Repricing in FFR on dovish Fed Speak // Are markets done pricing geopolitical risk premium?

"Mental Resilience comes from training the mind day in and day out"

Price action:

After the initial sell off in risk assets into the Asia open yesterday, markets reversed overnight on Fed Speak. Fed's Jefferson echoed the comments from Fed's Mary Daly last week wherein the recent rise in long term yields has tightened financial conditions and done part of the job for Federal Reserve. The FFR saw repricing - the market is now pricing in a 13% probability of a rate hike as against 27.10% on Oct 6. The Dec 24 pricing shifted 17 bps lower with market pricing shifting from 4.72% on Friday to 4.55% as at close of yesterday. The move lower in UST yields saw USD reverse gains into the close.

With Geopolitical risks lurking in the background after the surprise attacks by Hamas on Israel, the USD reversal came as a surprise. It is too early to call how the events unfold in the next few days and weeks and does the recent conflict escalate into a more broader conflict. So far price action suggests that markets are not pricing the recent turmoil extend into a broader conflict or it could just mean a long USD position wash off.

Crude Oil prices are 1$ lower in today's trading after closing at 88.60 levels yesterday.

We have a couple of Fed speak lined up for today as well which include Bostic, Waller, Kashkari and Daly.

I don't like chasing the USD momentum lower as the geopolitical situation remains fluid and would prefer to trade the range.

Few Observations:

Price range in EURUSD since the start of the month is seen between 1.0450 - 1.0600 while GBPUSD has seen larger price moves between 1.2030 - 1.2160. USDJPY has been capped at 150.00 handle after the intervention seen on Oct 3. AUDUSD briefly broke the 0.6360 - 0.6500 range to trade a low of 0.6282 but is back to trading in the earlier 0.6360 - 0.6500 range. CAD has clearly outperformed with USDCAD seen lower from 1.3785 to 1.3570 following the strong employment report.

On the domestic front, USDINR continues to be range bound between 83.15 - 83.30 and action in 1Y forwards is fairly muted around the 1.80%. India 10Y yields are holding on to the gains after the mention of OMO in the Oct Policy at 7.37%. Liquidity turned to neutral and as on Sep 22, durable liquidity stood at Inr 252K. 1Y OIS opened at 7.01% (- 5 bps ) on the day and 5Y OIS opened at 6.84% (-7 bps).

That's the wrap, a little delayed though...

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