14 May 2014
US data surprise index hits 5-year high - Westpac
FXStreet (Bali) - Richard Franulovich, FX Strategist at Westpac, outlines the fact that Westpac's US data surprise index just hit a five year highs, noting that the index is now very elevated and vulnerable.
Key Quotes
"In the wake of the recent run of mostly better than expected US data Westpac's US data surprise index has surged to 68.5%. Remarkably that puts the index above the peaks hit during the each of the brief "strong patches" that have been a recurring theme of the post-crisis US recovery in the last few years."
"At this very mature level in our index it would not pay to bet on another round of better than expected data. The implications for rates and FX markets are not however so clear cut. The USD went largely unrewarded during the recent bout of better than expected data while US yields fell. Our three week long USD basket trade, closed last Friday, delivered a -0.29% return. One might have expected USD/JPY to be nearer 105 and US10yr yields to be tracking toward 3%."
"One factor that held back both the USD and yields was Yellen's repeated comments (Mar 31, Apr 16 & May 7) that considerable economic slack remains in the labor market and that a high degree of accommodation is still warranted. Intervention flows from China related to the yuan depreciation will have been another factor suppressing yields. The outsized role of the weather in shaping recent data trends may have exaggerated the cycle in our surprise index too, another factor why the USD and yields may have been unmoved."
"Given all the aforementioned it may not be a surprise to see both fixed income and FX markets largely ignoring a patch of weaker data that may be in the offing too. Our model will nevertheless generate a short USD signal when our surprise index breaks back below the upper threshold in coming weeks."
Key Quotes
"In the wake of the recent run of mostly better than expected US data Westpac's US data surprise index has surged to 68.5%. Remarkably that puts the index above the peaks hit during the each of the brief "strong patches" that have been a recurring theme of the post-crisis US recovery in the last few years."
"At this very mature level in our index it would not pay to bet on another round of better than expected data. The implications for rates and FX markets are not however so clear cut. The USD went largely unrewarded during the recent bout of better than expected data while US yields fell. Our three week long USD basket trade, closed last Friday, delivered a -0.29% return. One might have expected USD/JPY to be nearer 105 and US10yr yields to be tracking toward 3%."
"One factor that held back both the USD and yields was Yellen's repeated comments (Mar 31, Apr 16 & May 7) that considerable economic slack remains in the labor market and that a high degree of accommodation is still warranted. Intervention flows from China related to the yuan depreciation will have been another factor suppressing yields. The outsized role of the weather in shaping recent data trends may have exaggerated the cycle in our surprise index too, another factor why the USD and yields may have been unmoved."
"Given all the aforementioned it may not be a surprise to see both fixed income and FX markets largely ignoring a patch of weaker data that may be in the offing too. Our model will nevertheless generate a short USD signal when our surprise index breaks back below the upper threshold in coming weeks."