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Investors stand to benefit from Czech koruna revaluation versus the euro and also from positive carry, while waiting for the central bank to remove the exchange rate floor. Go long CZK / short euro. Economic fundamentals and policy divergence between Poland and Hungary point to a stronger zloty versus the forint. Go long PLN / short HUF.
In this Weekly Report, we will discuss the outlook for BoJ and U.S. Federal Reserve policies after these meetings and the implications for bond markets in both countries.
Although the Fed is on track to hike rates in December, the credit cycle is far more advanced than the monetary tightening cycle. Position for a December rate hike by being short duration and in curve flatteners. Weakening corporate balance sheet fundamentals mean the long-term trend is for corporate spreads to widen.
The monetary policy sweet spot won't end for equities until interest rates climb above the equilibrium rate - that won't happen even with a rate hike in December. But even though equity markets will continue to cheer a go-slow Fed in the short run, the sustainability of these gains will be dubious until a healthier environment for earnings takes hold.
Stocks are flirting with new highs, courtesy of a gradualist Fed and the reduced threat of incremental near-term U.S. dollar strength.
The Fed delivered a "hawkish hold." Remain tactically short U.S. equities and position for a stronger dollar. Meanwhile, the Bank of Japan laid out a radical overhaul: The new framework is consistent with price-level targeting and debt monetization. Long-term investors should position for a weaker yen and higher Japanese equity prices. Also, stay structurally underweight Japanese bonds: Zero is a resting point, rather than a final destination, for 10-year JGB yields.