What Asset Categories Gain From The Fed Decision?

The much anticipated Fed decision following the September 16-17 meeting of FOMC resulted in a 9-1 vote decision against hiking rates. The doves won out in this round, and the lone dissenting hawk seeking a 0.25% rate hike will have to wait until the next round. Tremendous anxiety dogged the markets leading up to the September 17 decision by Janet Yellen, Stanley Fischer and the FOMC. While percentages varied between economic analysts and traders, there was a 25% – 30% perception that rates would be increased in September, with economists more evenly split at 50-50. Now that the decision has been made to retain rates at the 0% – 0.25% range how does this impact on asset categories?

Currency traders have been embroiled in a frenzy of buying and selling with emerging market currencies seeing the most activity of all. Typically what happens in the run-up to a rate hike is that the emerging market currencies get dumped en masse. For days before the decision was made, currency traders were buying up emerging market currencies at a furious pace. The South African Rand, the Brazilian real, the Russian ruble, the Venezuelan bolivar, and scores of other EM currencies gained ground. After the decision, they continued to rally but soon gave up all gains. It is particularly curious why this happened.

Currency markets like equities markets are driven by sentiment. While market anxiety was quelled after the Fed decision, speculators are fully aware of what Yellen said in comments following the announcement. She did not rule out the likelihood of a rate hike in October, November or December. This means that short-term market anxiety may have abated, but the likelihood of a rate hike remains. The immediate impact of a rate hike on the USD is clear: the greenback strengthens and emerging market currencies plummet. Therefore what we have seen recently is a run on the dollar with put options left, right and centre. But overall, the greenback remains the currency of choice moving forward over the long-term.