Dollar Firm Post-FOMC While BOJ Tests the "Impossible Trinity"

September 22, 2022
  • The two-day FOMC meeting ended with a 75 bp hike, as expected; Chair Powell drove home this hawkish message in his press conference; updated macro forecasts and Dot Plots were released; U.S. yields continue to march higher; September regional Fed manufacturing surveys will continue rolling out
  • BOE hiked rates 75 bp to 2.5%, as expected; Norges Bank hiked rates 50 bp to 2.25%, as expected; SNB hiked rates 75 bp to 0.5%, as expected; SARB is expected to hike rates 75 bp to 6.25%; Turkey unexpectedly cut rates 100 bp to 12.0%
  • BOJ delivered another dovish hold, as expected; BOJ intervened to support the yen for the first time since 1998; Taiwan hiked rates 12.5 bp to 1.625%, as expected; Philippines hiked rates 50 bp to 4.25%, as expected; Indonesia hiked rates 50 bp to 4.25% vs. 25 bp expected

The dollar remains firm in the wake of the FOMC decision. DXY is up for the third straight day and traded at a new cycle high near 111.068 before coming off a bit to after BOJ intervention to trade near 111 currently. USD/JPY spiked higher after the BOJ meeting ended with a dovish hold to trade near 146 before BOJ intervention drove it down below 141. With no change in monetary policy, this intervention is doomed to failure (see below). The euro bounced modestly in sympathy with the yen but remains heavy as it trades below $0.9900. We maintain our medium-term target at the June 2002 low near $0.9305. Sterling also remains heavy after the BOE decision and traded at a new cycle low earlier near $1.1210, the lowest since 1985. Charts point to a test of the February 1985 all-time low near $1.0520. The repricing of Fed tightening risks is likely to keep the dollar bid across the board near-term. With Ukraine tensions likely to persist, the global backdrop continues to favor the dollar and U.S. assets in general.


The two-day FOMC meeting ended with a 75 bp hike, as expected. The tone remained hawkish as the bank said that ongoing rate hikes are appropriate as inflation remains elevated, reflecting a supply and demand imbalance. The decision was unanimous and the Fed stressed that it remains attentive to inflation risks. The Fed also said it would continue shrinking its balance sheet as planned. This was all consistent with its recent messaging. Tightening expectations remain elevated as WIRP suggests another 75 bp hike is nearly priced in on November 2, followed by a 50 bp hike on December 14.

Chair Powell drove home this hawkish message in his press conference. He said inflation risks remain weighted to the upside. He added that decisions will be made meeting by meeting and that it will be appropriate to slow the pace of tightening at some point. He stressed that the Fed is looking for “compelling” evidence that inflation is easing and warned that history cautions against premature rate cuts. Powell noted that despite the slowdown in growth, the labor market remains “extremely tight” and out of balance. Lastly, Powell promised that the Fed will keep at it until it feels the job is done, and warned that this may lead to sustained below-trend growth and very likely softening in the labor market. His forward guidance was hawkish. Powell said there is a possibility of a pause but not at current levels, noting that “We’re at the very lowest level of what is restrictive.” He admitted that no one knows if this tightening will lead to recession.

Updated macro forecasts and Dot Plots were released. As we expected, the growth forecasts were cut while the inflation and unemployment forecasts were raised. While the bank decided not to deliver 100 bp, it did offer up some hawkish surprises in the updated Dot Plots. The median Fed Funds rate moved up to 4.4% in 2022 and 4.6% in 2023. Looking further ahead, the Dots show 3.9% in 2024 and 2.9% in 2025, suggesting no significant easing until well into 2024. Of note, Powell admitted that there was a “fairly large” group on the FOMC that saw 100 bp of tightening by year-end vs. the 125 bp median. This was a totally unnecessary thing to highlight. We'd also add that the big swing in the Dot Plots isn't quite justified by the upward revisions to inflation forecasts but the Fed is clearly making a strong statement here.

U.S. yields continue to march higher. The 2-year yield traded near 4.13%, the highest since October 2007, while the 10-year yield traded near 3.62%, the highest since April 2011. The real 10-year yield traded near 1.20%, the highest since May 2010. This generalized increase in U.S. yields is likely to continue and will ultimately support the dollar. Of note, the 3-month to 10-year curve remains positively sloped near 33 bp and so we are not yet ready to call for a recession in the U.S.

September regional Fed manufacturing surveys will continue rolling out. Kansas City is expected at 5 vs. 3 in August. Last week, Empire came in at -1.5 vs. -31.3 in August and Philly Fed came in at -9.9 vs. 6.2 in August. Q2 current account data, weekly jobless claims, and August leading index will also be reported. Initial claims will be closely watched as they are for the BLS survey week containing the 12th of the month. Last week, claims fell to 213k, the lowest since late May and they are expected to come in at 217k today.


The Bank of England hiked rates 75 bp to 2.5%, as expected. The market was split, however, as the analyst community saw 50 bp and WIRP suggested a 75 bp hike was nearly 80% priced in. The MPC was also split, with 5 voting for 50 bp, 3 for 75 bp, and 1 for 25 bp. The bank also announced it will being active gilt sales starting October 3. It said it still sees inflation peaking at jut under 11% next month but remaining above 10% in the following months. Updated forecasts were just released at the August 4 meeting and so the next official update comes November 3. The BOE said that the full impact of the mini-budget will be assessed in November. It noted that the energy price caps will likely cut inflation by 5 percentage points in 2023 but said that it will add to medium-term inflation pressures. WIRP suggests a 75 bp hike is fully priced in for November 3. Looking ahead, the swaps market is pricing in 275 bp of tightening over the next 12 months that would see the policy rate peak near 5.0%, up from 4.5-4.75% at the start of this week and 4.5% at the start of last week. Given the rather uninspiring 50 bp hike, we are surprised that BOE tightening expectations continue to rise.

Norges Bank hiked rates 50 bp to 2.25%. It said it would probably hike rates again at the next meeting November 3. The bank noted “Monetary policy is starting to have a tightening effect on the Norwegian economy. This may suggest a more gradual approach to policy rate setting ahead.” Updated macro forecasts and expected rate path were released. Growth forecasts were lowered and inflation forecasts were raised. Of note, the expected rate path sees the policy rate peaking near 3.0% in Q3 23. This is more hawkish than the swaps market, which is pricing in 25-50 bp of tightening over the next 6 months that would see the policy rate peak between 2.5-2.75%, down from 2.75% at the start of this week. Of note, August CPI eased to 6.5% y/y vs. 7.0% expected and 6.8% in July. This was the first deceleration since January but remains well above the 2% target. What happens in November will depend in large part on how the CPI data come in.

The Swiss National Bank hiked rates 75 bp to 0.5%, as expected. SNB President Jordan said “It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term,” adding that the bank remains willing to intervene in FX markets if needed and that the strong frank plays a key role in determining inflation . Jordan also stressed that the bank could move intra-meeting if needed. The bank thus becomes the last to exit negative rates but it’s worth noting that Jordan said “The benefits for monetary policy clearly outweighed the costs of the side-effects. Without negative interest, price stability could not have been ensured and economic developments would have been significantly less favorable. Negative interest will remain an important monetary policy instrument, which we will use if needed.” The updated forecasts don’t suggest any greater urgency to tighten. However, the swaps market is pricing in a peak the policy rate peak near 2.0%, up from 1.75% at the start of this week.

South African Reserve Bank is expected to hike rates 75 bp to 6.25%. At the last meeting July 21, the bank delivered a hawkish surprise and hiked rates 75 bp to 5.5% vs. 50 bp expected. The vote was 3-1-1, with one dissent in favor of a 50 bp hike and one in favor of a 100 bp hike. Its model now sees the policy rate at 5.61% by year-end vs. 5.3% previously, at 6.45% by end-2023 vs. 6.21% previously, and at 6.78% by end-2024 vs. 6.74% previously. However, the swaps market is pricing in a peak policy rate near 8.0% over the next 12 months. Governor Kganyago said that “Our assessment now is that this inflation risk is no longer transitory, but that there is persistence that is emerging.” He added that the bank is concerned about widespread wage settlements that are consistently above inflation expectations that could prompt a wage-price spiral.

Turkey central bank unexpectedly cut rates 100 bp to 12.0%. At the last meeting August 18, the bank delivered a dovish surprise and cut rates 100 bp to 13.0% and the moves suggest risks of a dovish surprise at every meeting. The bank clearly remains worried about slowing growth as it saw ““loss of momentum in economic activity due to decreasing foreign demand” and added that “It is important that financial conditions remain supportive.” There’s really not much to add that we haven’t said before. Turkey is heading towards a deep economic crisis that is only being made worse by ongoing policy mistakes. USD/TRY is trading at new all-time highs and will continue to do so until the policy regime changes.


The Bank of Japan delivered another dovish hold, as expected. The decision to hold rates and maintain Yield Curve Control was unanimous. It said will extend parts of its COVID aid program for 3 or 6 months and will eventually phase them out in stages. The bank downgraded its assessment of the global economy and maintained its assessment of the Japanese economy, though it warned that uncertainties remain “extremely high.” Next update to the macro forecasts will come at the October 28 meeting. Governor Kuroda remained dovish, stressing that “We won’t raise rates for some time. We have thoroughly debated what’s the best monetary policy while considering what will happen from here, and concluded that we will continue with monetary easing.” He added that the statement that the BOJ won’t change forward guidance “for the time being” means for the next 2-3 years. Kuroda said there may be some tweaks, but no change “in principle.” We maintain our view that policy will be left unchanged through the end of his term in April, with his successor tasked with eventually engineering an exit from its current policy stance.

After the yen weakened, the BOJ intervened to support it for the first time since 1998. Ministry of Finance official Kanda said “The government is concerned about excessive moves in the foreign exchange markets, and we took decisive action just now. We’re seeing speculative moves behind the current sudden and one-sided moves in the foreign exchange market.” Of note, this was a purely BOJ affair as the ECB and the Fed were not involved. As the bank bought yen, USD/JPY dropped quickly from a new cycle high near 145.90 down to 140.70. It has since moved back above 143 as market realize this is simply a temporary fix. With monetary policy remaining ultra-loose, a weaker yen is a natural by-product. Professor Mundell’s “Impossible Trinity” posits quite correctly that with free movement of capital, a country cannot run independent monetary policy and target the exchange rate. Having all three at once is simply untenable.

Taiwan central bank hiked rates 12.5 bp to 1.625%. It also raised reserve requirements 25 bp for the second straight time, which the bank estimated would drain TWD110 bln from the system. The bank revised its GDP growth forecast for 2022 to 3.51% vs. 3.75% previously and sees 2023 growth at 2.9%. It also revised its inflation forecast for 2022 to 2.95% vs. 2.83% previously and sees 2023 inflation at 1.88%. Governor Yang said that two members supported a larger 25 bp move. The bank noted that the weaker TWD was due mainly to foreigners selling local stocks, adding that the widening interest rate differential was not causing outflows of insurers’ funds. The swaps market is pricing in 50 bp of tightening over the next 23 months that would see the policy rate peak near 2.125%.

Philippine central bank hiked rates 50 bp to 4.25%, as expected. It noted that “The BSP reiterates its commitment to take all necessary actions to steer inflation towards a target-consistent path over the medium term.” It also tweaked its inflation forecasts for 2022 to 5.6% vs. 5.4% previously and for 2023 to 4.1% vs.4.0% previously. Deputy Governor Dakila said the bank will respond to FX fluctuations to the extent that it impacts inflation, adding that it does not target any particular level for the peso. USD/PHP hit a new all-time high near 58.508 and further gains are likely as global liquidity dries up. Governor Medalla is correct to say that the main cause of the peso’s fall is the Fed, though it really is a global tightening phenomenon that it is hurting EM. The swaps market is pricing in another 75 bp of tightening over the next 3 months that would see the policy rate peak near 5.0%, up from4.5% at the start of this week but we still see upside risks.

Bank Indonesia hiked rates 50 bp to 4.25% vs. 25 bp expected. This was the second straight hawkish surprise. Governor Warjiyo said “The decision to increase interest rates is a front loaded, pre-emptive, and forward looking step to lower inflation expectations and ensure core inflation returns to the target of 2%-4% in the second half of 2023, as well as to strengthen the rupiah stabilization policy.” He noted that the larger move would help the bank bring core inflation back below 4% by Q3 23 after an expected peak of 4.6% by end-2022. Warjiyo added that headline inflation is expected to peak above 6% by end-2022, reflecting the impact of the recent fuel price hike.

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