Fed repricing may be set to make waves, UBS says

The rapid shift in near-term rate hike expectations Stateside saw only relatively small moves in FX markets and bonds continued to trade within their recent trading ranges, but that might be about to change, UBS told clients.

"In our year-ahead top macro trades publication, we advocated trading for improving global growth, but pairing this with positions that would perform well if the pick-up in core inflation remains modest. The market has so far traded consistently and our views have not changed, but risks to our views are now emerging," UBS strategist Daniel Waldman said.

However, for a "significant shift to occur", especialy when looking at market pricing two to three years out, many factors needed to coincide.

Admittedly, Waldman's list of factors was rather long: the 'hard' economic data needed to converge with survey readings, European and China growth momentum needed to be sustained, equities need to remain resilient as policy makers adjusted their tightening pace, commodities need to stay robust, and European political risks need to diminish leaving room for a more hawkish ECB.

Running contrary to the above, he said that Fed re-pricing might have opened up some opportunities among the growth-sensitive currencies; namely, the Australian dollar, the New Zealand dollar and the Chilean peso.

All of those had been restrained by higher yields on US government bonds.

"We still see the longer-term path of EUR/USD as being to the upside, though political risk likely needs to clear for this to happen. In US rates, we continue to favour flatteners."