A 50 bps rate hike for March is now ~90% priced in.
And we are seeing more calls for more rate hikes by the Fed throughout the year. How much more upside can there be for the dollar if that is the case? Unless we are talking about the terminal rate being somewhere around 3% to 4%, I'd say it may be tough for yields and the dollar to run much higher than what we are witnessing right now.
Yes, there is scope for the market to get carried away but we all have to face reality one way or another.
As much as inflation is running out of control now, I am not going to shut the door on price pressures easing in the latter half of the year. There are a lot of moving parts and uncertainty still but if inflation pressures do show signs of peaking, I sense that the market mood will shift rather quickly. Of course, this is all conjecture and a conversation for another day.
For now, I don't see much chances of the market mood turning on a Friday. The spectre of a 50 bps rate hike and jitters surrounding a quicker pace of tightening is weighing on sentiment and that's likely to stay the course today. In turn, the dollar is also bid as Treasury yields threaten the next breakout leg higher.
I want to be one to get on the other side of the trade but I don't think sentiment favours the bold just yet.
I'd be more inclined to stick with buying dips in yen pairs as a structural trade. NZD/JPY is backing away after testing its 200-day moving average @ 77.97 while AUD/JPY is retreating after failing to crack key daily trendline resistance @ 83.36 yesterday. The more dour risk mood today could lend to added downside pressure so I'd be looking for long opportunities if there is a stronger retracement on those.
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