For Paresh Upadhyaya at Amundi Pioneer Asset Management, whether the Fed has reached the end of its hiking cycle is the key to 2019.
Chairman Jerome Powell said this month that the central bank can be “patient and flexible,” a dovish tilt from December, when policy makers projected two 2019 hikes. Futures show that traders are pricing in just a few basis points of tightening over the course of 2019.
“Even if they communicate that they’re essentially on a long-term pause -- barring any unforeseen events overseas -- that will start to get interest-rate differentials really moving against the dollar, and you’ll see non-dollar currencies start to rally,” said the portfolio manager. “To me, that is by far the most important question mark.”
And that’s the scenario he anticipates: Tighter financial conditions, a flat yield curve and growth headwinds should lead the Fed to pause, providing a “green light for risk to rally,” he said. For those reasons, Upadhyaya expects high-yielding emerging-market currencies such as the Colombian peso to outperform the dollar.
Source: Bloomberg Finance L.P.
Original Post: Mysteries Pile Up in FX Market, From Fed's Path to China Growth
Chart: Used with permission from Bloomberg Finance L.P.
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