Currency Point: Looking forward to more hiking

We are currently in the August lull period as the US Federal Reserve takes a 7 week break between meetings. Which gives the market a perfect opportunity to speculate and cook up all manner of ideas and theories.

The number one rule to remember right now is that they will hike again in September and probably every meeting left in 2022 (November and December). What is changing is the Fed’s language around data and overtightening.

Here is some context around this:
– St. Louis Fed President Jamie Bullard stated he is leaning toward another 75basis point increase, and a see the Fed Funds target rate at 3.75 per cent to 4 per cent by year end. He is a known hawk in fact probably the most hawkish there is and stated that it is premature to start thinking about easing in 2023.
– Kansas City Fed president Ester George also a known hawk said she has yet to determine the size of a for September. But if her previous comments are anything to go by she is likely to line up with a 50 basis point rise having dissented in favour of 50 basis point rather than 75 basis point in June.
– Minneapolis Fed president Neal Kashkari the most dovish on the board, this week stated that the Fed still has a long way to go. He is also the most open about the likelihood of the FOMC pushing the US into recession stating he is not sure the Board can avoid this scenario happening.
– San Francisco Fed president Mary Daly continues with the collective line of maintaining rates at higher levels using the “raise and hold strategy”. She see rates rising by 50 basis point or 75 basis point in September and advocates a rate of “a little bit above 3.0% this year and a little bit more above 3% next year”.

This is the basis case and should be seen as the most likely trading scenario.

What is interesting is the data that is coming out and the FX trading its causing. For example: US existing home sales fell for a sixth consecutive month in July to a 4.81 million annualised rate from 5.11 million in June. It’s now at its slowest rate in a decade and is still falling.

USD remains king because of all of this EUR/USD to a 1-month low and is testing parity again at $1.0080 GBP/USD plummeted more than 1 cent to $1.1930. USD/JPY rose 80 pips to ¥135.85 on really no major news. AUD/USD just cant get back above $0.70 and is holding at $0.695. Any short term weakness in the USD is quickly sucked up – a trend that has been intact now for 6 months and is showing no signs of abating.

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