Our short term DXY “behavioural” model, which disentangles the relative contribution of Fed policy/interest rates, US macro growth sentiment and global risk appetite, suggests virtually all the DXY’s 4.5% decline from early Oct 2023 can be attributed to the dovish reprofiling in Fed expectations.
There have been seven Fed easing cycles since the mid-1980s and three resemble the more modest and calibrated type (1995, 1998 and 2019), while four can be described as decisive rate cut cycles (1984-86, 1989-91, 2000-01 and 2007-09). Each cycle of course features idiosyncratic conditions, but lumping them into these two broad categories as a first approximation is a useful exercise for unpacking current market pricing.
“Aggressive” rate cut cycles produced an average 300bp+ in rate cuts within 12 months, while the more calibrated and measured cycles saw a lesser 100bp in rate cuts delivered within 12 months. For markets that have been perpetually cycling between a soft landing and a more adverse scenario, 2024 Fed rate cut pricing is arguably just a rough “each way bet”, pending more clarity on the inflation and growth paths. - Westpac Strategy
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