From last month’s labor market report in early August until now, market reaction to data has been asymmetric for USD: data beats have been relatively neutral USD, while data misses have seen sharper and more broad-based USD weakness, analyst at Citi said, in a note dated Sept. 3.
However, in the bank’s view, August was heavily driven by positioning, which has now flipped from long USD to short USD, and a focus solely on the US side of the growth story.
“We continue to emphasize that the growth backdrop in the rest of the world remains concerning, especially for manufacturing countries (e.g., Germany, China). We also have a significantly more dovish Fed priced by markets compared to one and two months ago,” Citi added. “We thus expect the USD reaction function to be somewhat different going forward compared to recent months.”
The market could be entering a period of greater dispersion in FX, Citi said, with risk-off on growth concerns leading to USD underperformance against lower beta FX, but outperformance against higher beta FX.
Thus a print in line with Citi’s expectations–an unemployment rate of 4.3% and nonfarm payrolls of 125,000–should see USDJPY and USDCHF downside, but not necessarily broader USD weakness.
“A more ambiguous print shifts attention to Fedspeak thereafter; here the market could face knee-jerk USD selling on a downside miss into Fed Governor Waller. A strong print could accelerate any USD short covering from the leveraged segment and see JPY and CHF underperform,” Citi said.
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