rahul.khanna's picture

Fed first rate hike a distant dream?

Focus has now firmly turned to problems in China having a detrimental impact on the growth in the developed economies. Also the first interest rate rise in US looks set to be delayed to the next year. One big reason for such a delay is falling commodities prices leading to a decline in inflation outlook. Also it’s unlikely for Fed to shock the markets with an interest rate rise when fear of a global slowdown runs high. 

US Durable goods figure came in above expected on Wednesday, providing some lift to USD.  However, any significant upside in the Dollar seems limited amid the glum environment. China's rate cut has provided little confidence in the markets and based on this risk off scenario continuing, we see continued support for safe haven currencies like JPY, CHF & EUR.   

Euro 5y5y forward inflation linked swap has also fallen sharply after the recent development in China and the commodities market. A measure ECB uses to assess current market view on forward inflation. Euro has also seen a significant rise as the carry trade unwinds and money flow in to safe haven currencies. This creates further problems for ECB in spurring growth; however, the ECB speakers have yet to talk down Euro, given concerns over rising Euro and falling inflation. In our view, ECB is likely to do what it does best, which is to move at a glacial pace, react slowly and cautiously. If this was to happen Euro will move up and down on risk-off, risk-on basis in the coming weeks. 

Performance of GBP remains mixed despite it having limited exposure to the Chinese economy, this is because the money markets have pushed timing of the first rate hike by the BOE in to the third quarter of next year, from an earlier expected rise in the first quarter. But GBP is likely to remain strong vs. the likes of AUD, CAD, and NZD given the scenario that China's economy will get worse.