n case you were hiding under a rock (which might make sense given increasing volatility) today is September US payrolls. Markets are pricing in a solid impact of negative weather with expectations for NFP on the low 60/80k and unemployment 4.5% (risk skewed to the downside). Traders should expect a FX volatility inducing read. However, recent payroll data has provided an asymmetrical outcome with weakness shrugged off but better than expected reads triggering sustained USD rallies.
The expected soft NFP reports contradicts some data seen after hurricane Katrina which lead to upside surprise in many economic indicators. We remain bullish on the USD given the general risk in risk (Specifically Catalonia independence referendum). US front-end yields continued to rise with 2-yr rates hitting 1.50%. The market is underpricing the fed commitments to normalizations, instead focusing on disappoint inflation read. In our view Yellen will continue tighten path, resulting in a December 20bp hike, in anticipation that inflation will eventually pick up. Despite the solid fundamentals story support EM countries we, are cautiously short key high beta and interest rate sensitive countries. HUF, ZAR, BRL, JPY and CHF stand out as key shorts in the current environment.
By Peter Rosenstreich
