Société Générale highlights the unexpected strength of the US labor market as indicative of a re-accelerating US economy, suggesting a “no-landing” scenario rather than a slowdown. This robust performance challenges the current expectations around Federal Reserve policy, raising questions about the potential for rate hikes as much as cuts. The contrast with Europe’s sluggish growth and China’s recovery efforts is stark, underpinning a scenario for further near-term USD strength. However, the path forward may feature low volatility and slow, grinding gains for the dollar, particularly given its current high valuation.
Key Insights:
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US Labor Market Resilience: Friday’s labor market report underscores the resilience of the US economy, potentially altering the trajectory for Fed policy decisions and challenging the prevailing narrative of an impending easing cycle.
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Fed Policy Uncertainty: The strong labor data injects uncertainty into Fed policy outlook, with the possibility of rate hikes being as likely as cuts, contrasting sharply with expectations in other major economies.
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Dollar’s Slow Grind Higher: Despite the dollar’s current high valuation, SocGen suggests there may be room for further gains. However, these are likely to materialize through a slow grind higher, given the subdued volatility in the FX market.
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Speculative Positions: CFTC data reveals a continued short positioning in yen despite a more hawkish Bank of Japan, and a reduction in euro longs, reflecting a cautious speculative market stance towards the dollar.
Conclusion:
Société Générale posits that the US economy’s unexpected strength may fuel further near-term gains for the USD. However, given the dollar’s already high valuation, any appreciation is expected to be gradual, amid a backdrop of depressed volatility. The current economic divergence between the US and its major counterparts, particularly Europe and China, underscores the complexity of the global monetary policy landscape and its implications for currency markets. Investors are advised to prepare for a scenario where the dollar incrementally strengthens, punctuated by periods of low market volatility.
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