Recent US Federal Reserve guidance that the Fed funds rate is “a long way” from neutral and the FOMC may go beyond the neutral rate sparked financial market turbulence with bond yields rising and equities selling off.
We see the Fed close to neutrality and think the FOMC will pause when the fed funds rate gets to 2.75%.
There are upside risks to our forecasts, but we think the Fed will struggle to raise the fed funds target much beyond 3.0%.
Despite our cautious fed funds view, we think risk sensitive currencies will continue to struggle versus the USD.
We anticipate further weakness in the AUD taking it below USD0.70 towards USD0.67. Outside of risk appetite and volatility, a strong US economy in coming quarters could continue to widen the interest rate differential in the US’s favour, which, on our estimates, would imply a move down towards USD0.68.
The NZD remains vulnerable to further downside versus USD, and we continue to advise selling rallies.
As with the AUD, spreads, risk appetite and deteriorating liquidity help to underpin this view.
Seems about right to me.
David Llewellyn-Smith is chief strategist at the MB Fund and MB Super which is long US equities that will benefit from a falling Australian dollar so he is definitely talking his book (or ANZ is!). Below is the performance of the MB Fund since inception:
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
