Article / 29 May 2016 at 23:35 GMT

The Macro Take: The big hike beckons, sooner or later

Global Macro Strategist [Asia based] / Saxo Bank
  • Again it's all about the US Dollar and upcoming Fed hikes, nothing else matters
  • DXY at 95.52 +0.20% for WK 21, is up 4 weeks in a row – but you still ain’t seen nothing yet, we should be in the 96-97 range by now
  • As per the thesis from last week, Fed implied rate hike probabilities continue to grind up – yet year end expectations of one and two hikes still too low at 74% and 25%. Market is still asleep
  • June now has a 30% chance, whilst July (KVP’s pick) has now moved from around 48% to 54% in the span of a week
  • Week ahead will be filled with final PMIs, US ISM will be key as will NFP. ECB? It's a non-event



1. Week 22
2. Remix: USD is going to take off over the next two to three months...
3. Reflections of a Global Macro Neophyte   

Up ahead for week 22   

Week will start with lower liquidity and a lack of direction from the US, given today being public holiday in the US, Memorial Day. The UK is also out on Spring Bank Holiday

Speaker wise

Six Federal Reserve speakers are currently scheduled for the week, will be interesting to see correlation or lack of with Fed chair Janet Yellen’s talk last Friday and of course we are just a little over two weeks to June 15.

Outside of the US I did not come across any other central bank governors due to speak. We will have an open meeting on June 2 that will see the usual hype and focus that the media give it.

Central bank wise
On this front its quiet with BoK minutes, ECB on Thu & Fed’s Beige book. ECB should be quiet

Economic data wise

Start of a new month means we are getting final PMI growth numbers as well as the heavily watched US nonfarm payrolls.

People will be also looking for inflation reads, in things like average hourly earnings. Most key to me is going to be whether we see US ISM manufacturing staying above 50 (50.5e 50.8p).
For more on the calendar week ahead see here

What KVP is watching this week

Central banks

Speakers/Other: Mon May 30th – Sun Jun 4th  

Fed Speak: Bullard (29), Powell/Kaplan (2), Evan (3), Brainard (3), Mester (4)

Other speakers: None scheduled that I could find   

Meetings/minutes this week: May 30 – June 5th  

BoK Minutes (31), Fed Beige Book (1), ECB -0.40%e -0.40%p (2)

Meetings/minutes next week: June 5–June 12
RBA 1.75%e 1.75%p (7), RBI 4.00%p (7), BZ 14.25%p (9), RBNZ 2.00%e 2.25%p (9), BoK 1.5%p (9), RU 10.50%e 11.00%p (10)

Right now nothing else matters: Watch the USD, wait for it… wait for it… then boom!
It’s a short one this week, as once again the most important thing is the Fed and US dollar strength that is about to unfold over the next two to three months.

I made the case for all that in last week’s Global Macro Take: Fed to hike over next three meetings as well as potential trading/investing themes around that view.

Below is the Fed Implied probabilities of the previous two weeks, with the snapshot taken over the weekend

“A 25% chance of two Fed hikes by year end is too low in my view…” (from week 21 piece)
Source: Bloomberg

Since then the market has moved in the direction I’ve been advocating as the Fed implied probability.

So first was after the Fed minutes and the second, a full week after…

Clear grind up in June, July and September, but once again… still too low for year-end expectations for one and two hikes.
Source: Bloomberg
To quote Yellen from Friday’s event at Harvard.

"It's appropriate ... for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate".

So not exactly committing to a month, but as I said before they need to get one in over the next three meetings to get a second one in Q4.

There is a very decent argument for the Fed to move on June 15. Photo: Flickr

Looks like she has one more scheduled public appearance on June 6, a little over a week before the June 15 meeting.

It is also worth bearing in mind the DXY is up four weeks in a row, some near-term consolidation or pullback would not be out of the ordinary. But I think we could head back to 100 before the end of the year.  

And to be honest DXY should already be in the 96-97 range… 96.22 & 97.23 are key levels to close above
xxx Source: Bloomberg

Early days, but interesting to see biggest gain coming through for July, which I still think is the prudent time for them to move. More and more clients have been falling in the June camp, despite June 23 potential Brexit date.

There is a very decent argument for the Fed to move on June 15 rather than July or September and that’s if they are worried about missing their window to get a hike in.

Perhaps they have learned something from last year after all?! That is, one risk of waiting to move on July 27 is that we could have a correction in economic data – like most things it rarely moves in a straight line – in the near-term that may still their hand.

US Citi Economic Surprise Index: Will the Fed take the June window, rather than risk an economic data turn?
Source: Bloomberg

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Reflections of a global macro neophyte

Less is often more.

-- Edited by Adam Courtenay

Kay Van- Petersen is s Asia Macro Strategist at Saxo Bank, the home of social trading. In addition to, please follow him on twitter @KVP_Macro.

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