22 Jan 2014
Flash: End of "Fed on hold" catalyst for FX trends - BAML
FXstreet.com (Bali) - According to John Hopkinson, FX Strategist at BAML, the end of "Fed on hold" should be the catalyst for some FX trends, as clearly seen in pairs such as AUD/NZD.
Key Quotes
"With the first Fed hike being priced as far as 34 months out during 2012, the persistence of currency trends was at record lows (Chart of the day). This was no fluke: "Fed on hold" generally entails mean reversion in currencies."
"However, since the end of the gold standard, there has never been three consecutive years of strong mean reversion as happened in 2011-13. The start of tapering sets the table for 2014 to be a break-out year for momentum trading in our view."
"The timing of the first Fed hike has remained broadly consistent around mid-2015 since the initiation of QE3 (Chart 1). Regardless of the ultimate timing, as this date approaches, "Fed on hold" is naturally replaced by themes such as "the great rotation.""
"Even if the consensus view for persistent low inflation keeps rates relatively low, greater uncertainty over Fed policy supports FX trends through divergence between rate policies for global central banks. This has already manifested in 2013 in AUD/NZD trending lower."
Key Quotes
"With the first Fed hike being priced as far as 34 months out during 2012, the persistence of currency trends was at record lows (Chart of the day). This was no fluke: "Fed on hold" generally entails mean reversion in currencies."
"However, since the end of the gold standard, there has never been three consecutive years of strong mean reversion as happened in 2011-13. The start of tapering sets the table for 2014 to be a break-out year for momentum trading in our view."
"The timing of the first Fed hike has remained broadly consistent around mid-2015 since the initiation of QE3 (Chart 1). Regardless of the ultimate timing, as this date approaches, "Fed on hold" is naturally replaced by themes such as "the great rotation.""
"Even if the consensus view for persistent low inflation keeps rates relatively low, greater uncertainty over Fed policy supports FX trends through divergence between rate policies for global central banks. This has already manifested in 2013 in AUD/NZD trending lower."