Nomura

USD

The near-term focus is on President Biden’s announcement of the new Fed Chair, which is likely to see an asymmetric market reaction. We expect a bigger move if Brainard becomes the Fed Chair, with some pricing out of near-term rate hikes and a likely softer USD (DXY -50bp). However, an announcement of Powell will likely (at this juncture) see only a slight move up in rate pricing and stronger USD (DXY +25bp). From various Bloomberg reports highlighting US senator comments on the Fed Chair selection (some explicitly highlighting support for Powell or raising concerns over inflation), we believe a majority in the market expect a Powell outcome Our recent survey shows that most investors expect 2022 Fed hike pricing to rise if Powell is selected (29.1% by more than 10bp, while 22.8% expect 5-10bp higher), but we expect the reaction to be short-lived.

The other major focus will be the US October core PCE release (24 Nov), where Nomura’s forecast of a rise to 4.1% y-o-y (3.6% previous) is in line with the market. As Nomura economics highlighted, this is likely to be the start of a wave higher in US inflation with core PCE to be closer to 5% y-o-y by February 2022 (Nomura’s Q1 core PCE forecast is 4.8% vs. consensus 3.9%). With likely steep % y-o-y gains in key core inflation numbers ahead, we believe there is still some room for a potential hawkish surprise from the 15 December FOMC meeting.

In particular, Nomura forecasts 2022 core PCE at 3.6% y-o-y (the Fed’s 2022 median forecast is 2.3%; consensus 3.0%). There is also likely to be more hikes projected with the Fed’s median dots for 2022 and possibly 2023, which could lift the 2024 median Fed funds above 2% (currently 1.75%; EDZ4 at +1.78%). The signals from Fed speakers over the past week have shown a shift with market-perceived doves such as Evans and Daly highlighting more uncertainty over the inflation outlook and suggesting more data dependence for policy with the possibility of a hike in 2022. Fed Williams, who we believe is closely aligned with Powell’s view, highlighted he definitely saw a pickup in underlying inflation, a pick-up in short and medium-term price expectations, and the US economy was roaring back with the jobless rate seen falling.

In G10 FX, our convictions remain short EUR/USD, looking for a break below 1.12 – especially with the backdrop of Fed/ECB policy divergence. Possible triggers for a move lower in EUR will be if flash November Europe PMIs (released next week) disappoint and if Powell is selected as the Fed Chair. We enter a short AUD/NZD position (target 1.01), with AUD hurt by a stronger USD, lower commodity prices, weak China sentiment, while NZD should be supported by a 50bp RBNZ rate hike next week (consensus +25bp).