Video Length: 00:07:08

Talking Points:

- High yielding and emerging market currencies in focus today.

- Base case is for no rate hike, lower rate guidance.

- See the September forex seasonality report.

The Federal Reserve did what was largely expected of it yesterday, keeping its main rate on hold at 0.25% and announcing no substantive changes to its policy tool kit. However, on the back of concerns surrounding global growth, inflation, and financial market conditions - notably tighter since the swell in Chinese-borne volatility - the Fed reduced its path of future interest rate expectations, known as the glide path, vis-a-vis its (in)famous "dot plot."

Indeed, the reduction in interest rate expectations proved to be a significant detractor for the US Dollar, a view iterated and reiterated several times ahead of the meeting (here, here, and here). If our view that foreign-borne risks had boiled over to the point that the Fed couldn't act was correct - be it due to the oil glut and its drag on inflation or the slow meltdown in emerging markets - then it probably means that the Fed might not act at all in 2015.

It's difficult to envision an environment where slowing global growth, a strong US Dollar, and the litany of factors listed above resolve themselves in the last few weeks of the year, at least enough to give the Fed confidence to raise rates. In fact, there may be new dovish winds blowing at the Fed: in what is a very dovish protest, at least one FOMC member indicated his/her expectation for the main rate in 2015 and 2016 would be negative at -0.10%. This is a new variable to the equation, and it further complicates the efforts to find unity among FOMC members to support a rate hike this year.

Markets are taking notice, and have already begun to reduce expectations of a rate move this year - the USDOLLAR Index's sharp decline again this morning captures the essence of this undertaking. The implied probability of a rate hike in October, per the Fed funds futures contract, dropped from near 45% yesterday to 18% today; for December, from above 60% yesterday to 26% today. The viability of a rate hike in Q1'16 (at any point over the next six-months) may be in question if US economic data sputters over the next few weeks.

See the above video for why the FOMC's decision bodes poorly for risk assets, and why the moves we're seeing in AUDUSD, NZDUSD, USDCAD, and even EURUSD, amount to short covering in the present; as well as technical considerations in USDJPY, the S&P 500, EURNZD, EURGBP, AUDNZD, and the USDOLLAR Index.