USD Funding Shifts as Market Prices in Tightening Monetary Conditions
The recent Federal Open Market Committee (FOMC) meeting in September has brought about a significant shift in USD funding, according to Goldman Sachs.
Going into the FOMC meeting, many market participants, including Goldman Sachs itself, expected that clients would fund short in USD and go against currencies like JPY, EUR, Gold, and also take on a pro-cyclical tilt with EM longs.
However, the actual outcome was different from expectations. The Fed's reaction function has been priced in by the market to actually tighten financial conditions in response to inflation, which is contrary to initial views that USD funding would be marked by debasement.
As a result, there has been a meaningful shift in everyone's portfolio, with funding now moving from USD into a mixture of EUR, GBP, AUD, and CAD.