Fixed Income Research & Macro Strategy (FIRMS) from Olivier Desbarres at 4X Global Research – 22 March 2018

  • Rising geopolitical tensions and stress in the US tech sector have strained equity markets. Conversely, FX volatility has eased below its long-term average and is now at the low end of its 12-month ranges with the exception of USD/CAD and AUD/USD.
  • The Dollar remains range-bound despite US-centric geopolitical tensions, White House turmoil and yesterday’s Federal Reserve meeting. We somewhat disagree with the consensus view that FOMC members have stuck to their assumption of three policy hikes in 2018 but upped expectations for 2019 from two hikes to now three.
  • The weighted average of FOMC members’ rate expectations for 2018, which more accurately reflects the Federal Reserve’s thinking, rose from 64bp (at the Dec-17 meeting) to 82bp at yesterday’s meeting a not insignificant hawkish turn, in our view. However, for 2019 this weighted average rose only modestly from 68bp to 73bp.

  • Overall, this suggests to us that while US government bond yields may fall further near-term, this is not the beginning of a medium-term trend of lower US yields.
  • Similarly, the Euro continues to flat-line and we maintain our view that it is unlikely to make much progress until there are clearer signs of inflationary pressures.
  • Commodity currencies have weakened modestly due in part to concerns about US tariffs on imports of steel and aluminium. At first glance, the direct impact of such tariffs on commodity-exporting economies appears modest. However, the quantitative assessment of this impact is conditional on a number of variables which we detail.

  • Slow and steady Sterling gains could extend ahead of the Bank of England’s policy meeting in May at which we still expect a 25bp rate hike.
  • The Norwegian Krone has been the outperformer year-to-date and we see further scope for modest appreciation on the assumption that the Norges Bank will cement its more hawkish position in coming months

For the full research note, a free 30-day trail is available.

4X Global Research is a London-based consultancy providing institutional and corporate clients with focused, actionable, independent and connected research on Emerging and G20 fixed income and FX markets and economies.

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