USD dips into 2018 – Nomura

As we enter 2018 the ‘Goldilocks’ environment seems well entrenched as global equity markets post new highs, yields grind higher and commodity prices look well supported, explains the research team at Nomura.

Key Quotes

“Over the Christmas period, the dollar was an underperformer – despite the passing of US tax cuts, an associated upgrade to US growth expectations and a hawkish Fed. In our view, we see two short-term factors as driving this move lower in the dollar – 1) the dollar typically falls after a hike in a “buy the rumour, sell the fact” dynamic, and 2) rising US inflation expectations could be hurting the dollar. Of course, the start of the year is a period when market liquidity is typically poor. Therefore, we need to be cautious in extrapolating too much from price action, but these two factors warrant attention, in our view.”

“This week’s FOMC meeting minutes support our economists’ view for three Fed hikes this year. Compared to the minutes from the September and October-November meetings, the December minutes contained broadly similar discussions on inflation. Where these minutes differed was a more robust debate about the effects of tax policy, with many participants expecting tax cuts to increase growth modestly in 2018. In addition, the minutes contained some debate about the flattening of the yield curve with a general agreement among participants that it was not a cause for concern at the moment. Given the FOMC’s improved outlook for output, of which taxes are one source, little change in the inflation outlook, and the generally positive economic news since the December meeting, this week’s minutes reinforce our call for three hikes in 2018, with the first expected in March.”

“Elsewhere, AUD saw substantial inflows in December, whilst JPY outflows accelerated.”