USD: Market is ripe for a correction - BBH

Research Team at BBH, suggests that the recent economic data point to a strong snap back to the US economy after a disappointing six-month soft patch. 

Key Quotes

“The NY Fed's GDP tracker is at 2.2% (its final Q1 estimate was 0.7% before last week's revision from 0.5% to 0.8%), while the Atlanta Fed's model sees 2.9% SAAR growth in Q2.  The Beige Book should confirm more activity. 

The survey data has been lagging behind the US economic recovery.  This looks set to continue with the May readings to be released in the coming days.  Of note, non-manufacturing ISM, whose employment reading is an input in forecasts for the monthly jobs report, will not be released until after the employment report next week. 

The April personal consumption expenditure data is expected to confirm the strong retail sales (which account for about 40% of PCE).  May auto sales are expected to remain firm but little changed sequentially.  The PCE core deflator, the inflation measure the Fed targets will likely remain at 1.6%.  The US 10-year breakeven continues to trade around there as well.

Due to a 40k person strike, the US nonfarm payroll data will not be clean, and the risk is on the downside.  The internals, like hours worked and hourly earnings, are likely to be little changed.  If there is a place to look for a pleasant surprise, it would be with the unemployment rate.  A tick down to 4.9% could offset some disappointment. 

Fed Governor Brainard, who speaks after the employment data, may be an important barometer. Although we don't put her in the inner sanctum of the Fed's leadership, her cautiousness first and then her sensitivity to international developments seemed to anticipate broader developments.  Yellen speaks again on June 6. 

Given that the dollar has rallied four weeks, and the risk-reward favors waiting until after the UK referendum, we suspect that the market is ripe for a correction.  Such a correction could be spurred by expectations for a rate hike being shift from June to July.  The main hurdle for a July hike is a communication challenge stemming from the absence of a pre-scheduled press conference.   We anticipate a dollar correction and will be particularly attentive to short-term reversal patterns in the coming days.”