Upside GDP surprise will add new charge to talk of Fed conundrum

Low expectations for Q1 GDP all but guarantee leg up for USD, says Kristian Siggaard-Jensen. Gold likely to sell off, decrease in treasury spread trading to continue, says Serge Laureau



FX strategist Kristian Siggaard-Jensen says USD is trading at a crossroads after failing to break all-time lows against EUR this week, and with consensus estimate for US Q1 GDP set very low, the risk to USD appears to be to the upside in the short term. \"Our index of weekly US economic indicators suggests that the consensus of 1.8% is too low and a likelier outcome is 2.0-2.2%. In addition to keeping EUR/USD hemmed in technically, this will renew speculation in the market as to how the Fed can or will respond to a scenario of solid growth and elevated inflation,\" says Siggaard-Jensen, adding that US quarterly GDP readings are notoriously fickle indicators of real economic health due to their repeated revisions prior to release and deviation from quarter to quarter. Comments this week from Fed member Janet Yellen place the US economic situation in perspective, he adds. \"Yellen warned that upside risks to inflation were actually rising, and that the tight US market was fueling the upturn in price growth. She did concede, however, that while economic growth had slowed substantially, this was due in large part to the weight of US housing market woes.\" Siggaard-Jensen says this explains why the dollar’s weakness throughout much of 2007 date has not culminated in a single breakdown, as many analysts have expected.


\"Only a rate cut cycle by the Fed on a quarter-on-quarter basis from the present 5.25% benchmark rate will accelerate downside in USD substantially. In that case, the unwinding of USD/JPY carry trades would be the main focus,\" says Siggaard-Jensen.

Equity strategist Torben Krogh Nielsen seconds Siggaard-Jensen’s view that quarterly US GDP, while a figure that moves the market and must be positioned against accordingly, is revised prior to release so many times that its distortion quotient is extremely high and may or may not be a truly reliable indicator of the state of the US economy. \"The consensus estimate of 1.8% is so low that any kind of negative surprise has been effectively priced out of the equation. After a flat day for US shares on Thursday which followed a series of bumper sessions, we expect the S&P to snap higher. But given the already low expectation of the market, a reading in the 1.5 to 1.6 range will result in meaningful downside.\"

Futures trader Serge Laureau expects risk to downside in precious metals on the likelihood of a stronger than expected US Q1 GDP reading. \"Given the conspicuously low consensus estimate, there is strong likelihood that US GDP will spark short-term strength in the dollar, sending gold lower and spreading to the rest of the metals complex. This despite the fact that the case can be made that a stronger than expected GDP reading would indicate heightened demand for industrial metals - we think the impact of the number will be too strong.\"

Laureau also expects the short-term decrease in spreads between US T-notes and bunds to continue. \"The past several months have seen fairly robust activity in fixed income spread trading involving the buying of T-notes against the selling of bunds due to the disparity in outlook for economic activity for both countries.