Investing.com – Markets seem to have bought into the ‘tender landing’ narrative after the Federal Reserve cut interest rates significantly, but Bank of America Securities remains a US dollar seller for now as the US central bank has room to fall.
After the Fed cut interest rates by 50 basis points, interest rates (the main driver of currency movements) reflect the expected amount of monetary policy easing by the Fed on par with significant past economic downturns, BoA Securities said in a September 26 note.
Meanwhile, the performance of risky assets is more consistent with a tender landing and reflation: higher beta FX outperforms lower beta, stocks and gold are higher, lending is tighter, and the bearish end of the UST curve becomes bearish steep.
The bank’s basic scenario is still a tender landing, which still predicts a broad depreciation of the USD. However, it appears that the risk of a challenging landing is underestimated and “we must be mindful of the risks in these uncertain times.”
High interest rate shocks (in both directions) tend to be positive for the dollar, but the nature of the move matters.
“With a well-priced soft-landing narrative, any negative headline shocks could actually lead to short-term USD retracements on risk-bearing grounds. Despite this, we believe that the US dollar is currently in an upward phase.”
