ING on USD - FJElite

It looks like FX and interest rate markets (plus this author) were getting a little ahead of themselves in expecting confirmation of hawkish views from Kevin Warsh at Sintra yesterday. Most of the panel discussion involved rubbishing forward guidance as a monetary policy tool and Warsh studiously avoided commenting on any of the Fed's or his own thinking. About 20 minutes into the discussion, the market decided that no hawkish rhetoric would be forthcoming and US short-dated rates dropped 5-6bp and the dollar sold off. Those moves have since been retraced. When the dust settled, it looked like the market was taking the view that Warsh had no complaints about Fed tightening expectations built in by the market, which had helped to lower inflation expectations.

In consequence, Warsh seems happy to let the data drive market expectations and keep the monetary policy debate in-house for FOMC meetings. On that subject, today sees the June NFP reading. Consensus is around +115k, with a whisper number near +140k. The unemployment rate is expected to remain low at 4.3%. We suspect that whatever the number, the dollar can remain relatively supported. Barring a big miss and massive downward revisions to previous months, the Fed's position is that, given the static size of the labour force, even a number close to zero does not need to see the unemployment rate pick up.