Post-Fed pullback in USD/CEEMEAs unlikely to last - Rabobank

According to Piotr Matys, EM FX Strategist at Rabobank, even as the USD softened after the Fed meeting, they remain of the view that the CEEMEA currencies will continue to struggle to regain their bullish momentum in a sustainable way.

Key Quotes

“The dot plot remained unchanged at 3 hikes in 2018 (including yesterday’s widely anticipated 25bps hike), our Stefan Koopman pointed out that the new projections laid the groundwork for a possible fourth dot for 2018 – that is now only one dot away instead of four before this meeting. So while the 2018 median has remained unchanged, the mean has actually moved up considerably.”

Essentially, the bias amongst FOMC participants has shifted in favour of those who prefer more rather than less hikes in 2018. The projections for 2019 and 2020 have been actually revised higher to 3 and 2 hikes respectively.

“It seems, however, that the trajectory of US interest rates could be steeper than initially anticipated, which would weigh on the CEEMEAs.”

“For now there is a sense of relief in the market that the 2018 dot plot still shows three hikes in total. Concerns about trade wars, however, continue to fuel risk aversion. At the time when European stocks are deep in the red and US futures indicate that the S&P 500 Index will extend its losses, we are very sceptical that the CEEEMA currencies will be able to hold to their post-Fed gains versus the US dollar.”

“In current environment we prefer to be positioned for another squeeze higher in USD/CEEMEAs in the short-term. This could be potentially triggered by a drop in the S&P 500 Index towards and perhaps beyond the early March low at 2647.32.”