closing up 0.25% at 144.07. Traders remained wary of pushing the dollar higher given the threat of Japanese intervention to raise the yen.
Caution.
The Bank of Japan will announce its interest rate decision on September 22. IG Group expects it to remain unchanged, focusing on the possible presence of foreign exchange intervention measures.
IG Group said the Bank of Japan is not expected to change its accommodative monetary policy stance on Thursday. Looking ahead, the likelihood of the Bank of Japan raising interest rates by 10 basis points in October is only 11% and the probability in December is only 21%. Japan’s recent main inflation rate of 3% indicates that the BOJ is under increasing pressure to change its easing policy and if Japan’s inflation rate rises further above 3% in the coming months, the pressure on the BOJ’s policy change will further increase. it will therefore closely monitor any changes in attitudes on the part of Bank of Japan policy makers.
The IG Group noted that, in addition,Any intervention by the Bank of Japan on the currency markets will be the focus of this week’s meeting, Bank of Japan policy makers are likely to continue to highlight concerns over a weakening yen at the meeting. Various events this year have proved thisWhile the BOJ is likely to push the yen higher, the lack of a concrete following could eventually keep the USD / JPY bullish trend intact.
The GBP / USD pair fell to a new 37-year low of $ 1.1234 on Wednesday and last time dropped 0.98% to $ 1.1268.
Adam Dent, a Santander strategist, said: “Investors’ views on the UK’s outlook have clearly deteriorated, so the bar for further sharp deterioration is high. But the inexperienced new government faces enormous challenges and is prone to errors, aggravating the concerns of investors. “
Some respondents pointed to the problems of the global economy and said the UK is not the only country facing challenges. ING economist James Knightley said: “We are seeing fragile investor confidence in many regions and asset markets. That said, the UK appears to be weaker than most.”
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Key data and outlook for Thursday
Great things to watch on Thursday:The Bank of Japan announced its interest rate decision, Bank of Japan Governor Haruhiko Kuroda held a monetary policy press conference and the Bank of England announced its interest rate decision and meeting minutes .
Summary of institutional views
1. Rabobank: Putin’s speech will support the dollar on safe-haven demand
① Rabobank said that Russian Putin has announced a partial mobilization, indicating that “the Russian-Ukrainian conflict could be on the verge of an escalation of the war”. This would put pressure on the euro and Eastern European currencies and also solidify the dollar’s attractiveness as a safe-haven currency. Prior to these announcements, the euro exchange rate did not yet reflect the economic risks posed by the energy crisis;
②In our view, this news increases the downside potential of EUR / USD. EUR / USD is expected to trade around the 0.95 level from winter to next spring
2. Bank of America: the dollar may be stronger for longer
Bank of America said the meeting should have less impact on the US dollar as markets are currently pricing in a 75 basis point rate hike from the Federal Reserve this week, but expects the US dollar to remain strong longer. and perhaps even stronger
3. Sony Financial Group: If the US and Japan exceed 150, Japan could intervene, but it is less likely
“If the dollar-yen rises very quickly, intervention may be possible, but in reality it is extremely unlikely given the intervention’s ineffectiveness,” said Hiroshi Watanabe, senior economist at Sony Financial Group.
4. ING: The Fed will remain aggressive until the December 2023 policy change
① Given the Fed’s aggressive stance and the potential for inflation to barely change in the next month while job creation remains stable, ING expects the Fed to raise rates by 75 basis points in November;
② By the December meeting, only a 50 basis point rate hike may be needed as leading indicators show signs of easing price pressures, but weak economic activity data may be enough to persuade the Fed to act with more caution. This means that a fifth rate hike of 75 basis points cannot be ruled out. Despite the Fed’s hawkish stance, the market initially expects a rate cut of nearly 50 basis points in 2023;
③ ING Bank believes the Fed could turn to significant easing in the second half of 2023 and said that over the past 50 years, the average time from the last rate hike in one cycle to the Fed’s first rate cut is only 6 months old.
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