Post last week’s FOMC meeting minutes and the dreadful NFP miss, market participants are aligning with FED members regarding growing concerns about global growth trends, believing that the probabilities for the FED to maintain its lower for longer path with respect to rates is likely to be the main driver for the remainder of 2015. Especially with continued jitters over China and worrisome domestic US data.
Implied probability of the Fed fund futures representing the probability of Fed to hike in Dec has declined to 31.9%. This decline represents a reduction to lowest probability reading of the year while the probability of a move in March 2016 has risen to 60% a sizeable jump in expectations. With market interpreting that the Fed is still waiting, USD long positioning according to COT data continues to unwind.
While FED speakers are keen to stress that the time for the FED to normalise rates is near they are reluctant to commit with concerns about global growth weighing on their enthusiasm. The FED minutes clearly highlighted the committees requirement for domestic data to continue to strengthen to support the lift off.
This weeks data has done little to move the dial on that front. In point of fact, their has been a deterioration that has actually dragged on the USD this week. Soft Chinese inflation along with weaker than forecast US retail sales and PPI data, are still seen hindering the start to the Fed’s liftoff.
One of the principal concerns to consider for USD bulls is the slide that has been witnessed in US manufacturing data, which will likely read through to become a further drag on growth and compound the deterioration in trade data. Traders will closely eye this months Q3 preliminary GDP release to see how the manufacturing input impacts the number with economists anticipating a .71-1% drain on the data from manufacturing. The trade issue will likely only become an issue in Q4 as the increased summer strength of the USD will become apparent in the data.
The Atlanta Fed’s GDP growth has fallen to 0.9% as data continue to disappoint. Falling gasoline prices aren’t fuelling spending in other areas. This release pushed expectations of Fed tightening further back and Treasury yields are falling, taking the dollar with them.
The USD Index started weaker again on Monday against the euro & the majors as markets focused on the comments by FOMC Vice Chairman Stanley Fischer (11 Oct) and Fed Board Governor Lael Brainard, whom both took cautious stances on Fed interest rate plans , and thus added to speculation against the Fed’s ability to start hiking rates this year.
Fed Governors Tarullo and Brainard offered surprisingly dovish monetary policy comments at the beginning of the week. Brainard in particular made a fairly substantial speech covering the FOMC’s monetary policy options yesterday, and her key message was that the FOMC should move away from guiding that the FFR should be increased this year and instead say that it is data dependent and waiting on economic data in order to judge what to do with respect to monetary policy. She is against raising the rate this year and thinks that the economic outlook is softer and more precarious than is broadly thought. Daniel Tarullo, also a Fed Governor, similarly noted that economic growth is uncertain and it would be better off for the FOMC to wait in an interview.
Today’s US data highlight is the September CPI report, where we look for headline CPI inflation to fall to -0l1% y/y, while the core stays at 1.8%. based on the trend of the data this week another disappointment form this release is anticipated. The core measure tells you something about what will happen when base effects turn around but that’s more likely a story for next year.
The USD has broken the near term trend line support that we highlighted in last weeks report as such I am looking to deploy bearish trading strategies while the trend-line caps upside reactions.
- Will be monitoring upside reaction and intraday reversal patterns that fail on a retest toward 95.50. Will venture short at these levels leaning against 96.50 targeting a grind down towards the lower levels of the six month range at 92.50