Slowing Down the Mint

In hours the Minutes will print
Perhaps they will give us a hint
Of when the Fed’s caper
The now famous taper
Will help them to slow down the Mint

The dollar continues to perform well against the Emerging market set, but is rallying against its G10 brethren as well this morning. Pretty much everything you read today prefaces some point with “…before the Fed minutes are released.” I don’t know that I can ever remember the Minutes being so anxiously awaited. The question is whether they will be that meaningful. I mean the release this afternoon has taken on almost mythical significance. I have a feeling we could all be very disappointed as they won’t actually reveal the starting date. I think we already know everything; that the Fed is watching the data closely and if the numbers continue to show their recent slow improvement, the Fed will slow down its rate of purchases. How will that disappointment play out? My guess is the initial move will be a dollar sell-off and equity rally. But ultimately, it remains clear the Fed is strongly considering a reduction of QE and so the dollar will eventually benefit further, likely even before the end of the session.

Perhaps just as interesting to FX markets has been the story from Germany where FinMin Wolfgang Schaeuble admitted yesterday that the Eurozone would have to resort to the “further measures and assistance” for Greece that were agreed last November. Cutting through the euphemisms, he is saying that Greece is going to benefit from either having loans forgiven or receive direct aid. As I have written consistently for the past 3 years, Greece is broke and there is nothing that the country can ever do to repay the current debt outstanding. They have already forced the private sector to take its haircuts and now most Greek debt is owned by the public sector. Thus, Schaeuble is starting to pave the way for the public sector to actually pay the freight. Now he and Merkel want to prevent any problems ahead of the German election in about 5 weeks, but there is no doubt that within a relatively short time after the election, we will awaken to a story about the Eurozone writing down debt or putting up straight aid, not loans. This highlights the ongoing problems for the euro, and remains one of the key reasons that I find it difficult to see a significant rally. However, I respect the flow story and the ongoing changes in the balance sheets of the Fed and the ECB continue to be a key support for the single currency.

In the UK, we saw modestly weaker data with the PSNB falling a smaller than expected £1.6 Billion indicating that the recent better than expected UK data has not yet led to an increase in tax revenues. But the market didn’t seem to care much as the pound is essentially unchanged this morning. The other stories about the pound are of the Mark Carney variety, with more analysis on the newly invoked BOE guidance efforts. While guidance had been modestly successful for the Fed, I believe that markets are becoming wise to the idea that guidance is an effort by the central banks to NOT do something, and as I wrote yesterday, markets are pining for action not words. I believe that we will continue to see markets push hard to force central banks to act, and will punish either government debt markets or currencies or both if guidance is all that they see. In this case, I actually think the pound has room to rally further because the BOE guidance has been an effort to continue low rates without spending any resources. One of the natural outcomes would be a weaker pound, something welcomed by the British manufacturing community. So a stronger pound would be the market response to force the issue.

In the commodity space, both CAD and AUD have traded lower, with CAD back at its lowest levels in a month. This seems to be a combination of general USD strength, combined with some softness in commodities and somewhat weaker minor data released yesterday. The options community seems to be focused on 1.0450, but the big psychological level will be 1.0500. While we did spend some time above that level back in June, it has represented a pretty strong resistance level during the past several years. Unless the Fed spells out a taper timeline, I think we fail at that level for now.

USDINR traded to yet another historic high overnight, falling some 1.2% as the RBI has proven incapable of convincing anyone that they can manage the situation. My big concern is that we are at the beginning of a legitimate currency crisis there and that we are going to see an imposition of restrictions and other measures as capital flees the country as quickly as it can. Who knows, maybe it will force the politicians to act, which is desperately needed, but of that I’m not confident. At the same time BRL has stabilized for the moment, seemingly finding a short term home around 2.40. While I continue to look for further depreciation in the Real, it will probably be a few sessions before that starts again. Across the rest of the space, most currencies are suffering this morning as well, but that is part of the general market activity rather than country specific news.

Later this morning we will see Existing Home Sales (exp 5.15M) but nobody really cares about anything except the Fed Minutes at 2pm. Equity futures are soft right now, but don’t look for anything until the Minutes are released.

Good luck

Misguided Efforts

We all know a banker named Ben
As part of a group of old men
Who used all their weight
To try to inflate
Large bubbles in stocks, bonds and yen

But markets of late have decided
Those efforts have been quite misguided
So stock markets fall
And bonds hit the wall
While currency moves are one-sided

It seems that all the carefully constructed theories about how central bankers should be doing their jobs, including the idea that just because interest rates were cut to zero didn’t prevent those same central banks from easing policy further, are starting to come undone of late. Guidance, the next step after QE, has become all the rage in the central bank community, but it seems to be losing its effectiveness. It all began when Bernanke uttered the famous word “taper” as part of an answer to a Congressman’s question back in May. Suddenly, the idea that the Fed would print money forever was dashed and markets have been responding ever since. Yesterday, 10 year Treasuries traded at their highest yield in 30 months, and while they have rebounded a bit this morning, this move still has legs. We are watching EMG equity markets get decimated, led by Indonesia down more than 20% from its recent peak. EMG currencies are falling dramatically. INR traded to new all-time lows (dollar highs) overnight, and the folks in Sao Paolo are really starting to get nervous about the BRL’s weakness (new 4+ year lows yesterday again). I have seen the BRL movie before and it doesn’t end well for the Real. At the same time what is so interesting, is that all the G10 currencies are holding up very well. If you think back to 2008, what we saw was that investors fled from every currency and asset class that wasn’t US Treasuries, and the price movements seen then were quite clear. That was the period where we coined the term risk-on/risk-off. It was a simple paradigm and easy for everyone to trade. But that is not what is going on in these markets. In fact, these seem far more reminiscent of the Asia Crisis of 1997 than the Financial Crisis of 2008. The constant refrain is that funds are flowing out of emerging markets, both direct investment and equity and fixed income securities, and heading back to the developed world. While that is certainly true, at this point the question is, just how much more of this will occur? My sense is that we have a lot more selling to come.

So let’s look at the far less interesting G3 currencies for a moment. The euro continues to perform well, edging up toward 1.34 for the third time in the past three months. If it cannot break that level convincingly, I think the technicians are going to have a field day calling for a major reversal lower. As I wrote yesterday, though, even with the taper of QE assumed, the Fed’s balance sheet is growing much more rapidly than the ECB’s, which actually seems to be shrinking a bit. I continue to believe this is one of the underlying drivers of the euro’s recent surprisingly strong performance, and it doesn’t seem like it will change in the near term. In fact, yesterday the Bundesbank, playing to its home audience, was explicit in its comments that the ECB’s pledge of low rates for an extended period didn’t mean that rates couldn’t be raised to combat inflation. Now, there don’t seem to be many inflationary pressures in Europe right now, but the Germans have always been hyper vigilant on the issue. The problem for the ECB, and especially for Signor Draghi, is that the Bundesbank continues to muddy the message he is trying to convey. This goes back to the idea that markets are running out of patience with guidance by central banks and want to see actions. But in this context, if the ECB’s actions are of the balance sheet shrinking variety, then the euro will remain underpinned despite all the problems with the economies in its member countries. The ECB has always been more constrained by its mandate than the other big central banks, and right now, that seems to be a key euro support.

In the UK, the market has also shown some doubts about Governor Carney’s promised guidance as he left himself too many opt-outs of the low rates for a long time thesis. So, the combination of an economy that has been producing surprisingly better economic results and doubts about the central bank’s willingness to keep rates at rock bottom levels has led to support for the pound. In fact, over the course of the past 6 weeks, from just after the time that Carney stepped in, the pound has rallied almost 6% a better performance than the euro or any other G10 currency other than the CHF (barely).

Finally, in Japan, we have seen very little in the way of movement lately. While the longer term view for the yen remains for a much weaker currency, the market is waiting for more actions, this time by the Abe government, to implement the promised, and desperately needed, structural changes to labor laws, and agricultural subsidies. Of course the politics of those moves were always going to be difficult, but perhaps given Abe’s commanding strength in both housed of government there, he will be able to get things done. In the meantime, Kuroda-san has not turned off the printing press and his promise of ¥7 Trillion of JGB buying per month is doing its job to expand the BOJ balance sheet. Remember, Kuroda’s target is to double the money supply over his first 2 years. Further yen weakness will come.

The overnight data was not of the market moving variety nor will today’s US data do anything. At this point, all eyes remain on the FOMC minutes to be released tomorrow at 2:00pm here in NY. Until then, look for EMG currencies to continue to suffer and majors to range trade.

Good luck

Away From the G10

Away from the G10 we’ve seen
That traders are really quite keen
To sell the Rupee
And while on that spree
The Rand and Real they demean

Mixed is the best description of the FX markets this morning as we are seeing the dollar weak against the euro and pound, rallying slightly against the yen and much stronger vs. a number of EMG currencies, notably BRL, INR, ZAR and MXN.

Starting with the G3, the euro seems to be benefitting from the realization that the ECB’s balance sheet has actually been shrinking over the past 3 months, and is now actually $400 billion smaller than the Fed’s. And that trend shows no signs of slowing. European banks continue to repay the LTRO loans, (some $57 billion since May) reducing the ECB balance sheet. At the same time, the Fed continues to buy $85 billion in Treasuries and Mortgage-backs each month, inflating theirs further. With no actual QE by the ECB, its balance sheet has no prospects for growth. So even though the taper is going to reduce the rate at which the Fed acquires assets, they are going to continue acquiring them for a while yet under virtually any circumstance. I believe this has been an important and little known fact that has helped underpin the euro’s relative strength of late. Every time I look at the big picture in Europe, I can see no good reason for the euro to maintain its current levels, but this information may be why the single currency has been so resilient. It is also why the taper is so important for the dollar’s value, as when the Fed stops ballooning its balance sheet, the dollar should find more significant support. As to the pound, it has been dragged higher by the euro, but there has been very little in the way of information as a driver. Meanwhile, the yen is softer this morning, down 0.50%, after the release of a much larger than expected Trade Deficit last night. The decision to shutter its entire nuclear fleet continues to have a major impact on the Japanese economy in two ways. First, there are concerns over the ability to generate sufficient power to insure that air conditioners stay on and factories continue to run at peak efficiency, and second, the Trade deficit continues to widen as the high cost of importing fuel impacts that directly. But given the general lack of volatility of late, and the fact that the summer vacation schedule continues to detract from market liquidity, right now these currencies don’t seem so interesting.

So let’s look at the EMG space instead, where we see USDBRL having traded to its highest level since March 2009 just below 2.40. If you recall, it was several months ago that I called for a move to 2.50, and now the market has really started to roll. While the central bank continues to try to minimize volatility, it does not have sufficient reserves, nor apparently credibility, to do the job properly. Weekend comments highlighted internal dissent between the government and the central bank and that is only likely to help the weakness continue. The thing about currencies like BRL is that once they get rolling, they have an opportunity to really overshoot any semblance of reality. So while I think 2.50 is almost a certainty now, I think there is a very real chance that it could trade to 2.75 or even beyond. And it can do this far more rapidly than you might think, so beware. India, too, is having serious problems as the central bank there is also running out of tools to help it manage the weak currency. As I have written consistently, slowing growth and rising inflation are a very difficult mixture for a central bank to manage effectively. At some point, they have to decide which issue they will attack first, to the detriment of the other. So if they go after inflation, growth will slow further, while if they attack inflation, then a recession is quite possible (likely). It should be no surprise that the INR is falling further, down another 2.25% overnight to yet another new low and now above 63.00. It was several weeks ago that I called for 65.00, but 70.00 now feels very realistic. Remember, the thing about EMG currencies is once they get started on a move of this nature, it is very difficult to slow them down without significant policy changes. As to the ZAR, it has moved back above 10 for the first time in a month as continued unrest by unions combines with further rate rises in the US Treasury market giving investors two reasons to exit the currency. In MXN, the big figure is 13.00, but here too it has been more than a month since we have traded at these levels. The story here is more focused on the US side of the equation, with better growth and higher Treasury yields sufficient to dissuade investors from emerging markets in general and seeking the safety of dollars. The dollar is strong throughout the EMG space and as long as we continue to see Treasury yields rally, I think this situation will continue.

While there is no data today, we do learn about the housing market this week, as well as get the FOMC minutes from the last meeting. Here is a look at everything expected:

Wednesday Existing Home Sales 5.15M
FOMC Minutes
Thursday Initial Claims 330K
Continuing Claims 2970K
Leading Economic Indicators 0.50%
Friday New Home Sales 487K

My guess is that the minutes will be the most interesting information unless the housing data miss forecasts dramatically. Of course, if the equity market weakness of last week continues more dramatically, then we could see a bit more volatility than we have been in the G10 currencies, but right now it does not feel like there is much to get excited about.

Good luck

Beginning to Heal

In Europe they’re starting to feel
That growth is beginning to heal
So euros are strong
And pounds are along
For the ride. Its all somewhat surreal

First the big news – yesterday was my first day at RBC. As time progresses you can be sure I will be reaching out to sit down and discuss things, but for now, as I am all alone on the desk in NY, the occasional phone call and my morning note will remain my MO.

Data out of the Eurozone this morning showed export performance improving while inflation remained under control. This combination has encouraged the FX community to bid up all G10 currencies relative to the dollar, with the euro and Aussie leading the way. The GDP data earlier this week was the first sign that things were getting better, although a closer look shows that stronger growth in Germany and, surprisingly, France offset still very weak situations in Italy, Spain and the Netherlands. So is the situation uniformly better in Europe? Clearly not yet. But at least it seems that they may have found the bottom in the economy. And that, when combined with the mostly mixed data that we have been seeing in the US, (yesterday’s IP, Capacity Utilization and Empire Mfg were all softer while Initial Claims fell to their lowest level in 5 years and Retail Sales were strong) has been enough to adjust attitudes. Hence the dollar’s current weakness. This morning we add the Housing picture to the markets with Housing Starts (exp 900K) and Building Permits (945K) at 8:30 followed by Michigan Confidence (85.2) at 10:00. As I wrote earlier in the week, the data would give us the opportunity to evaluate the ongoing recovery here, and so far it remains tepid at best.

But the question remains, is tepid good enough for the Fed to still consider the taper? Everything that I read, including St Louis Fed President Bullard’s comments last night, lead me to believe that the Fed has become quite concerned over the possible downsides of exploding its balance sheet from a bit less than $1 trillion prior to the 2008 crisis to almost $4 trillion now. And remember, even the taper won’t stop that growth, merely slow it down slightly. While they certainly take comfort in the continuing low inflation readings, I am certain that the FOMC is aware of the potential for inflation given the amount of reserves that are in the system. While they have not really been a problem to date, recent data shows that they may be starting to migrate from the excess category to the utilization category. And that is where inflation will start to show itself. At any rate, the betting is still for the taper to begin next month and I believe the market has a $20 billion reduction penciled in. So any difference from that will be the mover when the Fed finally speaks again.

In the emerging space, INR has traded to yet another record low, breeching 62 for the first time, although it has since rallied back a bit. This show is not over folks, and I continue to look for at least 65 and perhaps an eventual move toward 70 as it evolves. The RBI is losing reserves, down 7% so far this year, which means their ability to manage the currency will be impaired further. They are running out of things to do short of significant changes in fiscal policy. Alas, given the current political situation that is nigh on impossible. Brazil, too, is finding themselves on the wrong side of the market right now, and my view of 2.50 remains intact. Last night the central bank announced they would be rolling over their currency swaps on some $5 billion and they continue to intervene to try to smooth the market. While inflation printed slightly below the top of their range at 6.27%, it remains a grave concern. This is especially so in light of the fact that growth has shown no spark. It appears that Brazil is redefining the term stagflation, and that is going to weigh on the Real for a while yet.

The flip side of that is China, where the Renmimbi has been remarkably stable over the past months, stuck between 6.11 and 6.15 for months now. This has prompted discussion that the PBoC may widen the trading band again, perhaps to 2% or 3% from its current 1%. This is all part of the Chinese effort to achieve a convertible currency so that the CNY gains in global prominence. However, that goal remains a distant one as there is no indication they are going to suddenly remove exchange controls and it remains a question as to whether or not the Chinese banks could even withstand the pressures of a fully convertible currency. You know that the government will want the local banks to dominate the currency trading, but they won’t have the ability to do so in their current state.

For today, I think we see modest further USD weakness against the rest of the G10. However, if Treasuries accelerate their recent decline, that might change some views, further hampering the equity market and likely forcing some traders out of short USD positions.

Good luck and good weekend

On the Right Road

In England the MPC showed
That not all the members bestowed
Their blessing on speech
Designed to beseech
To the market they’re on the right road

The two biggest stories overnight were the MPC minutes failing to show unanimity over Governor Mark Carney’s new guidance idea and the GDP data release for the Eurozone printing higher than forecast. Interestingly, adding the modestly better UK employment data to the mix did nothing to move the FX markets at all. Both the euro and the pound are virtually unchanged from yesterday despite the news…or perhaps because of it. At any rate, the MPC voted 8-1 to approve the new guidance concept with the naysayer being confirmed hawk Andrew Weale. His concern was the timeline was too long for some of Carney’s opt-outs on the low rate guidance. But the UK employment picture showed the Unemployment Rate unchanged at 7.8%, the claimant count falling and was generally perceived as better than expected. Net, the pound is marginally higher this morning but the movement has been well within the recent trading range.

As to the euro, perhaps this is a greater disappointment. It is unchanged from yesterday’s closing levels despite Q2 GDP growth of 0.3% (exp 0.2%) led by Germany and France both printing higher than forecast. Remember, Europe has been in the midst of a 6 quarter long recession, so this more robust growth should be seen as quite a good outcome. Both Italian and Spanish 10yr yields have fallen a bit and more importantly, they have narrowed their premium over German Bunds to the tightest in 2 years. That spread narrowing should also be seen as quite a positive for the euro as it implies the bond market is becoming more comfortable that the worst is over for the peripheral nations. (Personally, I am not a believer in that idea). But the euro has been unable to gain any traction at all. What to make of this outcome? I think a combination of summer holiday doldrums and insufficient pizzazz in the numbers have left traders unwilling to commit to new positions.

In the EMG space, Brazil was notable for its weakness yesterday, setting new lows for the move and continuing its march toward 2.50. It seems the only news of note was the Brazilian House of Representatives passing a bill that would prevent the administration from cutting spending already authorized by the House. However, I believe the bigger problem here is ongoing concern over China’s growth leading to softness in commodity prices as well as the continued competition for investment dollars from higher interest rates in the US. The central bank was not seen in the market yesterday, but if USDBRL continues to rise, I expect it will show up today. They are clearly concerned about allowing the BRL to weaken too rapidly.

Meanwhile in India, inflation data printed higher than expected, at 5.79%, well above the 5% target they have. The INR has moved back to within pips of its recent historic lows and I expect it to breech those and move further in the next weeks and months. Despite a faltering growth outlook, the central bank is more likely to have to raise rates than lower them in the near term to fight an inflation situation that is beginning to get out of hand. The government has imposed 10% tariffs on the importation of gold and silver as a means to prevent the current account from getting too far out of balance, but as long as the government there remains unable to cut away red tape and allow the country to grow more rapidly, the Rupee is likely to continue to suffer. I continue to look for 65.00 before it’s done.

This morning brings only the PPI data here in the US (exp 0.3%, 0.2% core) and so is not likely to move things. However, with a bunch of data tomorrow, including CPI, Empire Mfg and Initial Claims, perhaps we will see a bit more action then. In the meantime, keep your eyes pealed for any comments by Fed players as that is the best chance for market moving information, although none are scheduled to speak today.

Good Luck

Is Europe Beginning to Grow?

Is Europe beginning to grow?
Economists claim that they know
It’s nearly two years
That growth’s in arrears
But now it’s moved up to so-so

The dollar continues its rebound from last week’s depths with the yen suffering the greatest fall, but most currencies declining. The Japanese story was a combination of better than expected data (Japanese Machine Orders grew 4.9% in the past year compared to expectations of 2.6%) and a story that in order to offset the potential fiscal tightening of the increased national sales tax, PM Abe is considering a cut in corporate tax rates to help stimulate growth. This was sufficient to bring out the yen sellers and spot has jumped more than 1.6% as I write. From the charts I think there is still room for a bit more upside, but barring any further news from Japan, I think 99.00 will certainly cap this rally. Of course, the opportunity for further news of this nature remains quite significant as Abe is struggling to get Japan back to its former glory. If he perceived this has had a salutary impact, look for another announcement of some newly tweaked policy in the near future. But not today.

In Europe all the discussion is on the narrowing gap between German Bunds and the yields of Italian, Spanish and Portuguese debt. The claim is that expectations of a resumption of growth in the Eurozone (Q2 GDP is expected at +0.2% tomorrow) will lead to a further reduction in any tensions with the peripheral nations. In fact, there are some who are expecting these nations (excepting Greece) to start to show positive GDP numbers by the end of the year. While nothing is impossible, the trajectory of Eurozone growth has not been such that I feel that is likely. Remember, the two key elements that started all these problems were the massive sovereign debt loads and the extremely weak banking sectors of these nations. And to the best of my knowledge, neither one of these issues has been even remotely resolved. While banks are trying to raise more capital, their loan portfolios continue to deteriorate, and all of the peripheral nations continue to see their debt/GDP ratios growing rather than shrinking. Many very serious problems remain in Europe and the political will to actually address them has yet to be found. I don’t think we will see too much activity ahead of the German election next month, but if we do see something, the likelihood is that it will be a negative event. So the euro remains little changed this morning near 1.33 but I think a slow drift lower is the most likely short term path. As I said yesterday, 1.30 is the target, but it will be a gradual move.

In the EMG space, ZAR has been the biggest loser, falling about 1% after unrest at some mining sites has raised the specter of a repeat of last summer’s activities. The rand can ill afford more problems like the striking that was seen last year given the alternative investment opportunities, not least of which are US Treasuries with a much higher yield, than last time this occurred. ZAR has already fallen more than 18% since the beginning of 2013 and all indications are that there is more to go. Meanwhile, MXN is weaker this morning after the market registered disappointment over President Nieto’s ‘reforms’ of PEMEX and the oil industry. This is one of the great tragedies of Mexico, the slow collapse of its energy infrastructure because of the nationalism that is attached to the issue in the country. The inability of PEMEX to even utilize the expertise of the international oil community to help improve its output has reached a point where it is on the political agenda. But the initial proposals were minimal, and the peso has suffered accordingly. While we are nowhere near the lows seen back in June, given the dollar’s underlying strength and no reasons to believe that further policy changes are forthcoming, a move toward 13.00 seems a reasonable bet here. Finally in this space, HUF has fallen some 0.75% after releasing softer than expected inflation numbers. This has the market talking about further rate cuts by the central bank there, with the natural currency response being a decline.

For one day at least, it seems there has been some logic in the FX markets. However, I wouldn’t get used to it.

This morning we will see Retail Sales (exp 0.3%, 0.4% ex autos) and then Business Inventories (0.2%) at 10:00. Equity futures are higher this morning after a recent weak run and Treasuries have fallen a bit with the 10yr yielding 2.66% right now. While market conditions remain relatively light due to holiday schedules, I continue to look for marginal USD strength, especially if we see a strong Retail Sales number. That said, there is no reason to look for a significant move today barring some Fedspeak or other comments out of the blue.

Good Luck

Abenomics Failed…Last Quarter

Abenomics failed
To increase GDP growth
Last quarter, at least

The dollar is firmer this morning, breaking its recent downtrend as the Asian session opened with news that Japan’s GDP grew a much less than expected 2.6% in Q2 (exp 3.6%). The yen weakened immediately and has retained those losses and the dollar has fared well against pretty much all currencies. In Japan, the ongoing debate remains about increasing the national sales tax, with a 3% rise slated for April 2014 followed by another 2% rise in October 2015. However, the weaker GDP numbers have called into question the country’s ability to withstand a tightening of fiscal policy at this stage, especially given the extraordinary focus on increasing growth and core inflation. Traders are starting to discuss the idea that there will be another round of easing by the BOJ as a response to the weaker data with yen weakness a natural outcome. While the timing of further stimulus remains uncertain, I am in the camp of believers that the BOJ will do more, and probably sooner rather than later. My sense is a rally back toward 98.50 or so is likely in the next several sessions.

Both the euro and the pound are also weaker this morning, although not falling nearly as much as the yen. The weekend press in Europe has been generally quiet due to the preponderance of summer holidays being taken right now, but in several places I have read about further concerns over Portugal and Greece. While Ireland seems set to make a tentative exit from its bailout requirements on a timely basis, Portugal is slipping on its commitments and Greece has never even come close. Despite some modest progress, both these nations are going to miss their budget deficit targets and require further financing. The problem is the Troika, or at least the IMF, seems increasingly unwilling to put up the cash. Greece remains in the worst shape of all with a budget hole of some €4.4 billion for 2014 and a larger one going forward. Growth continues to elude the nation and unemployment continues to expand. There has been no political will to actually dismiss government employees, one of the key measures required by the Troika. Asset sales have been de minimus and continue to lag the targets that were assumed as part of the financing package. In other words, virtually nothing of import has changed, so it can be no surprise that the country remains mired in a depression with a sense of hopelessness attached. I can see no situation where the Greeks repay their debt. It is simply a matter of time before the political cognoscenti in Europe see admit that as well. Perhaps after the German election we will see some views altered in public. While Portugal’s situation is not quite as dire, it too has been unable to generate the political will to make the changes required by the Troika. This has led to the government there losing key support and only a fragile coalition remains in place. These problems highlight the ongoing concerns in Europe, without even mentioning Italy’s increasing political difficulties. All in all, things in Europe remain quite problematic from a policy perspective. That said, it appears that the continent may be exiting its 6 quarter long recession as forecasts are for growth of 0.2% in Q2 (to be released Wednesday). While that would be a welcome outcome, it is hardly sufficient to change the monetary policy framework and we can continue to look forward to either no change or further ease from the ECB for now. All of this is a long way of saying that the euro has likely peaked after its recent modest rally, and I think it heads back toward 1.30 in the sessions ahead.

Looking ahead to this week, the data calendar is far more interesting than last week and some data has market moving potential. We will learn more about inflation and housing as well as the manufacturing situation in the Northeast of the country.

Today Monthly Budget Statement -$94.5B
Tuesday Retail Sales 0.3%
ex autos 0.4%
Business Inventories 0.2%
Wednesday PPI 0.3%
ex food & energy 0.2%
Thursday Initial Claims 335K
Continuing Claims 3000K
Empire Mfg 10.00
CPI 0.2%
ex food & energy 0.2%
Long Term TIC Flows -$10.0B
IP 0.30%
Capacity Utilization 77.9%
Philly Fed 15.00
Friday Nonfarm Productivity 0.6%
Unit Labor Costs 1.3%
Housing Starts 905K
Building Permits 948K
Michigan Confidence 85.3

While the Fed has clearly been more focused on unemployment than inflation, any surprises on the high side of CPI will almost certainly hit the bond market and are likely to support the dollar further. In addition, strong Philly or Empire numbers will be equally dollar positive.  After all, there seems to be a growing consensus that the Fed will begin to taper its QE come next month. So all in all, I think the dollar has reason to perform well this week. Not explosively, but certainly I expect it to be higher on Friday than it is right now.

Good luck

Less is More

Last night from the Chinese we learned
That growth there just might have returned
The market reaction
Showed some satisfaction
‘Bout Aussie, while dollars it spurned

Under the heading, less is more, today’s note will be extremely brief. Recent price action does not make for a very compelling story in any currency. Broad underlying themes remain in place, but the day-to-day activity is just uninteresting right now. As such we have once again seen a pretty dull overnight session. While the USD is generally softer, it is by no means universal. Norway and Australia are the leading gainers, with the Aussie story predicated on stabilization in China’s economic data (IP, Fixed Asset Investment and Retail Sales all released in-line to modestly better) and the Norwegian saga one of higher inflation readings indicating potential higher interest rates in the future. But you know that when I am leading with AUD and NOK that things are just not that interesting. The euro, yen and pound are all trading within pips of yesterday’s closing levels and quite frankly there has been little of real interest regarding any of these currencies. It appears that we are in the midst of the summer doldrums and the combination of thinly staffed trading desks due to summer holidays and lack of new policy information has reduced activity. In fact, CLS, which is an interbank, intraday settlement system, announced that daily volume has fallen by 16% in the past month. I think that is a pretty good indication of the reduced interest in the FX market right now.

In the emerging market space, yesterday saw both BRL and CLP rally more than 1%, with BRL the beneficiary of central bank intervention while CLP was responding to the rally in Copper. But outside of those two currencies, even this space has been quite dull.

I have not changed my long term views (equities and bonds are overpriced and the dollar has room to rally) but with no US data on which to focus and no scheduled speakers of note today, quite frankly I believe hedgers will be able to spend their time better on other tasks today.

Good luck and good weekend

Jobs Need to Be Created You See

Twixt England, Australia and here
The words we’re most likely to hear
Are jobs need to be
Created you see
Elect me or they’ll disappear

The thing that these fellows don’t say
Is government gets in the way
Of companies which
Do try to enrich
Themselves, and thus hire and pay

The fundamental fallacy that is pushed by President Obama, PM Rudd of Australia and Ed Miliband, UK’s Labour Party leader, is that the government creates jobs. We hear it incessantly in every political campaign from leaders and politicians on the left side of the spectrum. It is, however, false. Companies create jobs, at least the ones that are meaningful. Government jobs serve one of two purposes: defense, which is meaningful but a small proportion of those created, or reallocating the value created by the private sector to the areas desired by the government in power. There is no value creation and therefore no permanence attached to these positions. I am reminded of this again this morning as the weaker than expected jobs data from Australia overnight was a blow to PM Rudd’s reelection campaign. Aussie fell on the release initially and was trading quite poorly until the Chinese Trade data was released ninety minutes later. Those numbers showed both exports and imports climbing significantly more than expected (by 5% and 11% respectively) and indicate that the Chinese economy is not slowing further but rather is stabilizing after its recent slowdown. Again, one data point does not a trend make, but the news was clearly positive for Australia and Aussie jumped on the report. It is now trading back at its highest level this month, although it remains down more than 14% since April.

But back to jobs and their connection to the FX markets. There is no argument that significant unemployment is both a short and long term negative for an economy. The erosion of skills that occurs, the stress on the public finances and the general malaise of the unemployed population are all very real and very problematic. (Just look at Spain and Greece) The question is how do policymakers deal with the situation and what are the most effective solutions. And the problem is that in the current situation across most developed nations, policymakers have not been able to address the problem effectively. In most cases this seems to be a partisan issue, where the most likely solutions, like freeing up the labor market from its many restrictions, are anathema to the party in power. And the proposed solutions, like raising the minimum wage, are exactly the wrong medicine for the problem. The more a country pushes this type of process, the worse it is for that economy and by extension the currency attached. So here in the US, for example, we have that exact situation in place. Calls for a higher minimum wage, dismissiveness towards potential job creation of major private projects, like the Keystone XL pipeline, and a weakening currency. As I continue to try to understand the FX market, I look at US monetary policy, which while still quite easy has pretty clearly reached an inflection point as to the extent of that ease. They will be tightening soon with the taper. Fiscal policy could hardly be considered tight, although the sequestration did tighten it somewhat. The economy is showing signs of more stable growth and the employment situation, at least as measured by the Unemployment Rate, is improving. And yet the dollar remains on the defensive. Arguably, amongst the major currencies, the situation in the US is the best of the bunch. So why is the dollar soft? I cannot attribute it all to the misguided ramblings of the president with regard to his ‘jobs’ ideas, but underlying investment decisions are clearly predicated on expectations of future policy. The US may not seem as attractive an investment destination if the government continues to interfere more broadly than it has historically in the labor market. I mean when it comes to real investment like building factories and production capabilities, labor market policies matter a great deal.

And when it comes to the FX market, changes in perception of government policies matter a great deal. Remember, markets respond to changes in relative policies, not absolute measurements. So if a country tightens monetary policy, or fiscal policy or labor market policy relative to what it had been doing, that is the catalyst for market movement. And arguably, tightening labor policy is akin to tightening fiscal policy, which has historically been a currency negative. I am beginning to think that the G10 governments are addressing fiscal policy issues through other than direct means, like labor policy, as the channel to address them directly is too politically difficult. I have a feeling we will be seeing much more in the way of this type of market intervention as we go forward, mostly to the detriment of the currencies involved.

Aside from Aussie’s rally, the rest of the G10 space has been pretty dull. The BOJ did nothing, as expected, left their economic assessment unchanged and the yen is modestly higher. BOJ Governor Kuroda went on record saying the sales tax hike was necessary and important, and more importantly implied that the BOJ would support the economy with further monetary ease when it comes into effect. Again, it is hard to see this as a yen positive, but market momentum remains for a stronger yen right now.

In the EMG space, Brazil made new lows yesterday, trading up to 2.3162 at its worst and continues, in my view, on toward 2.50. While the China news will be seen as a positive, it will not be enough to stop this trend. INR also benefitted from the China news, rallying a bit, but remains within one Rupee of its record low. MXN, ZAR, KRW and the other larger currencies in this space have all rallied modestly overnight although this appears to be more general USD weakness rather than specific currency strength. Today’s Initial Claims data is not likely to have a substantial impact, so as we continue with summer markets, I expect the dollar’s slide to extend a bit further. Ultimately, I am still a dollar bull, but the market is telling us that being bullish the dollar right now is the wrong trade. So receivables hedgers, take advantage of this dollar weakness as I am convinced it will dissipate as we head into the fall.

Good luck

Inflation? Whatever

Said Carney, Inflation? Whatever
Our mandate requires we endeavor
To help England grow
When it’s apropos
Its fortunate we are quite clever

The pound is higher this morning although I’m not sure I get the rationale. Carney, in his first Quarterly Inflation Report (QIR), explained that the BOE’s inflation mandate was really quite flexible. In other words, he doesn’t really care about it at all. Right now growth is the focus and to that end he promised that until Unemployment falls to 7.0%, the MPC won’t even consider cutting back on QE. And when it reaches that level, they will simply reassess the situation to determine what they think is best at that point. And what of inflation? The fact that it remains well above the 2.0% target and has been there essentially since March, 2006 (with just two blips lower) simply is not relevant in the discussion. As UK GDP has not yet attained its pre-crisis levels, Carney is going all in to insure growth is sustainable going forward. So monetary policy in the UK is going to remain on the ultra-ease setting for many months to come.

At the same time, two Fed speakers yesterday, Lockhart and Evans, both were on the tape saying that the ‘taper’ could begin as soon as September. While Lockhart has been modestly on the hawkish side, Evans is a confirmed dove and to have him agreeing with a reduction in QE likely means that it is coming soon. It has become increasingly apparent that the FOMC is uncomfortable with a Fed balance sheet that has reached $3.6 Trillion in size and Chairman Ben wants to get the unwinding process started before he leaves.

Now if we combine these two stories, imminent tightening by the Fed and a medium-term promise of no tightening by the BOE one might expect the pound to suffer a bit. However, once again the perversity of the FX markets shows through and instead we see the pound higher. I wish I had a good explanation for that, but alas, I just don’t know. Arguably positioning ahead of the QIR has played an important role in the move, but for now, it seems momentum favors a continuation to at least 1.5540 and perhaps as high as 1.5750.

Elsewhere in the G3, the yen has been strengthening further, trading below 97 overnight as the BOJ heads into its 2-day meeting tonight. There is no expectation for the BOJ to ease further now and surveys point to no expectations for any policy adjustment until next April or May. The 2.0% inflation target remains far from the current readings, but it seems that the market is more focused on the fiscal picture and Abe’s regulatory efforts rather than more BOJ activity. That’s not to say that buying ¥7 Trillion/month is not significant activity, its just already factored into the price. While my long term view remains a much weaker yen, the shorter term picture is far less clear. Could we trade back to 94-95? Clearly that is viable. However, if I were a yen recievables hedger, I would see that as a golden opportunity to manage my risk.

The euro is the least interesting major today, little changed despite more good news from Germany (IP +2.4% in June). As we are just in the beginning of August and holidays are rampant throughout the Continent, I expect there to be little in the way of new news to drive things here for several weeks yet.

But while the dollar has suffered vs. the pound and the yen, it has rallied vs. the AUD ahead of the Australian labor report tomorrow. That report is expected to show a rise in the Unemployment Rate to 5.8%, which would be its highest since January 2010. We continue to see the INR decline, although it has not yet reached the historic lows set earlier this week. The new RBI Governor, Raghuram Rahan, will have his work cut out for him to try to get India back on track when he starts on September 5. BRL remains a mess, still hovering at the 2.30 level as the Central Bank keeps on trying to prevent any further mishaps there. The bulk of the EMG currencies are a bit weaker this morning, apparently having taken the FedSpeak into account, but movements have not been very large overall.

There is no data of note today in the US, but what we are seeing is lack of liquidity having a real impact on price action. The key to managing risk in this type of market is to leave orders at a comfortable level. This demands patience.  So be certain you (and your management) have that if necessary.

Good luck