Fed Succession Debate sustain USD even with a dovish Fed taper
Nikkei reports this morning (quoting sources) that President Obama is likely to name Summers as the next chairman of the Federal Reserve and Treasury Undersecretary Brainard as the Vice Chairman. Our economists estimate that a Summers-led Fed would add 50bps extra to the US 10Y year yield (See Market Economics: The Cost of FOMC Regime Change, published 29 August). Hence even if the Fed does manage a “dovish taper” next week (10bn vs. 20bn), USD dips could be limited as the focus remains on the Fed succession debate and with USD positioning now a lot cleaner. While a mini-taper now appears consensus, the bigger uncertainty is if the unemployment rate threshold of 6.5% (decided back in December 2012) are lowered further to, say, 6%. Our economists think that that if they taper next week (they place a 40% probability), we will also get a lowering of the threshold to 6.0%. But USD downside should be limited. If anything, the experience of forward guidance by the BoE and ECB has shown that markets have not given central banks the benefit of doubt when it comes to forward guidance, especially when data remains strong. Given that we expect stronger US data in the months ahead, any dips in USD remain buying opportunities against the low yielders. We maintain a long USDCHF recommendation. For today’s US August retail sales, we are in line with the market expecting 0.5% m/m on headline, and 0.3% ex-autos.
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BNP Paribas