The US dollar is the weakest performer in Asia-Pacific trading
Only the pound is (modestly) weaker than the US dollar so far this week. What's happening?
Here are four reasons:
1) The Fed hike is probably more priced in than you think
Implied probability calculators put the odds of a Dec 16 hike at around 76%. Economists are around 90%. This is a rare case where economists are a better gauge for where broader markets are at.
Fed fund futures trade on the effective Fed funds rate but remember the FOMC sets rates in a band. So on Dec 16, rates will go up to 0.25% to 0.50%. Probabilities watcher are acting as if the rate will be smack in the middle of the range at 0.375%. In reality, it may be skewed lower by year end. If you were to assume the average rate of effective Fed funds would be 0.34% over the past two weeks of the year, the implied probability of liftoff is closer to 100%.
I wrote more on this earlier today.
2) Market shifting to what's next after liftoff
More market watchers are coming down on the side of rates staying lower for longer and that's USD negative. The Fed may need as much as 6 months to evaluate the impacts of a hike. At the same time, there's a sense the trade will be to 'sell the fact' on a Fed hike to lock in profits on USD longs.
Citi wrote about this theme earlier today and said to cut USD longs.
3) Consumer confidence was weak
The market is especially sensitive to consumer data ahead of Christmas. Most surveys have been solid but today's Conference Board survey of consumers fell to the lowest since Sept 2014. There are lingering concerns the US economy isn't all it's cracked up to be.
GDP numbers were also a touch soft on the consumer side so that's a small factor as well.
4) USD has been strong for awhile
Nothing moves in a straight line forever. The US dollar is the second-best performer this month after AUD. It's gained 3% against the euro and a bit of position squaring ahead of a holiday long weekend is no surprise.
