SELL EURUSD/ LONG USD, DXY: HAWKISH FED GEORGE SPEECH HIGHLIGHTS
IMO FOMC George was largely bullish/ Hawkish $ on the margin; surprisingly coming out and stating for one of the first times that "Fed rates are too low" and "Not Raising Rates in June Was Due to Timing Issues" - these two statements imo hint that a hike coUuld be on the cards earlier than perhaps was expected (Dec), in-light of his opinion of them being too low and that the missed June hike was merely due "timing issues".. could these timing issue be corrected in July? Unlikely given the Brexit result (likely if the vote was bremain), but nonetheless this was more than encouraging.
On the wider economy George remained upbeat, highlighting last weeks NFP report as "welcomed news", and in the medium term reaffirming that "pace of job market growth has been notable" and "economy nearing full employment.
The only downers were his comments regarding business investment which he said was "weak" but after went on to assure that "outside of energy, business investment levels were better". Further, he cited that brexit issues were "longer run" uncertainties that the FOMC will watch.
Federal Funds Rate Implied Hike/ Cut Probability curve updates:
On the back of the strong 100k+ beat NFP print last week, going into this week we have seen an aggressive steepening in the Fed Funds implied prob curve across the tenors; Fridays steepening trend has continued into this week, where now a September/ Nov Hike trades at 12%/11.8% vs 5.9%/5.9% on Friday and 0%/0% on Thursday, with a Dec hike trading at 29.6% vs 22.5% Friday.
- This aggressive steepening, especially in the front end (where probabilities have doubled), is likely a function of FOMC member Georges Hawkish comments today, the NFP print and the aggressive recovery in risk across the board in the past few days which have all collectively improved confidence, which in turn has eased sell-side pressure on UST rates - today 10y UST rates have managed to trade 4.4% higher on the day (tnx), with 30y yields also up +0.95% - this is the first real break of downside pressure we have seen in rates for the past month.
Trading strategy:
1. The above combined has helped my broad long $ view with my favourite expressions short term being in NZD$ and AUD$ downside (See attached posts). In the medium term, EUR$ and JPY dollar upside are my favourite trades for the risk-on element that will readjust the USD higher in the backend of this year (see attached posts); And the Monetary policy divergence + brexit uncertainty that should bring EUR$ to a lower equilibrium in the future also. Alternatively, this view can be aggregated as pictured into a long DXY play, where imo, it trades 3-4% below equilibrium - index should be near 100.
FOMC Member George Speech Highlights:
-Fed's George: June Jobs Data Was 'Welcome News'
-Fed's George: U.S. Economy Has Proved 'Resilient'
-Fed's George: Expects to See 'Fairly Steady Pace of Growth'
-Fed's George: Consumers Strong, But Business Investment Weak
-Fed's George: Outside of Energy, Business Investment Levels Better
-Fed's George: Pace Of Job Market Growth Has Been Noteworthy
-Fed's George: Economy Close to Full Employment
-Fed's George: Labor Market Recovery Not Evenly Shared by Workers
-Fed's George: Labor Pressured by Loss of Middle Skilled Jobs
-Fed's George: Fed Policy Limited in Role For Long Term Labor Trends
-Fed's George: Fed Rates Are 'Too Low'
-Fed's George: Fed Should Raise Rates Gradually
-Fed's George: Not Raising Rates in June Was Due to 'Timing Issues'
-Fed's George: Brexit Issues Are Longer Run Items to Watch
On the wider economy George remained upbeat, highlighting last weeks NFP report as "welcomed news", and in the medium term reaffirming that "pace of job market growth has been notable" and "economy nearing full employment.
The only downers were his comments regarding business investment which he said was "weak" but after went on to assure that "outside of energy, business investment levels were better". Further, he cited that brexit issues were "longer run" uncertainties that the FOMC will watch.
Federal Funds Rate Implied Hike/ Cut Probability curve updates:
On the back of the strong 100k+ beat NFP print last week, going into this week we have seen an aggressive steepening in the Fed Funds implied prob curve across the tenors; Fridays steepening trend has continued into this week, where now a September/ Nov Hike trades at 12%/11.8% vs 5.9%/5.9% on Friday and 0%/0% on Thursday, with a Dec hike trading at 29.6% vs 22.5% Friday.
- This aggressive steepening, especially in the front end (where probabilities have doubled), is likely a function of FOMC member Georges Hawkish comments today, the NFP print and the aggressive recovery in risk across the board in the past few days which have all collectively improved confidence, which in turn has eased sell-side pressure on UST rates - today 10y UST rates have managed to trade 4.4% higher on the day (tnx), with 30y yields also up +0.95% - this is the first real break of downside pressure we have seen in rates for the past month.
Trading strategy:
1. The above combined has helped my broad long $ view with my favourite expressions short term being in NZD$ and AUD$ downside (See attached posts). In the medium term, EUR$ and JPY dollar upside are my favourite trades for the risk-on element that will readjust the USD higher in the backend of this year (see attached posts); And the Monetary policy divergence + brexit uncertainty that should bring EUR$ to a lower equilibrium in the future also. Alternatively, this view can be aggregated as pictured into a long DXY play, where imo, it trades 3-4% below equilibrium - index should be near 100.
FOMC Member George Speech Highlights:
-Fed's George: June Jobs Data Was 'Welcome News'
-Fed's George: U.S. Economy Has Proved 'Resilient'
-Fed's George: Expects to See 'Fairly Steady Pace of Growth'
-Fed's George: Consumers Strong, But Business Investment Weak
-Fed's George: Outside of Energy, Business Investment Levels Better
-Fed's George: Pace Of Job Market Growth Has Been Noteworthy
-Fed's George: Economy Close to Full Employment
-Fed's George: Labor Market Recovery Not Evenly Shared by Workers
-Fed's George: Labor Pressured by Loss of Middle Skilled Jobs
-Fed's George: Fed Policy Limited in Role For Long Term Labor Trends
-Fed's George: Fed Rates Are 'Too Low'
-Fed's George: Fed Should Raise Rates Gradually
-Fed's George: Not Raising Rates in June Was Due to 'Timing Issues'
-Fed's George: Brexit Issues Are Longer Run Items to Watch
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