Investing.com – Markets appear to have adopted the ‘soft landing’ narrative following the Federal Reserve’s big rate cut, but Bank of America Securities remains a seller on the US dollar for now as the US central bank has room to move lower to go.
Following the Fed’s 50bp cut, front-end rates (the main driver of currency movements) reflect the expected extent of Fed easing, similar to significant downturns of the past, BoA Securities said in a September 26 note.
Meanwhile, the performance of risk assets has been more consistent with a soft landing and reflation: higher beta FX outperform lower beta, equities and gold are higher, credit conditions are tighter and the UST curve is longer end becomes steeper.
A soft landing is still the bank’s base case, and it continues to expect a broad depreciation of the USD. But the risks of a hard landing appear to be underpriced, and “we must consider the risks in these uncertain times.”
Large interest rate shocks (in either direction) are generally positive for the dollar, but the nature of the move matters.
“Now that the ‘soft landing’ narrative is well priced, any negative shocks in the headlines could indeed lead to short USD retracements. Still, we believe the USD is in a sell-the-rally regime for the time being.”
