Fed: Market pricing of the odds of a 2016 rate hike continue to gyrate - SocGen

Kit Juckes, Research Analyst at Societe Generale, suggests that the market pricing of the odds of a 2016 Fed rate hike continue to gyrate with data and FOMC comments.

Key Quotes

“Better housing starts and manufacturing output data yesterday reversed some of the recent sogginess to the data but i was new York Fed President Bill Dudley’s comments that markets are too complacent about the pace of Fed tightening which made the headlines 9and rescued the day for USD/JPYU in particular, as it briefly traded just below 100).

This morning, the market prices a slightly better than 50% chance of a hike this year and a 16% chance of a hike in September as we await the Minutes of the July 27 FOMC Meeting. Do those back up the message from Mr Dudley? It’s hard to avoid being cynical about the Fed communication strategy: They need the market to price in a slightly faster pace of hikes to give themselves room for manoeuvre, since they don’t want to ‘surprise’ the market with hikes that then trigger significant market disruption (and a sharp dollar appreciation). Whether they actually act this year depends on seeing faster age growth, lower unemployment, stronger growth and calm markets.

The overnight session has, as a result of Mr Dudley’s intervention and the US data, seen a stronger dollar and a bit of risk aversion. In the longer term, I still think USD/JPY is building a base, but in the near-term I still think that a clear break of 100 would take USD/JPY into an airpocket and I’d expect shorts to be rebuilt around 101.”