Japanese yen will outperform if the Fed does not hike, HSBC says

Contrary to their standard procedure, ahead of today´s meeting of the US Federal Reserve FX analysts at HSBC on Tuesday pre-released a research note detailing what in their opinion might be the three possible scenarios which would unfold following the interest rate announcement.

Typically, they prepare three such 'reaction' notes and then, once the scenario has become known, release only the one which applies. The scenarios were:

1. Dovish hike - the most likely outcome

It would reinforce the broker´s view that the US dollar was set to weaken versus the remainder of the G10 currencies, following the historical pattern in such situations.

Questions will arise as to whether the Fed tightening cycle might end early too.

Emerging market currencies would have "one less factor to worry about", which would dovetail with their thesis that weakness in EM FX would be less "pronounced" in 2016.

In Asia, HSBC said that it would prefer the Indonesian rupiah and Indian rupee.

2. Hawkish hike - not priced at all

If a rate hike is not accompanied by "dovish overtones" that would likely create a 'risk-off' mood, HSBC said.

The currencies of those emerging market countries who are also facing political risks would be especially vulnerable.

"In the end, a USD-rally may sow the seeds of its own destruction as it would make delivery of additional ratehikes increasingly unnecessary. Short-term, however, we would not fight the USD-rally."

3. No hike - a risk-off event

"This outcome has the least clear market reaction," analysts David Bloom, Paul Mackel, Daragh Maher, Murat Toprak and Clyde Wardle claimed in a research note sent to clients.

Nevertheless, they argued it would flag worries about the economic expansion both Stateside and globally.

The Japanese yen would 'outperform' but it would also prolong the agony for EM FX.

Sterling would "languish", with a delay from the Bank of England then being anticipated alongside the Fed´s.