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MNI MARKET ANALYSIS: Risk Reward Profile Skewed To Dollar Weakness

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1 U.S.A dollar banknotes

Executive summary

  • With a rising number of economic and sentiment indicators pricing in a significant deceleration in the economic activity, Fed may disappoint investors this year by delivering less hikes that what the market is currently expecting.
  • In addition, declining fundamentals leave US risky assets vulnerable for 2022.
  • A less ‘hawkish’ Fed stance leaves room for some USD depreciation this year against EM FX and the Euro.

Link to full analysis:

USD Risk Reward - F.pdf

With the US economy expecting to continue to decelerate, it will be difficult to see 6 to 7 hikes this year, and US policymakers are likely to disappoint the market with less hikes, especially if we start to see market frictions going forward (i.e. another important consolidation in US equities) The chart below shows that a sharp increase in ST rates have historically led to a slowdown in the economic activity.

Source: Bloomberg/MNI

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