Post-Payrolls Dollar Analysis: Buy-The-Dip or Sell-The-Rally?

Dollar's price action since Friday's disappointing non-farm payrolls suggests the greenback hasn't yet turned into a sell-on-rally currency even if bulls are left disappointed, Bloomberg strategist Vassilis Karamanis writes.

U.S. Dollar Still a Buy-The-Dips Currency

Dollar sell-off after the payroll numbers was short-lived, thanks to some sizable good-through-the-data buy orders vs the euro, yen and pound which absorbed much of the selling pressure, according to traders who asked not to be named as they aren't authorized to speak publicly. The greenback has long been a buy-the-dip strategy for most investors as the Federal Open Market Committee was thought to be on a 2015 lift-off path. Even as that is now derailed as Future Fed Funds show probability of a Fed hike this year dropping to 33.8 percent, investors may not be ready to turn bearish on the U.S. dollar just yet, as the Fed is still poised to be the first major central bank to tighten policy.

Monetary Policy Divergence Remains

The first FOMC rate rise is now priced somewhere between March and July 2016, assuming the first policy tightening shifts the current zero to 0.25 percent rate band to 0.25 percent to 0.50 percent. Federal Reserve Bank of Boston President Eric Rosengren, who's a voting member next year, says the U.S. economy needs to grow at a 2 percent pace in the second half of 2015 to justify an interest-rate increase by December.

At the same time, other major central banks look set for further monetary policy stimulus, or at the very least, delay their tightening schedule. MPC-dated Sonia forwards price have pushed the first full 25 basis points Bank of England rate rise out to 2017 from late 2016 prior to the U.S. jobs data. Bank of Japan has a 42 percent chance of adding further stimulus this month while European Central Bank may join BOJ to address worries on downside risks to growth.

Barclays's strategists including Nikolaos Sgouropoulos said in a client note that further ECB easing may be announced as early as at the October meeting in the form of a time extension to the QE program.

NOTE: Vassilis Karamanis is a strategist who writes for Bloomberg. The observations he makes are his own.

With assistance from Richard Jones and Stefania Spezzati 

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