Below is an eFX summary of a note written by Nomura on the Fed and the US Dollar.
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Synopsis:
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Nomura expects the US dollar to strengthen initially following the FOMC's 25 basis point rate cut, but predicts that the US dollar may weaken during Fed Chairman Powell's press conference.
- A sharp cut of 50 basis points could lead to further depreciation of the US dollar.
- The firm also lowered its USD/JPY forecast and recommends selling USD/JPY and major yen crosses on any rebound.
Key Points:
1. Initial reaction to the rate cut:
• 25 basis points: A 25bp rate cut is expected to strengthen the US dollar in the near term.
• 50 Basis Points: A 50 basis point rate cut would likely cause a more significant US dollar weakening beyond the initial reaction.
2. Impact of Fed Chairman Powell's press conference:
• USD Weakness: USD weakness is expected as Chairman Powell's comments will be more dovish, potentially reducing support for the USD.
3. Revised forecast:
• USD/JPY: Nomura has lowered its USD/JPY forecasts through 2025.
• Trade Recommendation: We recommend selling USD/JPY and major Yen crosses, especially if there is a bounce towards 143-145.
Bottom line: Nomura suggests that a 25bp rate cut may initially lift the USD, but that the USD may weaken in a follow-up press conference. A more significant rate cut could exacerbate this weakness. With the USD/JPY outlook revised downward, the firm recommends adopting a “sell on the rise” strategy for USD/JPY and other major yen crosses.
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