BNP Paribas, Citi – All about Fed hike

11 December,, London – CitiFX argues all about Fed hike and an immediate USD impact after the expected Fed's interest rate hike next week and how it will play out in 2016. Meanwhile, BNP Paribas points that a hike is a hike and sees current FX levels as an opportunity to add to long USD positions.

Citi – All about Fed hike

Citi argues that the Fed has no incentive to sound upbeat at the next week’s FOMC meeting. The central banks’ priority will be to explain that the US economy is robust enough to handle the beginning of normalization cycle.

“We doubt that they want a strong USD to follow immediately on lift-off as it would probably be associated with weaker equities and pressure on asset market during a period of low liquidity,” Citi added.
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Once the fundamental normalization has been established, the Fed could revert to a data dependent hiking path, which might imply a faster pace of hiking thereafter, Citi adds. However, we could argue that the US data, especially after the initiation of the tightening, would only weaken the data relative to the one accommodated by an easier policy. Thus in turn making the hiking path slower.

Consider reading: Goldman Sachs USD bulls

“This (data dependency) may not come through immediately in 2016 strengthen as the rate path firm, but as H1 progresses we expect to see the USD strengthen as the rate path firms," Citi argues.

BNP Paribas – A hike is a hike

BNP Paribas expects the Fed to increase rates by 25bp on Wednesday and sees current FX levels as an opportunity to add to long USD positions.

"Our rate strategists expect a rise of around 50bp in US 2y yields by early 2016 to provide substantial support to the USD,” BNP Paribas projects.

BNP Paribas, Citi – All about Fed hike

Moreover, BNP Paribas FX Positioning Analysis suggests relatively neutral long USD positioning, leaving room for the position built up ahead of the FOMC meeting. Also recent USD weakness lowers the risk of the committee sounding overly concerned about elevated FX levels.

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