Fed: Getting serious about hike in March - Westpac

Sean Callow, Research Analyst at Westpac, explains that Fed member Williams’ declaration this week that a 15 March rate hike is getting “serious consideration” sparked a rise in market interest rates and a US dollar rally.

Key Quotes

“San Francisco Fed president Williams is not media shy, so his comments don’t normally elicit much market response, given that his comments are generally little different from one appearance to the next. But Williams’ declaration this week that a 15 March rate hike is getting “serious consideration” sparked a rise in market interest rates and a US dollar rally. Soon afterwards, New York Fed president Dudley said the case for tighter policy had become “a lot more compelling.”

“After Fed chair Yellen’s semi-annual testimony, we wrote that her outlook implied that “there isn’t an obvious reason why the Fed would wait until say June to move again.” Perhaps the uncertainty over US fiscal policy (which remains very much intact despite President Trump’s hopeful speech) will cause the FOMC to wait a little longer – it’s not as though inflation is exploding. But in the week ahead, the US dollar should remain on a firm footing. Market pricing for a March hike doubled on the day of the Williams and Dudley comments, to a 2/3 chance.”

“The US dollar’s yield-driven strength reinforces our view that AUD/USD will continue to run out of steam in the mid-0.77s. But its downside should be limited and AUD should extend its lead as the strongest G10 currency YTD, up more than 3% against second-placed NZD. Australia’s Q4 GDP report showed a steeper than expected rebound from the Q3 contraction. As the chart shows, consumer spending surged and even business investment surprised with a gain not signalled by the capex survey. We have our concerns about the sustainability of the consumption gain, with wages under pressure. The labour market will need to improve.”

“But overall, the RBA will see vindication of its growth forecasts. And despite the curious slide in Australia’s exports in Jan, AUD’s commodity support seems solid. Look for renewed gains against the likes of NZD, JPY, EUR, GBP and CAD.”