In the wake of weaker US job data, investor clients have generally been focused on two key issues: (1) fading US economic prospects and (2) outside of the US, a possible policy inflection point, with the momentum of further policy easing seen to be slowing rapidly.“The two issues are linked in so far as US dollar (USD) strength in Q1 was, in our view, largely driven by currency weakness against the USD rather than by robust US economic data” says Standard CharteredThe Bloomberg US Economic Surprise Index has fallen sharply since 12 February, after some initial hesitation in early February. The only US data print that showed consistent strength was US non-farm payrolls (NFP) – until March. The USD was able to ignore this for quite some time, precisely because the market was focused on easing outside of the US. The momentum of this easing has appeared to slow in the past two weeks, while US NFP data was also materially weaker than expected.The result has been a material reduction of long USD positions by the speculative community. Investors have also begun to question whether the end of policy easing in the likes of Europe and Asia is at hand. The answer is an unequivocal ‘no’, but, what of the risk of stronger US economic data in Q2? Not only is the market not pricing this in, but it also appears to be looking the other way, dwelling on whether US Q1 real GDP growth will be 1% or 2% q/q SAAR given weather-related distortions, when it could be above 3% in Q2.

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