Position update: Considering the impact of the Fed's March rate hike, Mr. Rikio Shima

Position update

Publish date: 2017/03/03 00:43

Long around 113.50 yen yesterday; I will close it around 114.35 yen for now. If there is a pullback, I plan to buy again.

Considering the impact of the Fed's March rate hike

Publish date: 2017/03/03 05:45

The probability of a March rate hike has risen to 88%. Tomorrow, the Chair will speak in Chicago from 3:00 a.m., and Vice Chair Fischer will speak in NYC from 2:30 a.m., but it is unlikely that there will be a sudden shift to dove and deny a March rate hike. The extent to which the market has priced this in so far comes from hawkish remarks by various Fed governors and regional presidents, and there shouldn’t be nothing at this point. Tomorrow is notable, but it seems to be moving toward a March 15 rate hike.

This year, a 2–3 rate hikes was anticipated, but a March rate hike is “unexpected.” The reasons are:
(1) The real economy is relatively strong
(2) Stock prices and real estate prices are rising rapidly, and you cannot leave them at near-zero interest rates. The administration is dismantling financial regulations and trying to push financial institutions to take on risk. To prevent excessive actions, a brake is needed.
(4) Tarullo has resigned as a director, and going forward many directors will be appointed by the Trump administration. Yellen's term as chair has a little over a year left. They want to finish the work while control within the FOMC remains effective.

However, from the Trump administration’s side, since they want to finance large-scale infrastructure investments, they would like rates to stay low. It seems Mnuchin and Chair Yellen had an hour-long meeting yesterday, but what was discussed is important. The two former Goldman Sachs people (Mnuchin and Cohn) are reasonable, so they will respect the Fed's independence, and there is a possibility they are providing some reassurance to prevent the Fed from moving too aggressively on rate hikes (for example, by guaranteeing Yellen's reappointment). If that is the case, there could be changes in tomorrow's Yellen speech. If so, that would be a major reversal, so proceed with caution.

If we stay on the path of a March 15 rate hike, it would be “unexpected,” so I think we need to adjust the market view a little. Since the end of last year I have said the first half of this year would be a pullback/adjustment market, but the Trump administration does not truly want a stronger dollar, and there is no funding for tax cuts, so I expected that at some point the Trump reflation trade could pause.

However, once a rate hike occurs, the next expectation will be “another hike in June?” There will be some dollar appreciation. Whether it reaches 115, 116, or a retry at 118 is unclear. Probably there will be some message from the Trump administration or from the Japanese political side. The impact will not be small. It will be large.

Yesterday I went long USD/JPY around 113.50 yen, and today closed around 114.35 yen. When the dollar falls, I think it’s a buying opportunity.

The currency most affected by US rate hikes will be the yen. USD/JPY volatility easily surpasses EUR/USD. Also, I am personally watching the AUD. The easing cycle should be over, but if Australia raises rates this year, it will be only about once. The US is expected to raise rates more than twice, so the US–Australia rate gap will gradually shrink, and the cross AUD long built up in the market may collapse at some point; that is something to watch.