USD: Positioning Itself for a Big Move - Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that the futures
market may be suggesting that the market is pricing in only a 10% chance
of a Fed rate hike in June but there other signs that many investors
may have started to take the risk much more seriously.
Key Quotes
“Emerging
markets stocks have dropped sharply in recent sessions. This is largely
a response to concerns about sluggish global growth but the spate of
recent hawkish comments from Fed officials regarding the chances of a
June move will likely have amplified the reaction. Similarly measured
from the start of this week the USD is the best performing currency
measured against an extensive basket of EM currencies in addition to all
from the G10 space. In recent months the market has been shedding long
USD positions in response to expectations of a dovish Fed. Insofar as
our house view favours a Fed rate hike in June, we would argue that the
greenback is positioned for too much negative news.
For central banks such as the BoJ and the ECB, the better tone of the USD will be greeted with relief.
Despite
some good news yesterday from the releases of US April
non-manufacturing ISM and March factory orders data, in recent weeks US
economic data releases have brought more disappointments than pleasant
surprises. Unsurprisingly this has weighed further on expectations
regarding Fed policy.
In the middle of last week the futures
market was suggesting there was around a 20% chance of a Fed rate hike
in June. This morning the implied probability stands at just 10%. Fed
Chair Yellen has positioned herself as a dove and there is a widely held
view in the market that the low level of Fed funds will make the FOMC
more likely to welcome an overshoot in inflation rather than risk the
onset of second round disinflationary effects taking root on the back of
too hawkish policy.
Consistent with this outlook CFTC data
suggest that speculative long USD positions have now returned to their
lowest level since H1 2014 – which was just ahead of the start of the
USD’s surge. This positioning, however, is out of kilter with the
warnings of Fed officials. Williams is just one of at least three Fed
members who has warned that the market may not be adequately positioned
for a Fed rate hike in June.
Indeed, the Fed’s dot plot suggests
that the median view of the FOMC favours two rate hikes this year. The
low levels of USD longs suggests that USD is set to find additional
support on the publication of a good payrolls report tomorrow. While
this would be welcomed by the BoJ and ECB, the PBoC will not be hanging
out the bunting. The softer tone of the USD since the start of the year
has dragged China’s effective exchange rate lower. If the USD were to
grind higher for here, the PBoC would have to weaken the value of the
CNY vs. the USD in order to protect the softer tone of the effective
exchange rate. While we believe such a move is on the cards the PBoC
will have to carefully manage the risk of a negative impact on
confidence particularly among commodity producers.”
