The Fed’s decision to leave rates unchanged has seen interest rate volatility drop and high-yielding currencies start to perform well again, economists at ING report.
Fed pause renews interest in the carry trade
Despite the Fed retaining a tightening bias, it seems investors are more interested in reading and trading a Federal Reserve pause. This has seen interest rate volatility drop and triggered renewed demand for high-yielding FX through the carry trade.
We continue to see upside potential for AUD/CNH. This would normally be a weak environment for the Yen as well, meaning that we cannot rule out USD/JPY retesting 152.
US data will determine whether the Dollar can generally hold steady in this carry trade environment or whether weaker US data finally triggers a more meaningful and broad-based Dollar correction.