Fed Futures Discounting Interest Rate Hikes and Dollar Support

By: Black_Swan

Today begins a heavily anticipated FOMC meeting. Yeah, we know all the meetings are hyped-up quite a bit, but this one’s a little different. That’s because the head hauncho, Ben Bernanke, has changed his tone.

Coming off a series of rate cuts that’s taken the Fed Funds rate from 5.25% all the way down to 2%, Bernanke is talking like he’s already prepared to start hiking his benchmark rate right back up. His comments over the last few weeks have been aimed most directly at inflation (rather than the potential for further economic weakness). He’s even made clear remarks about the consequences of a weak U.S. dollar.

Here’s a look at how yield side of the Fed Funds futures has been behaving while Ben is out talking the talk. In a nutshell, it’s telling us the market expects the Fed Funds rate to be at about 2.5% by November ...

The area circled shows a Fed Funds rate spike down towards 1% -- meaning the market expected the Fed to soon bring the Fed Funds rate down to that level. But by the time the following FOMC meeting rolled around the Fed only brought their benchmark rate down to 2%. And since then it’s been jumping.

The spike towards 1% also corresponds to the all-time intraday low for the U.S. dollar index. Since that point we’ve seen quite a shift in dollar sentiment.

Heading towards tomorrow decision, we’re under the impression rhetoric could waver but the Fed Funds rate won’t budge; not even little. The official Fed Funds rate will remain at 2%. Still, we can’t help but notice from the chart how trader’s expectations have changed. But even if we’re accurate and a rate hike is still months away, perhaps this chart is already telling us the worst is over for the buck ... at least for a while.

Jack Crooks

Black Swan Capital LLC

http://www.blackswantrading.com/

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