Nomura: It Will Be Hard to Deliver a Dovish Hike at FOMC

Will rates sell off?

Bullion.Directory precious metals analysis 16 December, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Twitter @Lemieux_26

Many traders believe the Federal Reserve will issue a “one-and-done” when it comes increasing the Fed funds rate, following today’s FOMC minutes. The “dovish” hike may not be in the cards, according to Nomura.

We don’t think 2016 Eurodollar contracts have any real room to rally, and even for 2017 and 2018 the potential seems fairly limited. In other words, it will be hard to deliver a dovish hike, and rates, especially 2016, may indeed sell off. In addition to the signal on future rates, ‘risk sentiment’ is a key parameter. Risk assets have been stabilizing on Tuesday and may benefit from reduction in uncertainty tomorrow (provided by eFX News).

Nomura went on to say that the Fed could have a hard time delivering a dovish hike that would cause a significant decline in monetary tightening expectations. If traders, following the FOMC, believe more rate hikes are on the table then this could drive up market volatility.

If the hike is neutral, Nomura expects emerging market currencies to rally against the dollar.

Emerging market currencies have been faltering against the dollar, after developing nations binged on dollar-denominated debt due to the Federal Reserves near-zero interest rate policy. Since 2009, emerging market dollar-denominated debt has more than doubled to $4.5 trillion. A stronger dollar would heavily burden these countries as dollars are in short supply.

According to the Economist, 25 percent of Chinese corporate debt is dollar-denominated opposed to only 8.5 percent of earnings. Large developing nations, such as Brazil, Turkey and South Africa, are already feeling pain from a combination of a strengthening dollar, high debt burdens and a lack of economic growth.

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