Morgan Stanley, Bank of America Merrill Lynch, Nomura, Societe Generale, and Danske Bank on the Fed

Morgan Stanley: The FOMC left rates unchanged, in line with market and Morgan Stanley forecasts. Nevertheless, the FOMC statement delivered a dovish surprise by (a) noting the negative impact of recent global developments on growth and inflation and (b) explicitly referencing these developments as risks. The statement was complemented by lower growth, inflation, NAIRU and Fed Funds rate forecasts. Despite the 'dots' maintaining a projection for a hike this year, we think there is room for some modest near-term USD softness as the market adjusts to a more cautious Fed. Long USD positioning is vulnerable over coming days and perhaps weeks...But USD Impact Temporary. Our structurally bullish USD view has never been Fed-focused. Rather, our framework is built on the reduced investment attractiveness in much of the rest of the world. Any setback in the USD is likely to be short-lived in our view, providing a renewed buying opportunity against EM and commodity-related currencies.

BofA Merill: We view this as a tactical delay and have pushed out our forecast of the first hike to December. However, we still expect the Fed to hike faster than the market is pricing in, with four hikes in both 2016 and 2017. There were two key messages in the Fed's directive, according to BofA: First, they are very concerned about global economic and financial developments...Second, The FOMC also rejiggered its forecasts. FX implications: USD on a back foot, but not forever. The dollar weakened across the board post-FOMC reflecting the increased risks to already low inflation from external developments causing the Fed to delay hiking. The lowering of the median dots raises risks around a hike this year. But, the FOMC's confidence in the outlook (particularly in the labor market) underpins hikes later this year, and therefore, the policy divergence theme we expect to support the USD. With a 30% chance priced into the meeting, we would expect some near-term pressure on the USD-particularly versus commodity-linked currencies where USD positioning is largest-as the timing of the first hike is now less certain. However, with any significant USD weakness likely to incent other central banks (like the ECB) to ease further and given our view for a December Fed hike, we see USD downside as limited here.

Nomura: The Fed delayed liftoff at the September meeting, and the details of the statement, SEP, and press conference had some dovish elements."1. there were a few passages of caution in the statement, both on inflation and on foreign developments, and 2. the dots suggest that a number of the FOMC participants that make up the core consensus group now anticipate a slower pace of tightening (less than 4 hikes). For the FX market specifically, Nomura doesn't think the information received today will lead to a sustained unwinding of USD longs versus G10 currencies-i.e., momentum could fade within a few sessions. We have been flat in terms of USD exposure versus majors for the last several weeks in anticipation of this outcome. But looking ahead, the Fed is still operating with liftoff this year as the central case, as the 2015 dots clearly signal. Bottom line: We still believe that our 1.10 year-end target for EURUSD is likely to be achieved under the assumption th that the Fed is able to raise rates by the December meeting, which seems fairly likely.

SocGen: The Fed's decision to leave rates on hold was not a surprise to a market positioned that way but the tone of the statement and the new lowered 'dot-path' (median sees one hike this year, 4 in 2016, 5 in 2017 and 3 in 2018 for a 3.375% Funds rate peak) have dragged Treasury yields down. That is not dollar-supportive. However, any bounce in risk assets will be short-lived. A dovish and dithering Fed inspires little confidence. Once EMinspired reduction in dollar long positions is over, we look for AUD, NZD and CAD to weaken again, with NZD the most vulnerable. And the biggest winner could still be the yen if the risk mood sours. They also note that yield differentials are moving in the euro's favour and may take us back to 1.16

Danske: The FOMC delivered an overall dovish message to markets today. The FOMC confirmed their bias to err on the side of caution. We think that the Fed will be able to check the boxes for a first rate hike in December but October is too early. FX implications G-10: In the very short term, USD could still suffer slightly on the dovish Fed stance. However, with the Fed still projected to hike later this year, we still expect USD to outperform the other majors such as EUR, JPY and GBP, in the coming months. Besides a reprising of the Fed we also believe that the pricing of an extended ECB QE programme will weigh on the euro over the autumn supporting the case for EUR/USD moving slightly lower on a 3M horizon. However, we stress that a lower EUR/USD could prove short-lived and we maintain our long held view that the cross should edge higher longer term supported by fundamentals. We target EUR/USD at 1.10 in 3M and 6M and then up to 1.15 in 12M. We forecast JPY to underperform among the G4 as rising expectations for additional BoJ easing will support USD/JPY going into the 30 October Bank of Japan meeting. Moreover, we note that the upside potential in USD/JPY has increased following the past week's substantial reduction in specualtive short JPY positions. We target USD/JPY at 124 and 125 in 3M and 6M, respectively. In contrast to EUR and JPY, GBP is also expected to perform on a 3M to 6M horizon supported by higher Uk interest rates as we still project Bank of England to hike in February. In the very short term, however, GBP is likely to come under pressure on low inflation prints in the UK as due to BoE's explicit concerns about the weak short term inflation outlook. We forecast GBP/USD at 1.53 in 3M.

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