US Economy in 2016: How Much Will the Screws Tighten?
Here Is How Uncertainty Creates Opportunity For USD Bulls - BNPP BNP Paribas outlook for the USD remains favourable as we head into the second week of 2016 and expresses via adding fresh long USD exposure this week. Here is their outlook, rationale, and trade details.
We see prospects for the USD to resume gains:
"Yield differentials moved significantly in the USD’s favour in the final weeks of 2015 and we see scope for this process to continue, as the markets remain under-priced for the extent of Fed tightening we expect. A solid employment report on Friday 8 January should set the stage for what we expect to be a steady build up in the market pricing in a follow-on 25bp rate hike in March, from the current 13bp currently reflected in the OIS curve," BNPP argues.
The JPY has outperformed so far in 2016, but we favour fading this:
"While JPY gains vs the USD and commodity-bloc currencies are perhaps not particularly surprising in the context of rising risk aversion and market volatility, the JPY has also underperformed other funding currencies. As a result, the EURJPY cross has fallen to 10-month lows and the BOJ’s nominal trade-weighted JPY is now back at levels prevailing before the BOJ’s surprise easing in October 2014. We think JPY outperformance is unlikely to persist and that BOJ easing expectations will likely build if JPY gains extend further," BNPP adds.
EUR/USD: Greenback Pares Gains After Initial NFP Boost US non-farm payrolls soared sharply from an upwardly revised 252,000 (from 211,000) to 292,000 in December, while the unemployment rate remained at 5.0%. Wage growth declined from 0.2% to 0.0% month-on-month, while the yearly change improved somewhat to 2.5% from 2.3% previously.
In addition, the labor force participation rate ticked up a tenth of a percentage point to 62.6% as the labor force grew by a robust 466,000 persons. The household portion of the data showed an increase of 485,000 employed people but only a drop of 20,000 unemployed.
The pair dived to fresh daily lows around $1.0800 immediately after the release, before quickly bouncing back some 80 pips, still down around 0.45% on the day.
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The focus of Federal Reserve policymakers in 2016 shifts from diminishing slack to evidence of actual tightening of labor resources, which would buoy their confidence that inflation - the one half of their mandate that still leaves much to be desired - will indeed return to the 2% target soon enough.
Simply put, if all goes more or less according to plan, workers will see their paychecks grow more rapidly next year than in recent history as businesses compete to attract and retain skilled labor.
But the experience of the past few years, as unexpected shocks repeatedly hampered growth, has taught the Fed some humility when it comes to predicting the economy's future. So much so, that gradualism - a glacial approach to interest rate normalization - has become a cornerstone of the policy assumptions for 2016 and beyond.
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