What the Fed Monetary Policy move might mean for various set classes.


By Chinedu Okoye 



Introduction:

The all but confirmed interest rate cut by the Federal Reserve Chair Jerome Powell on Friday already made ripple effects on the USD with the Greenback shedding value against its major peers in the early hours after the Jackson Hole speech. Gold also rose in the same time frame.

US 10 yr and 2 yr Treasuries also saw a decline in yields (rise in prices as both move inversely), whilst that of its peers remained largely unchanged. Commodities also saw a boost as did cryptocurrency, on the news.

We briefly analyse the asset classes mentioned in detail as we outline expectations. 



Currencies:

Here we highlight the currency moves between the USD and it's give major peers; EUR/USD; GBP/USD; USD/JPY; 

USD v Major Peers:

EUR/USD:

The Euro appreciated gainst he green back +1.51 week-on-week, upon the build up to the anticipated Jackson Hole speech. Though they already delivered a cut, the ECB indicated a possibility of a slowdown in cuts going forward.

In the other hand following the US Jobs data and the Federal Reserve is focused more on avoiding a labor market disruptio and less worried about inflation. We could see a more consistent or deeper than expected first cut from the Fed than the ECB delivered. And going forward, the Fed might actually lead the cuts as initially posited by Zero Equilibrium Economists.




GBP/USD:

The pound jumped 2.11% on the week. We expect it to hold at these levels barring a change in UK inflation expectations given the mixed results from other market fundamentals.




USD/JPY:

The dollar fell hard against the yen by -2.22% making the yen the peer to gain the most against the greenback on the week. This is however a complicated pair to analyse as there are many other factors that are in play.

The BOJ intervention saw the yen gatther momentum in the previous weeks. However a steady Fed cut might reduce the need for a continual  intervention.



USD v Africa: Focus on the Naira



Commodity (Gold and Crude):

The yellow metal experienced a sharp rise in the hour after the Jackson Hole speech indicated by the chart below. And it has maintained the level afterwards up until the time of the writing where it stands at 2,546.30, from.the 2,548.60 it hit  earlier.

Our prior expectations for a move to $3,000/oz. seems in order.

(Gold Prices in the past 24 hours)


Crude Oil Brent:

Crude Oil and USD have an inverse correlation and as the Greenback begins a downward trend, the commodity would receive a boost in prices. Unlike gold it doesn't have a direct correlation with interest rates so the interest effect as the Fed cuts would be indirect for Crude and dependent on the strength of the dollar going forward. 


(Brent Chart 24-hour)



Sovereigns:

A continual decline in US Treasury yields is expected and almost in order, but we anticipate a gradual portfolio readjustment to Emerging and Frontier markets as investors search for higher yields.

(US Ten year yields)

Cryptocurrency:

Even Crypto joined the party as Bitcoin jumped 7.98% against the dollar on the week. 





What this Means for African Sovereigns (Focus on Nigeria):

Stable Emerging and Frontier countries will be the biggest beneficiaries of this, and the deeper the Fed cut is, the less future hikes expected from these countries. In Africa - our major focus - we favor Nigeria, Egypt, South Africa.

It is also expected that currency gains for these countries might be in order. Though the Naira still hovers around the N1500-N1600 range, it is likely we see market adjustments in the months following the Fed rate cuts.

The Naira and USD Government securities might get an appreciation boost as the cuts widens the yield spread US treasuries, which could also allow for lower yield offerings on subsequent dent issuances.

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