Fed: Markets hoping for a liquidity trick or two – Nordea Markets

According to Anders Svendsen, analyst at Nordea Markets, market expectations for the future Fed funds path are already dovish (more than 100bp are priced in) by now and the Fed will likely have to deliver either 50bp or a liquidity adding trick to spur a dovish reaction.

Key Quotes

“We have said earlier that a bet on 50bp made sense from a risk/reward perspective ahead of the July FOMC meeting – that is probably no longer the case.”

“However, EUR/USD is still stuck in a downtrend as the liquidity outlook has turned USD positive after the recent US budget deal. The Fed will have to be very dovish to turn the EUR/USD trend towards our 3-month target of 1.15-1.16.”

“Also, markets will be hoping for a liquidity adding trick or two from the Fed as liquidity will otherwise be withdrawn over the next six to eight weeks as QT still has not ended (1 October) and as the US Treasury will rebuild its cash balance via higher-than-usual issuance activity now that the debt ceiling is no longer a constraint.”

“As long as liquidity is withdrawn, LIBOR/OIS spreads could widen, while the USD could remain bid alongside slightly weaker risk appetite.”

“In general, we have preferred to bet on the Fed going big, but our conviction is less firm than a week or two back.”