What Yellen Speech Means For March NFP? Which Currencies Will Do Best? - Morgan Stanley

What does the Yellen speech mean for the upcoming March NFP?

Ignore activity, but be sensitive to costs. In other words: it now requires wages to exceed market expectations by a substantial degree to allow the USD to return to its bullish trend early.

Indeed, Yellen noted specifically the uncertainty around the longer-run rate of unemployment consistent with inflation stabilizing at 2%. She highlighted that a lower NAIRU was more likely, and as such, a lower level of unemployment might be needed to fully eliminates lack in the labor market. By doing so, the Fed has now moved focus away from the headline number and squarely on to wages.

Which currencies will do best?

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Risky assets should remain supported by this new dovish approach as it suggests for each unit of GDP more monetary accommodation than previously thought.

Given the JPY’s inverse relationship to risk we continue trading USDJPY from the long side although other JPY crosses such as ZARJPY, AUDJPY, or NZDJPY should perform even better. The high-beta MXN is also likely to gain support in the current environment.