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PIG TODAY-2 Reasons To Proceed With Caution With USD Longs - BNPP

 

 

  The USD has outperformed our expectations in the aftermath of the September FOMC meeting, with the US currency beginning to move towards our bullish USD year-end targets. We remain wary of the near-term outlook for the USD, as real rates remain low and a December Fed hike is now heavily priced. Still, the USD has moved beyond the period of greatest danger in the immediate aftermath of the September FOMC meeting, and we favour cautiously adding to positioning for USD gains at this time

So why the caution? We see two primary concerns with recent USD gains that make us wary of fully embracing the moves:

1) Real rates: As we have highlighted in previous weeks, the aftermath of the September FOMC meeting has seen nominal yields in the US rise, but mainly reflecting an increase in inflation expectations. As a result, US real yields have remained low and negative across most tenors; on the front-end, they have actually declined on net since the September Fed meeting. Negative real yields have likely continued to support a recovery in US investor appetite for foreign higher-yielding bonds in 2016, and complicate the US current account financing calculus. Real yields should rise gradually if the Fed delivers tightening in December and as inflation expectations peak, but for now they are flashing a warning signal.

A39.PNG

2) Feedback loop: The recurring difficulty for USD bulls throughout the past two years has been the feedback loops that tend to short circuit big moves. With the big USD gains of late-2014 (vs EUR and JPY) and mid-2015 (vs CNY) now more than a year behind us, the year-over-year change in the Fed’s broad TWI is flat, likely reducing FOMC concerns about dollar headwinds for inflation and activity. Still, important linkages between higher US yields and gains in the USD and the risk environment continue to operate.

We favour cautiously adding to USD longs via derivatives, consistent with our bullish year-end targets, while avoiding spot exposure given the concerns above. At this time, we are adding a EURUSD down USDJPY up dial digital to our recommendations portfolio:

Trade Structure: 3-Month Dual Digital EURUSD Down & USDJPY Up – strikes 2% OTMS. EURUSD strike 1.0814, USDJPY strike 105.47. (13-Jan-17 expiry)].

Source: efxnews.com

 

 

  The USD has outperformed our expectations in the aftermath of the September FOMC meeting, with the US currency beginning to move towards our bullish USD year-end targets. We remain wary of the near-term outlook for the USD, as real rates remain low and a December Fed hike is now heavily priced. Still, the USD has moved beyond the period of greatest danger in the immediate aftermath of the September FOMC meeting, and we favour cautiously adding to positioning for USD gains at this time

So why the caution? We see two primary concerns with recent USD gains that make us wary of fully embracing the moves:

1) Real rates: As we have highlighted in previous weeks, the aftermath of the September FOMC meeting has seen nominal yields in the US rise, but mainly reflecting an increase in inflation expectations. As a result, US real yields have remained low and negative across most tenors; on the front-end, they have actually declined on net since the September Fed meeting. Negative real yields have likely continued to support a recovery in US investor appetite for foreign higher-yielding bonds in 2016, and complicate the US current account financing calculus. Real yields should rise gradually if the Fed delivers tightening in December and as inflation expectations peak, but for now they are flashing a warning signal.

A39.PNG

2) Feedback loop: The recurring difficulty for USD bulls throughout the past two years has been the feedback loops that tend to short circuit big moves. With the big USD gains of late-2014 (vs EUR and JPY) and mid-2015 (vs CNY) now more than a year behind us, the year-over-year change in the Fed’s broad TWI is flat, likely reducing FOMC concerns about dollar headwinds for inflation and activity. Still, important linkages between higher US yields and gains in the USD and the risk environment continue to operate.

We favour cautiously adding to USD longs via derivatives, consistent with our bullish year-end targets, while avoiding spot exposure given the concerns above. At this time, we are adding a EURUSD down USDJPY up dial digital to our recommendations portfolio:

Trade Structure: 3-Month Dual Digital EURUSD Down & USDJPY Up – strikes 2% OTMS. EURUSD strike 1.0814, USDJPY strike 105.47. (13-Jan-17 expiry)].

Source: efxnews.com

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