FOMC sets stage for USD gains in 2017 - BNPP

Sam Lynton-Brown, FX Strategist at BNP Paribas, suggests that fFollowing the 14 December FOMC BNPP remain positioned for USD gains via derivatives recommendations in USDJPY (targeting 128 by the end of 2017) and USDCAD (targeting 1.36 by the end of Q1 2017), but risks of a short-term USD correction are rising.

Key Quotes

“As widely expected, the Fed hiked its policy rate by 25bp but the accompanying economic projections unexpectedly showed a shift higher in the 2017 median dot, which now implies three hikes (from two previously). Fed Chair Yellen downplayed the change in the dots, noting it was modest and reflected adjustments by just a few members.”

“Nonetheless, US front-end yields have moved sharply higher with the next full 25bp hike now priced for June next year, and in sympathy the USD has strengthened significantly. The case for USD gains over the course of 2017 is sound, but risks of a reversal in Q1 remain elevated – a break in the risk environment, external geopolitical events, or concerns about the new administration’s trade and FX policy are all possible catalysts.”