In case you were hiding under a rock (which might make sense given increasing volatility) today is September US payrolls. Markets are pricing in a solid impact of negative weather with expectations for NFP on the low 60/80k and unemployment 4.5% (risk skewed to the downside). Traders should expect a FX volatility inducing read. However, recent payroll data has provided an asymmetrical outcome with weakness shrugged off but better than expected reads triggering sustained USD rallies.
The expected soft NFP reports contradicts some data seen after hurricane Katrina which lead to upside surprise in many economic indicators. We remain bullish on the USD given the general risk in risk (Specifically Catalonia independence referendum). US front-end yields continued to rise with 2-yr rates hitting 1.50%. The market is underpricing the fed commitments to normalizations, instead focusing on disappoint inflation read. In our view Yellen will continue tighten path, resulting in a December 20bp hike, in anticipation that inflation will eventually pick up. Despite the solid fundamentals story support EM countries we, are cautiously short key high beta and interest rate sensitive countries. HUF, ZAR, BRL, JPY and CHF stand out as key shorts in the current environment.
Volatility in GBP jumps
For this old time analyst its nice to see that fundamentals still can drive volatility. Falling letters, cough, and fake P45 form, not only weighted on UK PM May but sent GBPUSD 1 month implied volatility higher at 8.66 and GBPUSD down 2% (4% since the Conservative party conference). PM May now face open rebellion among backbenchers as up to 30 MP are reported have called for her resignations. Senior Conservative have rallied around the PM making the outcome uncertain. The political chaos makes the outlook for Bexit negotiations re-opening next week bleak.
EU negotiations are questioning the authority of the UK governments, already looking ahead, and limiting the prospect of a deal. Should EU-EU fail to make meaningfully headway, the UK economy is likely to suffer as business investments is further delayed. Given the prolonged negative outlook for the current situations (PM May need to secure her positing so markets can move forward), we are bearish GBP. We anticipated a bearish extension of current downtrend to 1.2830 based support.
