Will the USD actually rise after Fed hikes rates? – HSBC

FXStreet (Barcelona) - Stacy Williams, Director of Quantitative FX Strategy at HSBC, believes that markets are buying USD based on expectations of a rally if and when the Fed hikes rates, and not on the basis on change in fundamentals, and further comments that this “last hurrah idea is just one of the thorns in the side of the USD.”.

Key Quotes

“The USD bull run feels close to the end. The recent run may not be of the same scale as asset price bubbles in the past, but the lifecycle of these asset price bubbles and the current USD rally follow a similar pattern.”

“The recent rapid USD move, although much smaller, exhibits similar features to booms of the past such as the NASDAQ in the 1990s. The features are comparable because as the end of the move approaches, the pace of ascent picks up markedly and we see a one-way mentality develop.”

“The rise of the USD has exhibited all these qualities. Participants now seem to be buying the USD not based on a change in fundamentals but instead because they believe the rally will extend further. This is a classic mentality associated with unsustainable moves.”

“This last hurrah idea is just one of the thorns in the side of the USD. The others include recent data developments, the limits of the US tolerance for currency strength, valuations, all-encompassing USD bullishness and the fact the USD does not perform when the Fed actually pulls the trigger.”

“We continue to see EUR-USD at 1.10 by the end of 2016.”