Us Economy Growth.

Fridays solid NFP print at 228k and wage growth 2.5% y/y, in our view, cements a FOMC 25bp rate hike this week. US economic activity continues to outpace the markets and Feds expectations. Recent Fed communication indicates that hike was coming if the data and financial backdrop remained supportive. This is clearly the case. The market has fully priced in the rate hike with fed fund futures at 98% for a 25bp raise.
Current pricing suggests that the market focus will be on the Committee’s economic and rates projection. At the November FOMC meeting, the committee upgraded assessment of economic activity to “solid”. Since then data has further surprised to the upside. 3Q GDP data, which was already strong, was upgraded. Following payrolls sharp contraction post-hurricane unemployment rate has fallen to 4.1% well below the fed own median estimate of 4.6%.
Inflation data was marginally higher following trend developing in the 2H. Finally, consumer spending, income and production all indicate stronger upwards momentum. If the US needed any more stimulus the increased likelihood for tax reform has risen significantly. The corporate tax cut is likely have the most immediate and positive effect on economic activity estimated adding 0.5% to GDP in 2018. We suspect it is probable that a majority of FOMC participants will increase their GDP forecasts for 2017 and 2018. However, shifting the “dots” form 3 to 4 would be seen as an extremely hawkish signal.
We could get a few of the hawkish members to add hike in 2018 but this would not shift the median view. Our base scenario is marginally on three hike but we are assigning a high probably that and additional hike is added on either in end 2018 or early 2019. Should we see another dot show up the repricing would clearly benefit the USD, which remains on the softer side verse G10 currencies.
Our favorite trade would be given a shift in front end yields would be long USDCHF, which is highly rate sensitive considering the is SNB unlikely to move in 2018.
From an administration standpoint, this will be Chair Yellen’s last meeting and press conference. However, we don’t see that a meaningfully shifting the course of events (ie no event risk).
As with past transitions, Yellen is unlikely to disrupt the Fed current path prior to a handover to Jerome Powell.
Regards All.
Posted in Fx Market

  Australia: RBA Held Rates Unchanged

The Reserve Bank of Australia has maintained the Cash Rate Target at 1.50% for some time. It is now the 16th consecutive months in a row that the rates is held at this level. It has also been since 2010 that the rates have not been increased. At this rate level, we cannot consider that the housing market, one source of issue, will be soon cool off. Housing prices have tripled since 2000 and this has largely weighed down on consumption growth way below the inflation rate. On top of that markets have strong expectations that rates will remain on hold until at least 2019.
The tone of the monetary policy statement is slightly pessimistic with a downgrade of the outlook on growth. The RBA does not also see a strong increase in inflation next year. Economic conditions definitely look mixed. The low inflation and the low wages growth are then preventing any rate hike in a near future despite forecasts from the Australian central bank.
The RBA Governor mentioned that debt levels are high. Is this possible that this is actually the main reason for holding rates so low? We could hardly believe it. The era of free money has created and is still underpinning bubbles in all asset-class. Raising rates may trigger a massive bubble burst. We note that the Australian debt levels went from 15% to 45% of the GDP since 2009 (much sustainable than most of the G10 countries).
The Aussie is getting lower against the greenback and will likely continue to do so. The RBA will likely follow major central banks and not lead the move of monetary policy normalization. This is why we believe that the Aussie has some more downside room within the medium-term. Right now the AUD/is trading towards 0.75 aussie for one single dollar note. Over the next 6 months our target is 0.70 AUD for one dollar.
Regards All
Posted in Fx Market


Data in this report cover up to Tuesday December 5 & were released Friday December 8.
• This week’s positioning adjustments were remarkably muted across most of the reporting currencies, with the exception of GBP. Sentiment improved for all of the reporting currencies except JPY and CAD. EUR remains the largest held net long, followed by CAD, AUD, and MXN. GBP and NZD are close to flat, while CHF and JPY are held net short. The aggregate USD short widened a modest $0.6bn to $6.0bn, well within the extended levels from late September.
• Bullish CAD positioning continues to soften. This week’s adjustments were small, delivering a modest $0.2bn w/w decline in the net long to $3.4bn, roughly half of the $6.1bn high from early October. AUD saw its first w/w improvement since late September with a minor $0.1bn w/w rise in the net long to $3.1bn. The position has also roughly halved from its recent high ($6.1bn in late September).
• Considerable GBP risk was added to both sides in the week ended December 5th, with a sizeable $2.0bn build in GBP longs and $1.8bn build in shorts. The net long remains close to neutral, with a $0.2bn w/w rise to $0.5bn.
• JPY positioning has shown renewed signs of deterioration following two weeks of aggressive covering in JPY shorts. This week’s report saw positions pared on both sides, delivering a $0.3bn w/w widening in the net short to $12.7bn.
Posted in Fx Market