Currency Point – USD, fait accompli?

The USD, from a market perspective anyway, is facing in a very dovish set up; and that’s despite last week’s strong non-farm payrolls (NFP).

The NFPs certain throw out a red herring, its strength saw pairs whipsawing away from trend and did in fact knock out a previous trade idea in USD/JPY by hitting our stop. However, Friday week’s NFP rally has been short lived and the main event – a Dovish Fed – has finally grabbed hold of the USD.

In fact, Chairman Powell’s press conference mid-last week has actually made the July FOMC on the 30-31 st a fait accompli in the market’s eye. If we look at market probability pricing pre-NFP a 25-basis point (bps) cut was at 82%, Post-NFP below 50% and then after Powell’s testimony 93%.

It raises the bigger question in the USD dovish setup and that is: it’s not ‘if’ the FOMC cuts, its ‘by how much’ will they cut?

A minority point to the FOMC minutes which suggests a ‘gradual’ approach to accommodation suggesting 25bps is more likely (I actually concur with this statement as there is still solid strength in the US economy). The majority however, seemed to favour a stronger move of up to 50bps at the July meeting. This is by no means a lock but is ‘stronger’ view currently.

Which Pair?

The set up in the USD suggests you can almost choose your pair of choose. It is always ‘best practice’ to choose the pair you most comfortable with, thus for me its AUD/USD.

Straying Long AUD/USD

Entry: 0.6950 Target: 0.7200, Stop: 0.6900

Over the past year the AUD has been priced correctly, due to the slowdown in economics, inflation below trend and unemployment ticking up. This led to a pricing in of rate cuts, which have now been delivered in the form of two 25bp cuts back-to-back. If we couple this with the new government tax reform legislation the level of stimulus in the Australian economy should be a positive in the coming period and thus an AUDUSD positive.

If we also look at the US-China trade tensions this too appears to have abated (for now) again a risk F positive and even more so for an Asian-focused currency such as the AUD.

Trade Caveat:

Fed is hawkish even neutral – will hit all USD pairs