LONG USD VS JPY, EUR, GBP: HAWISK FED BULLARD - FED FUNDS RALLY
Updated
Bullard is the lone Fed official forecasting just one additional rate increase, and expects modest growth over the next two and a half years. But he reiterated Tuesday he's not expecting the economy to head south. However, did go out of his way to mention a relatively dovish point "We Have Some Ammunition if We Need it During Next Recession". Nonetheless he remained hawkish net on the margin, reiterating FED Georges hawkish comments regarding the labour market "About as Good as It's Ever Been", whilst using the June NFP print to flatten any questions regarding the low May print saying "Strong June Jobs Gains Showed May Report Was 'An Anomaly'". Similarly Bullard continued with Georges sentiment of the US's post-brexit robustness stating that the "Market Reaction to Brexit Shock Was 'Satisfactory,' 'Orderly'" - and infact surprisingly pushed this hawkish brexit sentiment on to new levels of "Ultimately the Brexit Impact on U.S. Economy Will be 'Close to Zero'". This is perhaps the most hawkish/ upbeat statement i have heard form a key Fed member since the decision which is positive given Bullard's naturally dovish stance.
Bullard also stressed the need for a solid US Fiscal package to boost demand, where i have to say fiscal stimulus has almost gone forgotten about in the last 7-years post crash, given the dominance of the central banks, quoting "U.S. Badly Needs Fiscal Agenda for Boosting Economic Growth".
Once again todays "FED speaker tracker" continues to add to my long $ view in the medium term. Today already we have seen front end rates continue their aggressive recovery this week, with the fed funds rate implied 25bps hike probability now trading for Sept/ Nov at a whopping 18% vs 11.7%Mon, with Dec trading at 36.3% vs 29.2%Mon.
10y UST (TNX) rates trade up another 4% today after a 5% gain yesterday, whilst 30yrs trade 3% up on the day (TNY) - as global risk rallies. Whilst USD is trading a little weaker in the immediate term as it readjusts lower for risk-on USD selling, long USD/ DXY is my medium term view as we continue to see the US FOMC Rate curve aggressively steepen, which is likely to continue for the next week at least - steeper implied curve means hike is more likely - more likely or realised hikes = increased (in the medium-term) dollar strength. Further, we expect dovish/ easing BOJ BOE ECB over the same period, this monetary policy divergence compounds the long $ view against its 3 biggest crosses (hence the long DXY expression)
Medium term trading strategy:
1. The best expression of this medium term USD view is long DXY - as above I hold 8/10 conviction views for a number of the heavily weighted USD basket crosses based largely on likely monetary policy divergence in the medium term (FOMC Hiking whilst BOE, BOJ & ECB ease/ cut) e.g. LONG USDJPY @104 - 106.3TP1 109.5TP2; SHORT EURUSD @1.11 - 109.3TP1 107.5TP2; GBPUSD @1.34 - 131.2TP1 128.5TP2
Bullard also stressed the need for a solid US Fiscal package to boost demand, where i have to say fiscal stimulus has almost gone forgotten about in the last 7-years post crash, given the dominance of the central banks, quoting "U.S. Badly Needs Fiscal Agenda for Boosting Economic Growth".
Once again todays "FED speaker tracker" continues to add to my long $ view in the medium term. Today already we have seen front end rates continue their aggressive recovery this week, with the fed funds rate implied 25bps hike probability now trading for Sept/ Nov at a whopping 18% vs 11.7%Mon, with Dec trading at 36.3% vs 29.2%Mon.
10y UST (TNX) rates trade up another 4% today after a 5% gain yesterday, whilst 30yrs trade 3% up on the day (TNY) - as global risk rallies. Whilst USD is trading a little weaker in the immediate term as it readjusts lower for risk-on USD selling, long USD/ DXY is my medium term view as we continue to see the US FOMC Rate curve aggressively steepen, which is likely to continue for the next week at least - steeper implied curve means hike is more likely - more likely or realised hikes = increased (in the medium-term) dollar strength. Further, we expect dovish/ easing BOJ BOE ECB over the same period, this monetary policy divergence compounds the long $ view against its 3 biggest crosses (hence the long DXY expression)
Medium term trading strategy:
1. The best expression of this medium term USD view is long DXY - as above I hold 8/10 conviction views for a number of the heavily weighted USD basket crosses based largely on likely monetary policy divergence in the medium term (FOMC Hiking whilst BOE, BOJ & ECB ease/ cut) e.g. LONG USDJPY @104 - 106.3TP1 109.5TP2; SHORT EURUSD @1.11 - 109.3TP1 107.5TP2; GBPUSD @1.34 - 131.2TP1 128.5TP2
Note
FED Bullard Speech Highlights:-Fed's Bullard: We Have Some Ammunition if We Need it During Next Recession
-Fed's Bullard: Nothing Monetary Policy Can Do to Change the Productivity Outlook
-Fed's Bullard: Eventually Expect General Purpose Technology to Translate Into Workplace Productivity
-Fed's Bullard: Labor-Force Growth Likely to Remain Low
-Fed's Bullard: Labor Market 'About as Good as It's Ever Been' According to Conditions Index
-Fed's Bullard: Jury Still Out on How FOMC Reacts to St. Louis Fed's New Economic View
-Fed's Bullard: 'Very Good Hypothesis' that Inequality is Dividing U.S. into Two Different Economies
-Fed's Bullard: Market Reaction to Brexit Shock Was 'Satisfactory,' 'Orderly'
-Bullard: Ultimate Brexit Impact on U.S. Economy Will be 'Close to Zero'
-Bullard: Strong June Jobs Gains Showed May Report Was 'An Anomaly'
-Bullard: Expect Continued, Normal Slowing in Pace of Job Growth Going Forward
-Bullard: U.S. Badly Needs Fiscal Agenda for Boosting Economic Growth
-Bullard: An unemployment rate around 4.7%, gross domestic product growth of 2% and the Fed' preferred inflation gauge, the personal consumption expenditures index, at 2%.
-Bullard: "If there are no major shocks to the economy, this situation could be sustained over a forecasting horizon of two and a half years"
-Bullard: "we have no reason to forecast a recession given the current state of the US economy"
Note
Also the long DXY play is further enhanced as I am 70% short AUDUSD and NZDUSD in the medium term, as RBA and RBNZ likely to make 50bps of cuts in the next 6months.So in total we have long USD vs GBP, JPY, EUR, AUD, NZD - this is pretty much the whole DXY index, hence it is likely the best expression of long dollar.. also by engaging the DXY play you can avoid the micro risk/ uncertainties e.g. one of the pairs rising as a CB does cut.
Note
NEW FOMC Kashkari Speech Highlights - 00:00GMT:*Kashari the first real dove we've heard from in the past few weeks with other members being much more upbeat. Kashkari outright stated "no urgency to raise rates" and "there are still job seekers sitting on the sidelines" which goes against much of what we have heard from Tarullo, George and Bullard this past week; especially in light of the 100k NFP beat - Which Kashkari failed to even mention. This may stem some expectations, however comments will likely move through time with little affect as the rally in risk keeps sentiment on the hawkish side, not to mention the late timing of the speech (missed by LDN and much of NY - the biggest FX flow centres, whilst Asia concentrates/ is distracted firmly on JPY fiscal/ monetary policy inferences).*
-Kashkari: No Urgency to Raise Rates
-Kashkari: Can Be Patient in Letting Economy Heal Before Raising Rates Again
-Kashkari: There Are Still Job Seekers Still Sitting on Sidelines
-Kashkari: Brexit May Have Bigger Impact If More Countries Leave EU
-Kashkari: Brexit Impact Still Uncertain, Could Take Years for Full Impact to Be Felt
-Kashkari: Not Opposed to Reinstating Glass-Steagall
-Kashkari: Glass-Steagall Alone Wouldn't Necessarily Solve Problem of Too-Big-to-Fail
-Kashkari: People Are Cautiously Optimistic About Economy
-Kashkari: Probably No Need to Turn to Negative Rates
-Kashkari: Economy Seems to Be Doing Well
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