USD: FX majors still struggling for direction in the near-term - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the two key events risks of the BoJ and FOMC meetings are now out of the way and they have failed to materially provide fresh direction for the FX market in the near-term.

Key Quotes

“The major FX rates continue to consolidate within the narrow ranges which have been in place over the summer months. The low volatility environment remains supportive for carry trades encouraging demand for high yielding and emerging market currencies. The sharp rebound for the rand over the past week highlights that the search for yield is the dominant driver overriding domestic economic fundamentals. With the Fed unlikely to resume rate hikes until the end of this year, the US Presidential election poses the main known risk to the continuation of stable financial market conditions.

The Fed’s decision to leave rates on hold and remove one planned rate hike from next year prompted some initial relief but should not prove a sufficient trigger to weaken the US dollar more materially in the near-term. The US interest market going into the meeting did not expect the Fed to raise rates and is unconvinced that even if the Fed raises rates in December that it will follow up with further rate hikes next year.

The market’s already very dovish outlook for Fed policy which is close to thinking the Fed is almost on hold forever will continue to help limit US dollar downside unless the risk of the US economy falling into recession builds. At the current juncture, we still expect the Fed to deliver more tightening than the market is currently discounting in the coming years offering support for the US dollar but will remain alert for any early warning signs that a recession could be on the horizon.”