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    Fed hike still somewhere over the rainbow – Westpac

    Sean Callow, Research Analyst at Westpac, suggests that for all the effort put into forecasting US non-farm payrolls each month, the report retains the potential to produce surprises that have a lasting impact on markets.Key Quotes“Every G10 currency is up against the US dollar over the past week, and by a lot. Gains are led by NZD (4.6%), bolstered of course by the RBNZ’s steady hand and apparent reluctance to cut rates again. Sterling is the laggard (0.6%), as polls show a tighter contest with only 2 weeks to the UK’s EU vote. But otherwise, gains range from 2.1% for JPY to 3.4% for AUD.The 150k average NFP growth pace so far in 2016 is a steep slowdown from 2015. Fed chair Yellen this week sounded hopeful that the data did not augur a broader slowdown. But little wonder pricing for a rate hike next week is 0% and only 50/50 by November. This backdrop should chip away at USD for some time.The Fed outlook is one of two key drivers of the past week’s AUD/USD gains, producing the first (brief) 0.75 prints since 5 May, the aftermath of the RBA rate cut. In May, AUD/USD was slammed from above 0.77 by the rate cut, sliding iron ore prices and a sudden increase in speculation about a Fed hike in June or July. AUD/USD’s recovery this month to the 0.7450/0.7500 area seems fair, with iron ore prices recovering a little after the probe under $50/tonne, the RBA firmly on hold in June (the other key driver) and pricing for near term Fed tightening unwound after the May payrolls shocker. There is probably scope for probes of 0.7550 so long as USD remains on the back foot.But we doubt the 0.75 handle will be sustained, given our unchanged base case of an RBA rate cut in August, Fed hike in September and multi-week/month downside risks on iron ore (Q3 swaps are trading around $46/tonne). We still see the Aussie 0.72 and below in Q3.”

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