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.
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.
Copyright © 2016 BNP Paribas™, eFXnews™
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