Fed Interest Rate Decision: 'Hard To Do A Dovish Hike' Bottom Line For FX Nomura

Good morning,

Asian equities update: Nikkei 225 18961.83 (+2.13%), Hang Seng 21750.30 (+2.26%), CSI 300 3708.42 (+0.38%).

$NZD, $AUD, and $EUR are expected to be the most active majors vs $USD with 1W implied volatility at 15.67, 14.49, and 13.78 respectively.

New Zealand Finance Minister English: NZ exporters would prefer weaker Kiwi Dollar, NZ exporters would prefer Kiwi in "mid to low 60s".Exporters prefer relatively stable exchange rate, May be case for lower RBNZ rates if drought bites

US Equities: DJIA 17587.97 (+1.26%); S&P500 2050.04 (+1.39%); NASDAQ 5018.484 (+1.34%).

GBP BoE's Cunliffe: UK is "growing robustly"."Next move is up". Fed rate rise would be "good sign" of US strength.

CAD BoC's Poloz: Financial system is resilient to oil price shock; policy rate divergence should be expected. Underlying adjustments from lower oil to take years; Canada economy will diverge from US economy.First line of defense in housing is underwriting; Canada banks have strong underwriting culture. 2016 should see more constructive housing evolution; he sees housing market in slower growth path.sees some movement in CDN bond markets from any US hike; he sees higher longterm CDN yields from possible Fed hike.

In a note today, Nomura discusses how the Fed will communicate tomorrow. "We think dots will come down, although more so in 2017 and 2018, than in 2016. In the past, dots moving lower have been bullish for rates and negative for the dollar. But this time may be different. We are talking about actual liftoff, and the levels of dots should start to matter more and more (vs changes) We don’t think 2016 Eurodollar contracts have any real room to rally, and even for 2017 and 2018 the potential seems fairly limited. In other words, it will be hard to deliver a dovish hike, and rates, especially 2016, may indeed sell off. In addition to the signal on future rates, ‘risk sentiment’ is a key parameter. Risk assets have been stabilizing on Tuesday and may benefit from reduction in uncertainty tomorrow," Nomura projects. "We don’t think the Fed will be able to generate a hike that is sufficiently dovish to move rate expectations down meaningfully. This is almost certainly the case for 2016 expectations, given current pricing. For 2017 and 2018 expectations, it is more tricky; median dots may move down meaningfully. But even for the out years, we do not expect a market impact similar to previous dot changes (i.e., market rates will be less sensitive to dot changes, and respond more to levels).What may end up being the crucial market driver is the “risk sentiment” effect. On this front, there is some evidence that risk aversion may have climaxed in the near term. We also note that there has been a pattern of relaxation around important Fed events in the past, and this could be the case again. If the Fed delivers a neutral hike, it may indeed be supportive for risk assets in the near term, and we could see a divergence between USD/G3 (higher) and USD/EM (lower)," Nomura argues.

Great quote from Janjuah on oil. "Saudi Arabia can stay irrational longer than rest in market can stay solvent”.

The Federal Reserve should consider using negative rates to counter the next serious downturn, said former chairman Ben Bernanke in an interview with MarketWatch. “I think negative rates are something the Fed will and probably should consider if the situation arises,” Bernanke said. Former Fed Vice Chairman Alan Blinder urged the Fed during the financial crisis to set negative interest rates for overnight deposits essentially charging banks a fee to park funds at the central bank. Blinder argued this would force banks to find more productive uses for the money.

The eurozone economy saw a solid end to 2015, with robust growth leading employers to take on extra staff at the fastest rate for just over fourandahalf years. Output prices meanwhile continued to fall. The Markit Eurozone PMI® dipped from 54.2 in November to 54.0 in December according to the preliminary ‘flash’ reading, but remained well above the 50.0 level. The expansion seen in December was sufficient to complete the strongest quarter of growth recorded by the survey for fourandahalf years.

Manufacturing output rose at the fastest rate in 20 months, and outpaced the expansion in services activity for the first time in over a year.

• Major news for today: FOMC Interest Rate decision, US Housing Starts, US Industrial Production, US Manufcturing PMI.

Have a great day!