Investing.com – Markets appear to have bought into the ‘soft landing’ narrative following the Fed’s massive interest rate cut, but Bank of America Securities remains a seller of the US dollar for now as the US central bank has room to fall.
Following the Fed’s 50 basis point cut, forward interest rates (the main driver of foreign exchange movements) reflect the amount of expected Fed easing on par with previous large contractions, BoA Securities said in a September 26 note.
Meanwhile, the performance of risk assets was more consistent with a “soft landing” and recovery: FX with higher betas outperformed lower betas, stocks and gold rose, credit tightened, and the long-term UST curve steepened.
A soft landing remains the bank’s base case, and it continues to expect a broad decline in the value of the US dollar. But the risks of a hard downside appear to be underestimated, and we must be mindful of the risks in these uncertain times.
Large interest rate shocks (in either direction) tend to be positive for the dollar, but the nature of the movement matters.
“With the ‘soft landing’ narrative well priced, any negative major shocks could actually lead to short USD pullbacks due to risk aversion. However, we believe the USD is in a ‘sell the rise’ regime at the moment.”