We Look For A Sub-Consensus NFP & For Fed Hike In Q1 '17 – ING

After two months of bumper non-farm payrolls (NFP) figures, we look for a sub-consensus drop back to 150,000. This may come as a disappointment and prompt markets to push out rate hike expectations, but does a lower NFP number matter for the FOMC anymore? Recent FOMC speakers suggest not.

The FOMC no longer needs to see 180,000+

NFP One thing that most FOMC members appear to be agreed upon is that the economy is at, or at least close to, full employment. As the pool of available labour evaporates, the rate of decline in unemployment has slowed. Job creation need only keep pace with increases in the overall size of the labour force. An increasing number of Fed speakers have said that they would be comfortable with sub-150,000 NFP, most notably Fischer (75,000-150,000).

Markets could be left disappointed by Friday’s NFP, even if the FOMC isn’t.

Two strong months of job creation more than compensate for the rapid decline in April and May. A third month would be too good to be true, if the theory above is correct. Our FX team has for some time noted that markets have become more sensitive to wage surprises relative to NFP. But it seems markets may not have fully adjusted to the FOMC’s new NFP thinking, and an excessively low figure this week would prompt some Fed re-pricing (at least for September). This disparity between market and Fed perceptions could be a vulnerability when the FOMC comes to hike rates again (note: May’s poor NFP took a potentially viable June hike off the table, albeit ignoring Brexit) – expect more Fedspeak on this subject.

Wages are now key for the FOMC – and may be finally turning a corner.

Despite a remarkable labour market recovery since the crisis, wage growth has remained low. But according to Atlanta Fed measures, those workers moving jobs are starting to see pretty sizeable wage increases (4.2% YoY). Historically, this has a tight relationship with overall pay (with a lag) – is this the first sign of a more pronounced upturn in wages? Going by recent comments, Chair Yellen and other voting members are becoming more optimistic on wages.

FOMC to wait for political uncertainties to pass – we expect a 1Q17 hike.

If the FOMC is indeed in no rush, then it makes sense to wait for the US election to pass. There are also potential stumbling blocks in the form of the Italian Referendum and increased Brexit-related headlines. If these events pass without tightening financial conditions or hitting economic activity, we think the FOMC will hike rates in either December or, more likely, early next year.

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Time To Trade FX Crosses: Here Is How To Position? – Morgan Stanley

We underline our bullish calls for the EUR and CHF based on our assessment of the capability of European financial institutions exporting capital.

The SNB’s continued intervention adds to EUR support,explaining why downbeat EMU inflation data had a very limited impact on the EUR.

Our bullish GBP case is more of tactical nature based on better UK data readings. Upcoming PMI data should show a bounce back. Overnight saw UK August consumer confidence bouncing back from -12to -7.

Against long EUR, CHF and GBP positions we trade KRW, AUD and CAD shorts. Copper prices easing back to June levels and iron ore rolling over will support these trades too.

In its strategic portfolio, Morgan Stanley maintains a limit order to buy EUR/AUD*, and as its trade of the week, MS recommends buying EUR/CAD.

*This trade is recorded and tracked in eFXplus Orders

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AUD/USD: What cannot go up must come down? Critical 7 days for the Aussie [Video]

The Australian dollar had positive prospects and some solid data but was not able to advance above resistance. Is it vulnerable to falls now? A lot depends on the RBA decision and the accompanying statement, and before this event, we face a string of top-tier data not only from Australia but also from China. We examine the big events as well as AUD/USD support and resistance lines.

Special video about a busy week for the A$:

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How Best To Trade USD Strength – BNPP

The macroeconomic case for a near-term rate hike has strengthened since Friday (26 August):

1- Pivotal speeches and comments from both Fed Chair Yellen and Vice Chair Fischer have signalled a more compelling case to hike.

2- Friday’s release of the August employment report (2 September) will be critical; we expect an above-consensus print of 215K. The three-month moving average should move to 254K from 150K at the last FOMC meeting.

3- External risk factors have diminished, and we expect Q3 US GDP growth to accelerate to 3.0% (SAAR) from 1.2% in Q2. 

4- This week’s Conference Board’s report of consumer confidence for August showed that the labour differential index, which measures plentiful minus hard-to-get jobs, rose its highest level since January 2008, a signal of strength for the upcoming August employment report.

Markets are only pricing a 35% probability (extracted from Fed funds futures contracts) of a September hike. Market adjustment to fully price a hike will encourage greater US front-end yield support, as signalled by our rate strategists’ forecast for a move in 2-year sovereign yields to 90bp by the year end and 125bp by the end of 2017 from the current 80bp.

q3-.PNG

We favour capitalising on the scepticism surrounding a Fed rate hike. Markets are short the USD and momentum is turning.

BNP Paribas Positioning Analysis reports a net short USD exposure of -18, close to the largest USD short exposure during 2016 (-21); the latter was a three and a half year low. This positioning likely represents the market’s scepticism that the Fed will deliver a hike, given the frequent disappointment, despite apparently clear rhetoric. In contrast, the market is longest the JPY (+24) and the AUD (+20) signalling that these currencies are vulnerable if the Fed delivers a hike in line with our expectations (Chart 2).

 Sensing the opportunity, we are committed to our bullish-USD strategies and reiterate these views. Against renewed USD strength, we believe the best opportunities are in selling the AUD and JPY.

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Play USD Long For Now But 'Be Careful Not To Overstay Your Welcome' – CIBC

A disappointing opening half of the year left US yields looking less juicy to foreign buyers, taking the US dollar moderately weaker in the process. Sterling has been the only exception to that trend among the G10 currencies. Soft growth temporarily took the FOMC off the tightening warpath, pulling long rates down in the process. Without the attraction of rising yields, the US dollar tends to struggle given the net outflows associated with America’s trade and current account deficits. Central banks in other developed economies have tried to ease policy with a view to weakening their respective currencies against the dollar, but have found little success thus far in 2016. Indeed, Fed policy has dictated the majority of currency developments, with the exception of Brexit’s hit to the pound.

Looking ahead, improving US economic performance should buttress both Fed hike expectations and the US dollar over the balance of 2016. A hike we see before year end isn’t fully priced in, and the first hike is likely to cement expectations for more of the same in 2017.

With the market keying off of yield differentials, the greenback is likely to gain against just about every G10 currency in the coming four months. Expect that trend to reverse come 2017. A December rate hike from the Fed could see markets initially price in too aggressive a rate path for the ensuing year. With economic activity and inflation likely only able to justify two rate increases in 2017, the greenback will underperform against a variety of developed and emerging market currencies.

q29.PNG

Monetary and/or fiscal stimulus in America’s trading partners should also be kicking in, reducing the pessimism on those markets. As we’ve seen this year, pauses in Fed tightening allows the weight of the US trade and current account deficit to take the dollar weaker against surplus counterparts like the Eurozone and Japan.

Overall, play the US dollar from the long side for now, but be careful not to overstay your welcome, as greenback gains should prove short lived.

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Play USD Long For Now But 'Be Careful Not To Overstay Your Welcome' – CIBC

A disappointing opening half of the year left US yields looking less juicy to foreign buyers, taking the US dollar moderately weaker in the process. Sterling has been the only exception to that trend among the G10 currencies. Soft growth temporarily took the FOMC off the tightening warpath, pulling long rates down in the process. Without the attraction of rising yields, the US dollar tends to struggle given the net outflows associated with America’s trade and current account deficits. Central banks in other developed economies have tried to ease policy with a view to weakening their respective currencies against the dollar, but have found little success thus far in 2016. Indeed, Fed policy has dictated the majority of currency developments, with the exception of Brexit’s hit to the pound.

Looking ahead, improving US economic performance should buttress both Fed hike expectations and the US dollar over the balance of 2016. A hike we see before year end isn’t fully priced in, and the first hike is likely to cement expectations for more of the same in 2017.

With the market keying off of yield differentials, the greenback is likely to gain against just about every G10 currency in the coming four months. Expect that trend to reverse come 2017. A December rate hike from the Fed could see markets initially price in too aggressive a rate path for the ensuing year. With economic activity and inflation likely only able to justify two rate increases in 2017, the greenback will underperform against a variety of developed and emerging market currencies.

q29.PNG

Monetary and/or fiscal stimulus in America’s trading partners should also be kicking in, reducing the pessimism on those markets. As we’ve seen this year, pauses in Fed tightening allows the weight of the US trade and current account deficit to take the dollar weaker against surplus counterparts like the Eurozone and Japan.

Overall, play the US dollar from the long side for now, but be careful not to overstay your welcome, as greenback gains should prove short lived.

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Two Consensus Long Trades (Gold, TYs) At Risk: Implications For USD – BofA Merrill

Two consensus long trades test key inflection points Two trades the market has been long this year are TY bond futures and gold. Both are forming descending triangle top patterns by testing major support levels this week.

Gold prices pierce support at 1,315 and enter pre-Brexit levels

Tuesday’s price action led to a daily close below horizontal trend-line support and a new two-month low. The red arrow approximates a measured move target based on the descending triangle top. The break of support suggests gold prices may correct and target 1,250, or the 38.2% retracement of the YTD rally. A deeper retracement could target the 50% retracement at 1,210. Year to date, we see additional support at the trend line and bottom of the Ichimoku cloud from 1,290-1,300.

q26.PNG

US 10yr Bond future technical detail

Post Jackson Hole, price action led TY futures to test support at a trend line connecting the January and May lows (red line). It also formed a descending triangle top pattern by closing below 131-27, a bearish implication. However, trend-line support held as markets rallied back on Monday. Trend lines like this are often associated with levels where market participants accumulate (buy) the market. Another bond sell off like Friday, possibly fueled by a strong NFP report, could result in a break of support at 131-12 and the recent low of 131-09. This would put new longs in the red and may trigger a sell off to the triangle target of 130 to 129-18. This also equates to a 50% Fibonacci retracement of the YTD rally. A decline through the RSI adjusted oversold level would add conviction to a decline.

q27.PNG

Breakdowns favor tactical shorts in TY, gold and long $

A daily close below 131-09 in TYs could be sold with a stop at 131-27 and target of 130. A daily close below 1,315 in gold could be sold with a stop at 1,335 and target of 1,250. If these supports break, we would also favour long USD vs DM.

US Dollar Index (DXY) rally would continue The rally from trend-line support is approaching resistance at the 200d SMA at 96.30. A strong NFP number that could accelerate the bond and gold decline would also accelerate the rally in USD, especially against DM currencies in the DXY index.

q28.PNG

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CAD holding strong despite oil slipping under $45

The prices of oil remain under pressure. WTI Crude Oil is now trading under the round level of $45, in a fall of nearly 3% and extending downtrend that was seen in recent days. August was a very volatile month for the black gold: it roughly ranged between $39 to $49.

The Canadian dollar is losing some ground, but things could have been worse. USD/CAD is trading higher, at 1.3130, but this rise of around 30 pips on the day is telling: the C$ is looking good.

One of the reasons for this resilience is the GDP report released in Canada earlier. The northern nation is unique in releasing its GDP data on a monthly basis. This time, we had the figure for June, concluding the second quarter. While the data was mixed, the last piece of data may have the final word: output advanced by 0.6% in June, significantly better than 0.4% expected and serving as a rebound from the fall of 0.6% in May.

The Canadian economy still has issues, but a positive month and expectations for a better second half look positive for the loonie. Also in the US, many expect the second half to be better than the first one. Today’s key data piece from the US was the ADP private sector report, which came in line with expectations: 177K jobs gained in August.

USDCAD August 31 2016 oil down GDP up

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What Would It Take For USD/JPY To Break Above 104-105 Resistance Area? – BTMU

The yen continues to trade on the on the back foot following Jackson Hole which has resulted in USD/JPY rising back above its 55-day moving average at just below the 103.00-level for the first time since the end of last month.

The next key resistance area for the pair comes in between the 104.00 and 105.00-levels where the downtrend line from the start of February is located and the top of the Ichimoku cloud. Facing such strong technical resistance, a stronger trigger will likely be required for yen weakness to extend much further in the near-term.

The upcoming BoJ & Fed policy meetings which are both scheduled to take place on the 21st September are viewed as a potential trigger for further USD/JPY upside in the near-term. If the BoJ eases monetary policy on the same day as the Fed tightens it could provide a more material uplift for USD/JPY even if it proves only temporary.

The market’s focus on the BoJ’s upcoming policy meeting was heightened overnight following comments from BoJ board member Funo. He stated that the BoJ decided to have a comprehensive assessment as uncertainties over their price goal heighten, and the review will mull how to get to the CPI target as soon as possible. He still sees Japan reaching its 2% CPI target in FY2017 although acknowledged that the risks to the outlook are large. He does not expect to see any debate at the BoJ’s upcoming policy meeting regarding changing the CPI target to 1% or 3%. Interestingly, he stated that the BoJ could theoretically purchase foreign bonds, but stressed that it was hard in reality and could not happen soon. Other G20 members are will not support more direct action from the BoJ to weaken the yen.

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Too Early To Give-Up On Sterling Shorts – SocGen

Short GBP/USD still works for me, and will until the whole gilt curve’s moving higher. At the moment though, publicly wondering when it’ll be safe to sell gilts causes people to question my sanity, so I guess it’s still too early for that, let alone giving up on sterling shorts.*

Brexit too has become more of a gradual process. There is a special UK cabinet meeting being convened today to discuss the Brexit agenda with the key issue being whether to continue with Single Market access. This has followed growing speculation that formal Brexit negotiations could commence next spring.

*SocGen maintains a short GBP/USD from 1.3750 targeting a move to 1.25.

*This trade is recorded and tracked in eFXplus Orders.

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