Focus of the day:
“Simplifying, the trade suggested by Stanley Fischer’s recent speech is to be long the dollar and long US rates. This has been a compelling trade for the bulk of the period since the taper tantrum.
The combination of US strength and global disinflationary pressure has meant that both legs of the trade have performed in tandem.
However, the entry point to the trade now looks challenged: the dollar is toward the highs of its range over the last three years and protection for being long USD rates in the belly of the curve toward the lows.
If disinflationary momentum stays high, dollar longs should be concentrated versus EM and commodity producers and the rates market can remain a buy on dips and still outperform the forwards.
However, if growth momentum starts to improve, we think the better risk/reward exposure is through USDCHF, EURUSD and USDJPY as set out in our 2016 Outlook.
In this case, USD rates longs are better seen as a risk-off hedge rather than a core component of the trade, particularly given our view of a December Fed tightening.”