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5 Feb 2016
USD: Whether to buy or a sell? - Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that investors are hoping that this afternoon’s release of the US January labour report will shine light on the debate over whether the Federal Reserve jumped the gun by hiking interest rates in December.
Key Quotes
“The strength of new hiring in the December payrolls report did appear to lend support to the Fed’s decision and in 2015 as a whole the US posted the second best year of job gains since 1999. That said, while few analysts would have any contention with the notion that the US economy has been successful at creating jobs, there is far less uncertainty about the outlook for inflation. We would argue that this was already the case before the FOMC hiked rates in December and we would expect that this will still be a major concern after the release of this afternoon’s January Labour report.
Despite the drop in the unemployment rate in recent years, US earnings growth has been unable to return to pre-crisis levels. This is in tune with other inflation indicators which continue to suggest that price pressures in the US remain moderate.
We have argued many times before that USD strength has likely been doing some heavy lifting in terms of keeping US inflation pressures contained. This week three Fed officials have referred to USD strength in relation to overall monetary conditions.
Given the predominately dovish remarks from the Fed this week, in addition to the spate of weaker data, it is not difficult to explain why expectations regarding the pace of Fed rate hikes has been hit and why the USD has softened. The question now is whether the USD has much further to fall.
The USD is not a high risk currency and we would expect the positive pick up on US interest rates to limit the extent to which the USD will be sold in favour of the EUR or the BoJ in the coming months.
In summary the repricing of market expectations about the pace of future Fed rate hikes can be easily interpreted as USD negative. However, it is not so easy to determine what to buy in lieu of USDs given the far more dovish position of all the other major central banks. As a consequence we expect the current bout of position adjustment in the USD as likely to run out of steam and expect that the USD will still be higher vs. the EUR and the JPY on a 12 mth view. This, however, assumes that the next policy move from the Fed will still be a rate hike. On any other turn of events, USD downside is likely to persist.”
Key Quotes
“The strength of new hiring in the December payrolls report did appear to lend support to the Fed’s decision and in 2015 as a whole the US posted the second best year of job gains since 1999. That said, while few analysts would have any contention with the notion that the US economy has been successful at creating jobs, there is far less uncertainty about the outlook for inflation. We would argue that this was already the case before the FOMC hiked rates in December and we would expect that this will still be a major concern after the release of this afternoon’s January Labour report.
Despite the drop in the unemployment rate in recent years, US earnings growth has been unable to return to pre-crisis levels. This is in tune with other inflation indicators which continue to suggest that price pressures in the US remain moderate.
We have argued many times before that USD strength has likely been doing some heavy lifting in terms of keeping US inflation pressures contained. This week three Fed officials have referred to USD strength in relation to overall monetary conditions.
Given the predominately dovish remarks from the Fed this week, in addition to the spate of weaker data, it is not difficult to explain why expectations regarding the pace of Fed rate hikes has been hit and why the USD has softened. The question now is whether the USD has much further to fall.
The USD is not a high risk currency and we would expect the positive pick up on US interest rates to limit the extent to which the USD will be sold in favour of the EUR or the BoJ in the coming months.
In summary the repricing of market expectations about the pace of future Fed rate hikes can be easily interpreted as USD negative. However, it is not so easy to determine what to buy in lieu of USDs given the far more dovish position of all the other major central banks. As a consequence we expect the current bout of position adjustment in the USD as likely to run out of steam and expect that the USD will still be higher vs. the EUR and the JPY on a 12 mth view. This, however, assumes that the next policy move from the Fed will still be a rate hike. On any other turn of events, USD downside is likely to persist.”