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FX Viewpoint: Going negative, really?

IGM FX and Rates

In our piece NEXT WEEK - WHICH SIDE OF 100? , we questioned whether Fed negative rates speculation will weigh on the Dollar and prevent the DXY from reclaiming the 100.00-plus handle?

Well, the latest Fed comments indicates there could be some push-back against the controversial subject matter.

  • BOSTIC described himself "not a great fan" of the concept.
  • EVANS remarked he didn't anticipate this being a tool that we would be using in the US and also predicted unemployment could fall to 9% by year-end. (Separately, the Fed said its secondary market facility will start buying ETFs today).

Looking at the sixth window of the US Dashboard as well, the implied probability of another Fed cut by December is just 15%, despite the COVID-19 related economic concerns. We suggest keeping an eye on upcoming speeches and possible comments on the subject from other Fed members and in particular a discussion on current economic issues by Fed Chairman Powell on Wednesday.

Here are views of some of the major banks:

  • CITI said last week we think that Fed rhetoric may become a little (but only a little!) more open-minded about the possibility of negative rates in the future, should other tools be exhausted.
  • DEUTSCHE BANK - Sees negative rates as highly improbable as Fed policy in the near term. Moves in futures markets last week were driven by hedging flows rather than such speculation and expect Chair Powell to use the virtual public event Wednesday as an opportunity to reiterate the Fed's current stance on negative rates. The German giant also cites a nuclear option ie the Fed could implement an IOER hike on or before the next meeting to send a clear message that it is not contemplating negative rates.
  • GS - Even in the event the Fed were to explore negative rates, it would be reluctant to go deep, given political issues with penalising cash.
  • MS - Thinks negative rates in the US are very unlikely as long as the Fed's balance sheet remains large relative to nominal GDP, and would likely weaken the USD while tightening financial conditions via other US capital markets.
  • UBS - Sees negative rates at the US short end as driven by technical factors and recommends fading it by selling May 21 Fed funds futures. Chair Powell has mentioned several times the Fed doesn't intend to take interest rates negative. Moreover, it would damage the US money market industry.

There has been a feeling early in the week that the US Dollar’s gains could well be down to fears of a second spike in COVID cases once lockdowns are eased across the globe. Perhaps, but we also suspect it could be position adjusting ahead of Powell’s speech on Wednesday.

Back to the DXY and 100-plus? Yes, we look for buy opportunities too still (above the 200-dma) for a renewed charge on the 100.87-93 area over coming weeks.

Per our technical charts:

IGM FX and Rates 


  • Focus is returning to April's 100.867-100.931 highs/61.8% of March's 102.992-98.270 fall at 101.188, as dips continue to attract bids ahead of the 200-DMA (approx 98.42).
  • Through there could extend to challenge 101.878/.910, which guards March's 102.992 peak.
  • Below 99.097 at this juncture threatens a bearish resolution instead. 

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