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PIG TODAY- Risk/Reward Still Favors USD Upside Against The EUR, GBP And JPY - RBS

We wrote last week that “Yellen talking about lower long-term rates isn’t the same as dampening expectations of a near-term rate increase. We therefore still believe risk/reward favours USD upside against the EUR, GBP and JPY. Discussions about lower terminal rates should ensure that EM FX out-performs the G4 currencies”. Yellen kept the door open for possible action as soon as September. She signalled growing confidence in the outlook for activity given the rebound in labour markets and the solid rise in household spending in Q2.

Whether they choose to move at the September or December meeting (or not at all), will depend on the incoming data and financial market conditions. This starts with Friday’s payrolls release. Currently markets assign a 46% chance of a 25bp Fed rate hike by December, 36% by September. Perhaps this can rise to circa 65% or a little higher for December in coming weeks. We don’t believe that this would be enough to undermine risk or drive a significant USD policy divergence narrative. However, the balance between inflation and growth will be important.

For now, we keep to our risk constructive view into this week’s payroll report and favour buying dips in AUD against GBP.While we do, we’ll be keeping a close eye on evidence that Asia’s growth cycle may be turning lower and the reduced impactfulness of China’s credit easing.

Source: efxnews.com

We wrote last week that “Yellen talking about lower long-term rates isn’t the same as dampening expectations of a near-term rate increase. We therefore still believe risk/reward favours USD upside against the EUR, GBP and JPY. Discussions about lower terminal rates should ensure that EM FX out-performs the G4 currencies”. Yellen kept the door open for possible action as soon as September. She signalled growing confidence in the outlook for activity given the rebound in labour markets and the solid rise in household spending in Q2.

Whether they choose to move at the September or December meeting (or not at all), will depend on the incoming data and financial market conditions. This starts with Friday’s payrolls release. Currently markets assign a 46% chance of a 25bp Fed rate hike by December, 36% by September. Perhaps this can rise to circa 65% or a little higher for December in coming weeks. We don’t believe that this would be enough to undermine risk or drive a significant USD policy divergence narrative. However, the balance between inflation and growth will be important.

For now, we keep to our risk constructive view into this week’s payroll report and favour buying dips in AUD against GBP.While we do, we’ll be keeping a close eye on evidence that Asia’s growth cycle may be turning lower and the reduced impactfulness of China’s credit easing.

Source: efxnews.com

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