The rebound in payrolls last Friday is weighing on market expectations for a 50bps rate cut this month. The repricing we’ve seen is closer in nature to a 25bp cut and with the short-circuit in expectations it is “loading time” again for risk-off assets.
Given the circumstances a 50bps cut would now be considered very dovish and give momentum towards broad-based USD selling particularly versus AUD, NZD, CHF, BRL , MXN, NOK , RUB, INR and to a lesser extent JPY. Whilst to the other side, should the Fed remain on pause (very low odds) it would be considered very hawkish and allow USD to find support. Risk-off assets would be bought significantly if this were the case and JPY would see a notable strong bid.
Should we only see the 25bp cut that markets are now pricing (highest chances), focus will be on the guidance. Any cuts without guidance will be underlying hawkish, weighing on risk assets whilst pushing US yields higher. In this scenario JPY will be a major winner. If we see a 25bp cut with the door left open for future cuts then dips in EM FX should be seen as a buying opportunity.
Whilst investors are taking some deep signs of relief that the economy was not as soft as feared, the ISM softening is not to be ignored and shows that the slowdown globally is starting to crack the broader US macro prints. Q2 will be the barometer here as the slowdown in Capex has already begun to fall from the 2018 peak.