Q2 soft patch limits USD upside for now
Friday’s employment report hit a sweet spot for market sentiment. The on-consensus 175k increase in payrolls was sufficient to keep tapering of QE under consideration, a view corroborated by a Fed sources story in the WSJ. Following the release, 10y yields rose about 8bp, regaining 2.15%, and the USD gained broadly. At the same time, the data was not strong enough to push markets to anticipate an immediate move towards tapering, which allowed equity markets to post solid gains and the CAD and MXN to rally. On Monday, St. Louis Fed President Bullard (a voter) speaks, marking the last scheduled FOMC appearance prior to the June 18/19 Fed meeting. Bullard was quoted on the eve of the employment report noting that he continues to oppose tapering while inflation is slowing. Later in the week, we expect soft readings on core retail sales and industrial production for April to reinforce the message from the May ISM of a sequestration-related slowdown in activity. The data should limit appetite to rebuild USD longs, though we expect USDJPY and USDCHF to stabilize this week. IMM data as of Tuesday shows USD longs falling to USD 39 Bn and we expect positions to have been reduced much further in Thursday’s selloff.
Read the full report: FX Daily
BNP Paribas