Stay long USD heading into FOMC meeting
The July Treasury TIC portfolio flow data on Tuesday will be of some interest as we await the FOMC on Wednesday. Currency market participants will look for evidence of repatriation by US investors and increased demand for US stocks from abroad given anecdotal reports of US investors cutting EM positions and foreign investors raising allocations to US equities during that month. In terms of cyclical data, August CPI will be the main focus in the US and we expect the headline rate to slow to a 0.1%m/m pace, bringing the headline y/y rate back to 1.6% from 2% in July. This will still leave it running well above the 1.1% lows seen in April, and the core y/y rate should accelerate to 1.8%, the firmest rate since March. The data should be relatively neutral in terms of impact on Fed expectations heading into Wednesday’s meeting. US front-end rates came off Monday following the weekend news about Larry Summers, but bounced off their lows helped by an article by Wall Street Journal reporter Jon Hilsenrath highlighting the difficulty the Fed has communicating forward guidance even as its own projections suggest recovery continuing. We remain constructive on the USD, particularly vs. the low-yielding CHF and JPY.
Read the full report: FX Daily
BNP Paribas