On Monday we showed you Citi’s August NFP dot plot and outlined the bank’s suggestion that Friday’s number could disappoint handily to the downside if history is any guide. Which, we also noted, would be just fine for the Fed as it would preserve still more “optionality” and effectively give them two months of breathing room, which is critical because hiking into an uncertain election is a dicey proposition.
One problem is of course the dollar which is sitting at a three-week high. A hike risks creating another taper tantrum scenario at a time when EM flows may have gotten ahead of themselves.
Well you can count BNP among those who are expecting more USD strength and a veritable blockbuster on the payrolls front. Here’s some color from a note out Tuesday (via Bloomberg):
“USD Has More Room to Run as Focus Shifts to U.S. Payrolls: BNP. BNP Paribas expects U.S. data this week to reinforce rate hike expectations with scope for the dollar to gain ground as U.S. rates adjust higher. BNP position metrics suggest USD positioning was short heading into Yellen’s speech last week, particularly vs JPY and AUD. BNP economists expect Friday’s employment report to show a payroll growth of 215k, which will put 3-month average job growth at a ’’powerful pace’ of 254k. Fed Vice Chair Fischer, interviewed on TV at 10:30GMT, likely to be asked to repeat his interpretation of Yellen’s Friday speech.”
Which he was and which he essentially did (more here).
Here’s a bit of color from SocGen about this year’s “idiosyncratic FX market:”
“The performance of the dollar this year has been tied to shifting market expectations about Fed rate policy (Graph 2). The nearly doubling of crude oil prices between January and June this year also depressed the dollar relative to unpegged commodity currencies. Finally, the UK EU referendum in June gave a notable though short-term boost to the dollar against European currencies. Brazil rose as a cheapened currency was buoyed by improved expectations as the Rousseff administration was edged out and the ongoing growth contraction appeared to peter out. The global search for yield also helped BRL given its double digit short-term rates. Japan on the other hand saw the yen appreciate as Japanese inflation waned, the BoJ’s negative interest rate policy elicited vocal criticism from local banks, and the market sought to test the BoJ. The yen’s appreciation has meant that the classic G10 carry strategy has not worked this year at all.”
And all of the above means one simple thing: this is just another area of the market where the “smart money” is no longer “smart.”