The Fed Hike Will Unleash A Monster Dollar Rally Goldman Predicts; Merrill Disagrees

Tyler Durden's picture

The "long dollar" trade may be the most crowded ever...

...but that doesn't mean there aren't disagreements where the greenback goes from here, especially after the Fed's historic first rate hike which according to some means the end of the dollar's tremendous year-plus long rally as the market starts to price in the next recession as a result of the Fed's own action, while according to others as a result of rate differentials and other central banks' ongoing debasement of their own currencies, the dollar surge is only getting started.

Among the latter, is none other than infamous Goldman FX strategist Robin Brooks, whose recent firm conviction that the ECB would crush the EUR led to massive losses for anyone who listened. This time, Goldman is intent on making anyone who still isn't onboard the long-USD monorail, shown originally here in this January 2015 post...

... get right on board.

From Goldman's FX team explaining why "they hiked it and they liked it"

The Fed today raised interest rates for the first time since 2006, without – as our economists note – resorting to an overly dovish message. This was very much in line with our “hike it and like it” expectation and markets responded in the way we anticipated: the SPX bounced, EM currencies like the Mexican Peso strengthened, buoyed by the recovery in risk appetite, and the Dollar rose versus the G10. The turning point for price action came in the press conference, when Chair Yellen did not use a question on credit markets to head in a dovish direction, but emphasized the soundness of the financial system and strength of the economy instead (Exhibit 1).



As we argued prior to the meeting, risk markets tend to take direction from the Fed when uncertainty is elevated, as in September when a dovish FOMC caused risk to sell off, while risk rallied on the hawkish October statement. This pattern held true today, as Chair Yellen’s upbeat message helped markets put aside worries over credit markets.

Yes, sure, let's just forget the terrible September jobs report which unleashed the tremendous October market surge on hopes of a dovish Fed, which then magically morphed into a narrative that it was a hawkish Fed that is good for stocks all along. Anyway back to Goldman:

The biggest beneficiary in G10 FX was $/JPY, which moved higher on a double lift via rate differentials and the relaxation in risk aversion. Into year-end, long $/JPY is our favorite expression of Dollar strength, as aggressive QQE implementation from the BoJ – 10-year JGB yields have been anchored at 30 bps through recent market gyrations – has on multiple occasions given rise to “phantom” moves higher in this cross, which we think reflect the power that QQE has on domestics shifting their portfolios out of JGBs into risk assets and out of the Yen. This channel, incidentally, is not operating as effectively for the Euro, where the volatility in Bund yields since May and the most recent press conference have undercut the effectiveness of QE.

As yes, the Euro. Let's recall what happened to that particular Goldman recommendation. On second thought, let's not and let's give the podium back to Goldman:

There is no doubt that 2015 was a difficult year for the divergence trade, notably EUR/$ lower.

Yes, that's one way of putting it.

But we don’t think there is a mystery as to what happened. Disagreement within the ECB has hampered the implementation of QE, which was one driver that caused the bounce in EUR/$ from 1.05 to 1.14 and temporarily put the Dollar on the back foot (the other driver being the dovish shift from the Fed at the March meeting). We certainly do not subscribe to the theory that Dollar strength is over now that lift-off has occurred, which is a popular view in some quarters given the behavior of the greenback during past hiking cycles. We think such historical comparisons ignore what a unique policy experiment has just ended: an emergency setting for policy rates since 2008, large scale asset purchases that more than quintupled the Fed’s balance sheet, and forward guidance that prevented interest differentials from moving more strongly in favor of the Dollar. The unwinding of all this will on our estimates drive the Dollar around 14 percent stronger through end-2017, with front-end rate differentials continuing to dictate that move (Exhibit 2). The Dollar is a buy.

For the benefit of those who are not convinced, and who have been kermitted one time too many, here is BofA Merrill Lynch with the variant perspective:

The dollar was mixed in the aftermath of the FOMC today with the market nearly fully priced for the first hike in 9 years. The still optimistic tone of the statement with respect to the labor market and growth, the unlimited ON RRP facility (strengthening the Fed’s ability to control short-rates) and with the dot plots still signaling 4 2016 hikes, the USD initially rallied--though later retraced—price action inconsistent with market’s expectation for a dovish hike. However, the USD’s experience of strengthening the 3-6 months into the first Fed hike, only to selloff in the months after, leaves us hesitant to read today’s Statement and Press conference as unencumbered bullish USD factor. More specifically, net USD long positioning was still quite high heading into the meeting, therefore, the USD’s retracement was likely a reflection of position adjustment than a fundamental catalyst. The mixed price action suggests today’s meeting will not be a near-term catalyst for the USD to rally further.


Dollar performance going forward (now that the Fed has started the normalization process) will depend on: First, US data and the pace of hikes—if the Fed is able to hike 4 times next year versus the 2 priced into the market, the USD will move higher in our view, particularly against a backdrop of further policy easing by the ECB and BOJ in 2016. A sharp RMB depreciation could slow the pace of USD appreciation, in our view. And second, equity performance which, in part, will reflect the market’s assessment of the ability of the economy to handle higher rates (and a higher USD). Given the USD’s positive correlation with equities, any weakness here will likely hamper USD gains against funding currencies like the EUR and JPY in this scenario. Recent financial market volatility and the Fed’s still consistent message of conducting 4 hikes in 2016 (vs only 2 priced by the market) make us cautious on this front.

And there you have it: two opinions, two diametrically opposite conclusions.

Confused? That's the point. However, if one had to come up with a coherent trade from all of the above, it would be to go alongside Goldman's prop traders, which is by definition precisely the opposite of what Goldman's clients are advised to do.

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SgtShaftoe's picture

That would be stupid.  Anyone buying dollars or treasuries unless to immediately convert to some other tangible are fools. 

Truther's picture

Ever notice the markets are sooooo sensitive to every little quirk comes out of the shitty mouth pieces? Everyone is jittery and fucking anxious for somepin'



no buy,

but I really need to sell,

BTFD now or I will raise my shorts.

I dare you


Nothing is real anymore.

SgtShaftoe's picture

Just wait until the HFT AIs decide to sell their positions.  There will be innumerable sellers and no buyers.  That's not an air-pocket you hear, that's a perfect vacuum. 

Remember the Chapelle Show "when keeping it real goes wrong" sketches?  That's exactly what's going to happen to the markets. 

eforce's picture

The Protocols says...



1 . We shall soon begin to establish huge monopolies, reservoirs of colossal riches, upon 

which even large fortunes of the GO YIM will depend to such an extent that they will go 

to the bottom together with the credit of the States on the day after the political smash "


Perhaps they will try one last long push to get the dollar up as high as possible to make the inevitable fall even more painful.

arbwhore's picture

Given the Feds track record on prediction... I'll go with Merrill on this one...

kralizec's picture

Well, that was easy.

You must have stayed at a Holiday Inn last night.  :)

jcia's picture

If Goldman says to go long... GO SHORT!

nosam's picture
nosam (not verified) jcia Dec 17, 2015 1:08 AM

They have fooled us so many times and still we fall for their crap predictions.

Kirk2NCC1701's picture

It's not rocket science, it's investment basics

If you expect Inflation for YOUR window of interest, you buy real assets (e.g. PM and RE) and stocks.

If you expect Deflation for YOUR time window of interest, you hold cash. Lots of cash, so that you can pay your bills and buy things cheap, from others who are desperate for cash.

If you don't have a divine crystal ball, to see the future, you hedge. You hedge by having a mix of all of the above.

Zealots will complain, but the truth is that you build the most equity and mitigate risk, by mimicking the investments of the rich, not the contrarian poor. Here too, the key is to not overextend debt or cash flow, to keep risk in check.

Yen Cross's picture

 My Primary goal> Makes the United States of America {strong}  [powerfull]

 Fuck politics/

  As Google searches for the name?

 Okay were connected/ Jan hatzius

 I'm taking a nap before I go to the Dry Cleaners, bitchez

 Yes, Tyler... I read the article.

FedFunnyMoney's picture

Time to fuck the muppets again.

-Goldman Sachs

DYS's picture

Between now and 2017 is the time to get your cash out of dollars. The real crash will come around 2020. Expect easy 40% devaluation.

bozoklown's picture

impressive reasoning

Crash N. Burn's picture

"Between now and 2017 is the time to get your cash out of dollars. The real crash will come around 2020."


Might want to shorten that timetable:

"The Script, and the eight-year, bubble-and-crash cycle, call for the markets (and the economy) to be torpedoed at the end of the U.S. election cycle. This is necessary so that the outgoing half of the Two-Party Dictatorship can be fingered as the villain/scapegoat for the crash, with the previously-banished Party being forgiven, and hailed (by the media propaganda machine) as the White Knight riding to the rescue."


The Fed-Rate Hike: the Torpedo is Launched
Hohum's picture

Enough of this dollar stuff.  Let's have an anti-polar vortex article.

GhostOfDiogenes's picture
GhostOfDiogenes (not verified) Dec 16, 2015 9:55 PM

Is that a bunch of brown people, maybe indian (dot as opposed to feather) loading up on a monorail?!?

That is the funniest thing of 2015!

Ness.'s picture

Monorail, monorail!! The Springfield monorail.  What'd I say?  "Monorail".

yogibear's picture

Is that how all the recent H2 visa holding visa holders get to their work shifts in the Disney Parks?

OldPhart's picture

Wouldn't doubt that they have such privileges.  Back in the day we had to ride a bus to the tunnels, then trudge down them to our entry point.  If working Central Foods, then you'd trudge back out of the locker room to the buses and go back where you came from.

RMolineaux's picture

I hope readers are aware that, even though the Chinese yuan is now, or soon will be, part of the SDR basket, it is not one of the six currencies that determine the US dollar index.  That means that the yuan can continue to depreciate without any effect on the reported level of the US dollar.  

PS: Gartman now says to sell all stocks.  I am waiting for Tyler's reply.

JailBanksters's picture

I would hardly call it a Hike.

A Hike is a sharp increase, especially in price or cost.

This is Pharies Phart on top an existing Pharies Phart.

I've had Zitts that were bigger than this.

If people stopped calling it a hike instead of what it really is, the world would be better informed.

OldPhart's picture

So, a same OLD Pharies PHART?

besnook's picture

the market tanks and the dollar loses value. the market goes up and the dollar gets stronger, uh,er,d'oh.

alfbell's picture


USD just got stronger... next, things get worse in EU and more capital flees to USD... USD gets stronger... next, capital starts to hemorrage out of emerging markets next... USD gets stronger... next, commodities continue to drop and capital flees out of commodity based countries... USD gets stronger... next, deleveraging and default begins to occur on a massive level causing a deeper deflationary spiral... USD gets stronger... next, US corp profits crash due to high cost of export and US goes into lockstep with the slowing global economy... next, everything looks black and all capital heads for the only safe haven, the USD.... the USD gets stronger as US cash is king... next, global depression. I don't know what happens next. 

American Psycho's picture

strong dollar means cheaper silver / gold / international assets....long those.

Yen Cross's picture

 The Tylers were caught "off guard", and are running for technical help.

 Who could have imagined Zero hedge would have become such profitable property?

 I certainly hope the Tylers' are steadfast, and continue to expose the TRUTH.

  I'll do my best to support Tyler's.

medium giraffe's picture

ZH is fine dude.  The FED article had +30 million page views in minutes.  There's not much point in building an expensive server cluster with load balancing and failover for a blog that gets pummeled once in a blue moon.  Normal service will resume, reason for outage: 'shit happens'.

DYS's picture

Auto scaling clusters are not expensive when you only pay for what you use in services such as Amazon AWS.

Source: me, cloud architect

Johnny Horscaulk's picture
Johnny Horscaulk (not verified) medium giraffe Dec 17, 2015 5:29 AM

No way it had that many views. Particularly not in minutes.


FreedomGuy's picture

What the actual point is to this and most of the other current economic news is that people invest government news. They no longer in any rational way invest in business news. What the Fed will do, what the Chinese yuan will do, what the next ECB meeting produces, what the 27th Greek bailout looks like...and so on.

What the next iThing does, what retail sales do, the prices of commodities, etc. are secondary or even tertiary. If retail, employment and incomes all suck, bullish! Why? Because the Fed or a central bank will do something. So bad news is bullish and good news which rarely happens is at best neutral. BTW, what was the last unabashed great economic news we had? Really. Show me anything but occasional blips in the economic data. The fact the economy of the U.S. has not completely died is the good news. It is sort of a "It could be worse!" type of sentiment.

All the investing principles I learned in the 1980's and 90's and older principles are out the window.

I applaud you actual traders and wish you well. It takes a lot of courage, skill and maybe some luck. I'd rather play craps or roulette where I know the exact odds and rules. No casino interventions.

Vex's picture

All dollar deonominated emerging market loan sphincters twitched last night, a precursor to cardiac dollar arryhthmia. Get ready for the 9 trillion dollar emerging mnarket USD debt panic and the front running that is already underway. 

bobbydelgreco's picture

Pm loving morons it's  not fiat fiat is a wrinkled 100000 mark bill used to buy shit the 3 trillion  $ made by the Fed is not money you & I will spend it's given to financial markets inflation is only in modiglianis the dollar is fine

joego1's picture

Rates go up and Gold is held in utter contempt of court and sentenced to 40 lashes!

Blood is almost in the street,  must buy silver.....

Salsipuedes's picture

Actually it only depends on whether it´s Merrill or Goldy who wakes up on the right side of the bed. In any case, only the proprietor gets stiffed.

OldPhart's picture

Asked before, bank will let me purchase a minimum $300 in foreign currency with $8 fee.  They'll waive the fee for me.

Would now be a good time to buy rubles and yuan?  Say $150 each?  Just to have something that isn't dollars, but is still paper money for the masses?  I've got AG/AU/PB already, looking for flexibility.

medium giraffe's picture


Today's Euro rally brought to you by Mr Kermit T. Frog.

Quinvarius's picture

No it won't.  The Fed and Treasury will continue to devalue the USD because they have to.  FOREX rates are not set by market forces.

Maestro Maestro's picture

I was wrong.


When I said the Americans would not raise their interest rates, I was totally wrong.  Now it's certain the Americans believe their own lies.  How the Fed could have done this otherwise, and thence remove the possibility of all plausible denial to responsibilty for the economic and financial calamity to ensue?


The Americans are completely mad.


And there's nothing to save us from them. 


Except ourselves.



Arnold's picture

Better than NIRP


EUR = ISIS breeding ground.

Johnny Horscaulk's picture
Johnny Horscaulk (not verified) Dec 17, 2015 6:02 AM

as science, it sure is dismal.

No one doubts that the dollar is still king the issue is how secure the throne is given rotten fundamentals.

They can reassess in a few months and cut back to zirp and kick the can a bit more but isnt more QE inevitable?

Nothing - not a thing the fed has done has helped the real economy - we have the same large banks even more lev'd than in 2007, and stocks and for the most part real estate are artificially inflated. unskilled immigrants flood in, household and federal and municipal and state debt still grow, still importing h1bs and exporting manufacturing and now white collar jobs... The dollar could jump for a while because a small group of bankers and oligarchs can suppress pms and stuff cash into things like farcebook and snapchat but longer term?

The Hedge has covered the assault on the dollars rc status exceptionally well, and has also covered the deficits and debt well.

So why in the fuck would a modest hike premised on horseshit manipulated metrics do more than a temporary boost, at best?

We cant have the poors getting out of debt, of course, but we need to extrnd them more credit for "the economy" to grow so that the banks and billionaires can buy real assets for pennies on the dollar when oil races back up or when negative rates and bail ins are announced because... "The economy" needs it.

What contemptible pseudoscience. The fundamentals are rotten and getting worse. Purchasing power and velocity keep eroding. More people on more benefits with fewer workers making less and less - not everyone can create currency out of thin air. And banks and large corps sitting on hundreds of billions does not help the real economy, just obfuscates the weakness of the frn as china and russia and now turkey and other chip chip away at the frn's rc status, and consumers too busy paying off christmas gifts to worry about getting the latest iCrap once february rolls around.

A short boost - sure why not, theres no 'market' goldman and boa and 'Belgium' cant manipulate - for a while. But winter, most assuredly, is coming.

Fuck Goldman.

And fuck the next round of QE.