Global FX: Dollar down after FOMC, MoF intervention

**Patrick Locke** (0:03)
Hello, and welcome to this week's At Any Rate podcast. My name is Pat Locke, FX Strategist based out of New York here at JPMorgan. Joined this week by my colleagues, Junya Tanase out of Tokyo, Ben Jarman out of Sydney, and Kunj Padh next to me here in New York. Pretty big, significant week, feels like for the FX space. Dollar's gotten hit pretty hard by the combination of the FOMC outcome, and then the MOF stepping in and pouring gasoline on it as well. We'll break all that down this week. I guess from my side, just to kick off from the Fed, Wednesday definitely felt like a material setback for the dollar. It's not the end of the dollar up view that we have at this point. But again, it was a tactical setback, and the MOF accelerated that for the time being. But just to walk through what happened. Looking at the two o'clock, I thought there were actually some hawkish components at the outset and the prepared remarks. And obviously, we got three descents, which is at the higher end of what we were expecting. So I think, reasonably speaking, the 2 p.m. delivery met the hawkish bar that we had been expecting to take the dollar up a little bit.
Even at 2 o'clock, the dollar started selling off. And I think in retrospect, our conversations over the preceding 24 hours tended to indicate that people had actually gotten pretty hawked up and were really leading into this idea that the Fed might actually hike on the day. And consistent with that, you saw an uptick in dollar topside protection in demand earlier in the week. And so I think just that the fact that they didn't go, even though they delivered three descents at the outset, it was still a tactical disappointment for the dollar. But at the time, I was thinking it really wasn't actually that big of a setback. It was just a positioning, a lot could still be delivered on the press conference. But obviously the press conference is where it got significantly more interesting and the dollar sell-off got significantly more intense.
What happened? Chair Kassem Dao on a future of PCE.
He didn't really articulate the conditions for what we would see when we would get a hike. Didn't talk much about the descents.
Obviously, he kept coming back to this idea that the market had done some of the tightening for the Fed in the intra-meeting period. Ultimately, I think that came off as relatively dumbish. But I think more importantly, our economists are saying basically, quote, this raises questions about the new chair's credibility in delivering lower inflation. We're coming back to this idea of Fed credibility and inflation risk premium. The dollar response, I think, makes a lot of sense when seen through that kind of perspective. Specifically, if you map the DXY performance on the day, the 230s curve, which obviously steepened very dramatically in a twist fashion, where the short end was lower and the back end was higher, the dollar sell-off matched the contours of that profile very well. That's not surprising. I would point to two pieces of evidence for that first, is that the last time that I can remember, I was having that nasty 230 steepening, was the middle of last year when you might recall, there were rumors that the Fed's Chair Powell at the time might lose his job. 230 steepened and the dollar sold off fairly aggressively, however briefly at the time. I think the price action this week was consistent with that. Second, we've noted for a long time that a various rate environments, one of the most negative for the dollar is when the short end is falling and when term premium is rising. When you're talking about things like fiscal risk, for example, you see the term premium rise. If short end is going higher because it's happening against a backdrop simultaneously of strong growth and Aukashvara expectations, the dollar can endure that much more easily. But when it's short end lower, back end higher, historically, it's proven to be quite dollar negative. A lot of that all indicating that the dollar did basically what it's supposed to be doing.
What we're looking for in terms of other currencies, obviously, with the back end volatility, keeping a close eye on what sterling and Japan rates are doing, given their similar sensitivity in the last few years to higher long end rates. For euro, this could potentially slow down a full convergence to fair value, which is still lower than spot. But we wouldn't take that to really alter the direction of travel for euro lower in our view. Ultimately, you could see maybe some relief in places like Sweden, but we still see a more bearish top down environment there. Overall, sticking with the pro-carry orientation that we've been discussing on this call, ultimately for some time. Ultimately, just to wrap up on my end, this question is, does this continue dollar a week or from here?