USD: Dovish Fed risks and ceasefire repricing – Societe Generale

Societe Generale’s Kit Juckes discusses Robin Brooks’ view that the Dollar looks significantly overvalued versus G10 rate differentials and could fall sharply on a ceasefire, with Oil tumbling and safe-haven flows reversing. Juckes notes markets price no Fed hikes this year while other G10 central banks tighten, and expects a broadly range-bound Dollar if Fed policy stays unchanged.

Fed stance and ceasefire risk for Dollar

"Robin Brooks, once upon a time the Chief economist at Goldman Sachs, and then at the IIF, posted a chart on Substack showing the dollar against the other G10 currencies, and the 2y/2y forward rate differential. It shows the dollar significantly overvalued relative to rates. He argues that “A ceasefire is coming."

"Two things will get repriced quickly when that happens. Oil futures will tumble, and the Dollar will fall sharply” as safe haven inflows into the currency reverse and a politicised Fed cuts policy rates in the face of rising inflation."

"As of this morning, the rates market prices Fed Funds unchanged for the rest of this year, while the ECB is priced to raise rates by 70bp. The market expects hikes from ALL the G10 currencies except the Fed, despite the fact that the only G10 economy that is forecast to have stronger growth than the US this year, is Sweden."

"IF the Fed really does ease policy significantly at the same time as inflation rises and the Government runs accommodative fiscal policy, the dollar probably will fall. Our Fed call is for rates to be unchanged all year, which is what is currently priced by the rates market and may argue for a rather range-bound dollar from here."

"Overall, the market is long USD, albeit not dramatically so. It is also long AUD and short JPY. The EUR long has fallen dramatically from 180 thousand contracts, to 507."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)