With the White House set to nominate a new Fed Chair anytime within the next month, we take a look at whether any of the leading candidates pose a threat to our strategically bearish USD view.
While President Trump did say that he would nominate a new Fed Chair around mid-October, it looks like the search is nowhere near being concluded - with White House Chief of Staff John Kelly last week noting that interviews are still in the 'first round' stage, while Treasury Secretary Mnuchin hopes that a nomination will be made within the next month.
We strongly believe that it is way too early to make any sweeping assumptions about what particular nominees would mean for the future of Fed policy. Yet, we are wary that markets are likely to react to President Trump's nomination based on their current preconceived ideas. And while perceptions and reality may be two different things, our scenario analysis table below aims to provide a snapshot of what we expect to happen in markets if one of the leading Fed Chair candidates were to be nominated in the coming weeks.
Given that uncertainty over the next Fed Chair is likely to be weighing on short-term rates - not least because it currently makes any US monetary policy call largely invalid beyond Feb-2018 - the nomination of a new Chair would be USD positive. But most of the candidates would not be game-changing for our strategically bearish USD view and we would be inclined to fade any post-announcement moves.
In fact, we think only John Taylor - renowned economist and pioneer of a rules-based monetary policy framework - would pose serious risks to the current 'goldilocks' market environment. But again, the reality may not be what it seems on paper; even Mr. Taylor knows that for his more radical rules-based policy proposal to work, it requires international coordination to the likes not seen since Bretton Woods. The likelihood of this happening is trivially low.
Elsewhere, we do see the next few weeks as a window of opportunity for the EUR. It's somewhat disappointing not to see the EUR higher on the latest ECB 'sources' floating the idea of a cut in monthly asset purchases to EUR 30bn from January 2018. However, expect more of these 'sources' and 'leaks' to sporadically appear in the build-up to the 26 October ECB meeting - and it's hard not to see Eurozone yields and the EUR moving higher on any relatively aggressive QE taper speculation.
We expect the dollar's cyclical decline to continue as markets have little optimism over US economic fundamentals. Politics in Europe and the UK are unlikely to thwart either the euro or pound, with the focus starting to narrow on key upcoming central bank policy meetings.
Lacklustre US inflation dynamics should see the benign bond market environment persist and the high-yielding AUD and NZD recover some recently lost ground. In Canada, there's key inflation and retail sales data to keep an eye on before an important Bank of Canda meeting later this month.
As markets narrow their focus on ECB...