Ladies and Gentlemen,
Countdown to ‘Lift Off’ begins.
Tomorrow interest rates are going to rise in the US for the
first time since June 2006.
To put this into perspective a high percentage of my
esteemed colleagues have never seen a US rate rise in their careers, sadly I
have.
In recent weeks the term ‘Dovish Tightening’ has been talked
about in the media. The US economy is close to full employment, the time is
right for a quarter-point rise and has been telegraphed to the market. The Fed
does not want to shock the market and undermine it credibility. The impact on
the economy, the dollar and the markets will be closely monitored.
Investors we will be paying particular attention to the
communique trying to ascertain when the next hike will come after this month’s
increase. How many hikes will there be in 2016, the range is anywhere from 2-4
and 67 basis points is priced into the one year market. This is in stark
contrast to the other major central banks of the world. Will the message be
‘gradualism’ or ‘commitment’ to future rate hikes? Commitment is a very hawkish
signal whilst gradualism is more of the data dependant approach. The gradualism
camp will be looking for language suggesting that rates will remain below
normal levels for some time to come. Any reference to ‘Equilibrium real rate’
the rate of interest compatible with full employment and stable inflation
underpins the gradual approach.
The $ index has been under pressure during December, the
gradualist approach is believed to be favoured by Janet Yellen, we opened the
month above 100 and are now close to the 100 day and 200 day moving average at
96.90 and 96.72 respectively, going into this major event risk these support
levels are very pivotal.
No matter what the outcome there is going to be a lot of
activity into the year end and believe the festive period will be busier than
normal.
It is not the holiday season yet.
Good Luck
