HSBC says the consensus for the dollar over Fed hikes could be wrong
HSBC reckon that the there are two big errors with the consensus on where currencies are going
- The consensus continues to "now-cast" rather than "forecast", obsessed mistakenly with "when" the US Federal Reserve will begin to raise interest rates. The more pertinent questions are "how high" will rates go, and "how long" will it take to get them there? This is the real debate that the FX market will have in future months and that will determine currency fortunes well into 2016
- The consensus is ignoring the lessons of post-crisis central banking.Central banks that have begun to tighten policy have been forced to stop early and, in many instances, ease policy afresh. The confidence among the consensus that the Fed can break this mould seems at odds with the US data and the global outlook
They've even drawn up a handy flow chart for us
The currency results of these shifts in Fed expectations depend on the catalyst;
"If the abbreviated cycle is prompted by a benign US inflation backdrop rather than a realisation that it was a mistake to tighten in the first place, we believe the USD will see wholesale weakness. Monetary policy divergence, which has favoured the USD for more than a year, could go into sharp reverse. It would be a very different world for the USD, and a far more challenging one for USD bulls."
Finally they advise that the optimism for USD is excessive, especially against G10 currencies;
"Having seen the end of the USD bull run against developed market currencies, we could now be on the cusp of a weakening USD trend. The upcoming US tightening cycle could be unconventionally brief, confounding USD bulls relying on the US Federal Reserve to deliver a more aggressive series of rate hikes than is currently priced in."
They make some valid points but they could have very much simplified this note by simply saying the reasons and expectations for the dollar bull run are running out, which means the trend is in danger of dying out.
Once expectations become reality the trend that followed them is usually over. That would be my input but it probably wouldn't be worth a 6 figure analyst salary :-D
