Look for a dovish Fed

From Morgan Stanley:

"The Fed should provide us with some dovish sound bites and may even cite international uncertainties to highlight the economic damage provided by a stronger USD. In order to have a meaningful impact on markets, the Fed has to 'jump ahead of the curve'.

The curve is defined by current market pricing for rate expectations. Jumping ahead of the curve would require the Fed to signal a long rate hike pause. Any other rhetoric would only 'mark to market' the Fed's own projections closer towards current market pricings, which would be insufficient to prevent the USD from rising," MS argues.

...do corporate spreads matter more?

"Rising US corporate bond spreads complicate the matter. While widening credit spreads provide an additional reason for the Fed to turn dovish, rising corporate funding costs are impacting the cost of USD liquidity, which matters in a world that has become increasingly dependent on the cost of USD, not only due to the US$9.8trn of USD-denominated debt outside the US, but also due to indirect effects. The USD is used as a reference currency in setting the cost of local FX funding costs for countries which are the most indebted: i.e., Asia. Now as US corporate spreads widen, their impact on international funding costs should not be underestimated. Widening corporate bond spreads have the potential to increase the pace of the USD appreciation by forcing the highly indebted EM world into a faster pace of deleveraging. The related savings increase should lead to USD supportive capital exports," MS adds.

"Hence, we stay USD bullish should dovish Fed commentary fail to ease corporate spreads," MS advises.

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