December Rate Hike Probabilities:

USD   82.8% (Increasingly likely)

EUR     2.4% (Think December 2019)

GBP   88.5% + (Done deal, probably this week)

CAD   24.3% (Ain’t gonna happen now, maybe June 2018)

Fed Rhetoric               25bps


The one thing that’s truly ‘persistent’

Is price rises are nonexistent

Thus Draghi will keep

The cash rate quite cheap

With any rate hike still quite distant!


Inflation – Inflation is defined as a sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. Put differently, as inflation rises, every dollar you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation. (from Investopedia)
Once again I will ask, why are central bankers so keen for the rest of us to pay more for the goods and services that we buy on a regular basis? I don’t know about you, but I know that I am perfectly happy when the price of things remains stable over time. And for those things like electronics, where the price falls, I think that is even better. I guess this attitude precludes me from ever being a central banker, but I would be interested to hear from anyone who appreciates rising prices in their daily life. I bring this up because once again inflation, or the lack thereof, is a key topic of discussion. This morning the Eurozone CPI data showed that headline inflation fell to 1.4% (exp 1.5%) while core fell even further to 0.9% (exp 1.1%). This brings to mind the ECB’s recent meeting where they laid out plans to cut the rate of QE purchases in half starting in January 2018, and retain the current interest rate structure (Deposit rate of -0.4%) for an extended period of time beyond the end of QE. Remember, Signor Draghi said that the ECB will remain “…patient and persistent” in their easy money stance. Well, certainly today’s CPI data will not have changed that view.


Interestingly, Eurozone GDP data continues to improve, with Q3 printing, preliminarily, at 0.6% and Q2 revised higher to 0.7%. So the economy in the Eurozone seems to be performing pretty well. In fact, it is the best performance since 2011 on that measure. At the same time, the Unemployment Rate there fell to a lower than expected 8.9%, its lowest measure since 2009. And yet, to listen to the ECB, you would think the Eurozone economy was in a depression. Falling unemployment, quickening growth and modest inflation sounds like a winning combination. But I guess not. At any rate, the market response was to sell the euro on the CPI data as that merely cemented the idea that the ECB will not be adjusting policy rates for several years to come. I have been suggesting December 2019, but if CPI remains this low, it could be longer still.


Last night we also heard from the BOJ which left policy unchanged as universally expected. Negative rates and control of the yield curve have certainly helped the economy, which has shown positive GDP growth for the past seven quarters, its longest streak in 16 years, and it has helped power the Nikkei to its highest level since 1996. But there is no happiness there either. In fact the one dissenting vote on the BOJ council wanted to control the yield curve out to 20-years, not just 10. I guess some people are never happy. At any rate, it should be no surprise that the yen is a bit softer this morning as well, down 0.15%.


In fact the only G10 currency that is higher this morning vs. the dollar is the pound, which is up just marginally, as the market prepares for the BOE to raise rates on Thursday. CPI is running at 3.0% in the UK, well above their 2.0% target, and though GDP growth remains desultory and uncertainty over the Brexit outcome is significant, Governor Carney seems set to raise rates. This will, however, be one and done. The BOE will not raise rates from the new level, expected to be 0.50%, for at least a few years.


In the end, all of this is why I continue to harp on the policy divergence story. It is truly only the Fed that is willing to acknowledge that the economy no longer needs the continuous boost of extraordinary monetary policy stimulus and will continue its rate hike path. And in the end, higher US interest rates combined with stagnant, record low interest rates elsewhere in the world will draw dollar buyers out of the woodwork. The dollar has further to run higher!


Helping to underpin the Fed’s case was yesterday’s Personal Income and Spending data, as well as yet another Fed survey (Dallas) showing manufacturing growth performing well. In fact, since the hurricane impacted payrolls data at the beginning of October, we have seen a steady run of positive, better than expected US data. I continue to expect the Fed to raise rates at least three times next year and believe that four hikes are quite viable. The Fed funds futures market continues to price in just 40bps over that time frame. The dollar has further to run. And that doesn’t even assume that tax reform is passed and with it some sort of repatriation act, which will simply supercharge the dollar’s rally. (Remember the HIA in 2005?). Hedgers beware.


As to today’s data, we see the Employment Cost Index (exp 0.7%); Case Shiller House Prides (5.93%); Chicago PMI (60.0); and Consumer Confidence (121.5). I would argue that all eyes will be on the Chicago number as a harbinger for tomorrow’s ISM data. But in the end, Friday’s payrolls report remains the big kahuna and so positioning is likely to remain light. Of course, the BOE meets Thursday, so there is always the possibility that Governor Carney fails to deliver the widely expected rate hike, something he has done before both at the BOE and previously at the Bank of Canada. I don’t expect that, but it cannot be ruled out. However, my assumption is the BOE will act according to plan and that the US data picture will be the critical feature. Oh yeah, the FOMC meets tomorrow, but there is essentially no expectation that they will do anything, a prospect with which I agree heartily.


To sum it up, all signs still point to tighter US policy alongside unchanged, ultra-easy policy elsewhere in the world. The dollar has further to run.


Good luck








Power Ahead

December Rate Hike Probabilities:

USD   84.3% (Increasingly likely)

EUR     3.1% + (Think December 2019)

GBP   88.0% (Done deal, probably this week)

CAD   26.9% (Ain’t gonna happen now)

Fed Rhetoric               25bps


The signs point to growth on the rise

With GDP’s Friday surprise

So look for the Fed

To power ahead

With rate hikes bond bulls will despise


Although the Fed does meet this week, there is virtually no expectation that there will be any policy adjustments at the meeting as there is no press conference scheduled to follow. It seems that Chair Yellen, as did Chair Bernanke before her, are afraid to allow the market to simply respond to their actions without an explanation. One might think that market participants are incapable of understanding what the Fed is doing if the Fed doesn’t tell them explicitly (certainly Yellen believes that). I actually consider this to be one of the worst features of the current Fed, this effort at transparency, which has resulted in the entire market building the same position. And while I understand that it was an effective method of driving policy ease during the crisis, its shortcomings are far more evident now as the Fed attempts to adjust its policy. Forcing Encouraging investors to buy risky assets during a crisis is an understandable, if potentially misguided, central bank response. However, the palpable fear that those same central banks now exhibit over any market correction has delayed policy normalization for a number of years and allowed significant excesses to build in markets. It is why virtually every equity (and fixed income) valuation measure is at historically high levels, and why I remain concerned that when this market cycle turns (and it will turn at some point) the results will be at least as dire as the financial crisis in 2008/09 if not worse. There is no perpetual motion machine, the laws of physics see to that. Similarly there is no perpetual moneymaking machine, the laws of economics prevent that as well. With that in mind, I think it is fair to say that Wednesday’s Fed meeting will have virtually no impact on the market. I would look for the statement to be essentially unchanged from the September meeting and all focus will remain on December’s outcome.

It is with this backdrop that we turn to this morning’s FX market where the dollar is modestly softer. The thing is, given the dollar’s performance during the past two weeks, where it has rallied vs. essentially all its counterparts, a modest correction is only to be expected. In fact, Friday’s US GDP data showed that the economy is not only maintaining a fairly strong pace of growth, printing at a better than expected 3.0%, but that price pressures continue to build. The GDP Price Index printed at 2.2%, its highest level in five quarters, and potentially indicative that the Fed’s goal of generating price inflation, as opposed to asset inflation, is working. After all, they have generated asset inflation in spades for the past nine years! Nonetheless, the data are simply the latest in a long line that will help cement the Fed’s more hawkish rhetoric and insure that they raise rates, not only in December, but numerous times next year. Once again I will reiterate that the narrative that has been driving markets, that of policy convergence, is no longer valid. The Fed remains in tightening mode, despite the market’s reluctance to accept that, while the ECB remains in easing mode, despite the market’s reluctance to accept that either. The dollar has further to climb, although it won’t be in a straight line. Hence, today’s price action of a modest correction is perfectly normal.

A quick tour of the overnight activity shows that both Japanese and German Retail Sales data continue to grow as expected, if not even a little better. Meanwhile, German inflation data are drifting out from the states with the national number due at 9:00 this morning (exp 0.1%, 1.7% Y/Y). But Signor Draghi has made it clear that he is less concerned about Germany than about the Eurozone as a whole, and that easy money is the order of the next nine months, at least, on the continent. The other piece of news from Europe was a stronger than expected Economic Confidence number, printing at multi-year highs. However, the continued absence of measured price inflation will keep the ECB at bay for a long time to come.

Otherwise there has been remarkably little news of note released. And that includes the emerging market bloc as well. While the dollar is generally softer there, the movement is so modest and broad based, it can only be a position squaring exercise.

As this is the first week of the new month, we do see a great deal of US data as follows:


Today                         Personal Income                                    0.4%

Personal Spending                                 0.9%

PCE Core                                                   0.1% (1.3% Y/Y)

Dallas Fed Mfg                                         21.0


Tuesday                     Employment Cost Index                        0.7%

CaseShiller Home Prices                        5.90%

Chicago PMI                                              60.0

Consumer Confidence                             121.0


Wednesday               ADP Employment                                    200K

ISM Mfg                                                     59.4

ISM Prices Paid                                        67.3

Construction Spending                           -0.2%

FOMC Rate Decision                                1.00%-1.25% (unchanged)


Thursday                   BOE Rate Decision                                    0.50% (+0.25%)

Initial Claims                                             235K

Nonfarm Productivity                              2.5%

Unit Labor Costs                                        0.4%


Friday                        Nonfarm Payrolls                                    310K

Private Payrolls                                        300K

Mfg Payrolls                                                18K

Unemployment Rate                                 4.2%

Average Hourly Earnings                        0.2%

Average Weekly Hours                            34.4

Participation Rate                                     63.1%

Trade Balance                                           -$43.3B

ISM Non-Mfg                                              58.5

Factory Orders                                          1.2%


So as you can see there is a ton of stuff coming out this week. And expectations are running high for the data to demonstrate continued strength in the US economy. Clearly the NFP number is expected to make up for last month’s hurricane impacted number, so I would look for the average as a better idea of the run rate. In this case, that would be about 138K, not dissimilar to what we were seeing before the hurricanes. But looking at the ISM data, the Personal Spending data and the confidence data, it is very easy to understand why the Fed is going to stay the course. And this is true regardless of who is the next Fed Chair. This week should remind everyone why the dollar is likely to recoup a significant portion of its lost value from earlier this year. As I have been discussing for a while, hedgers, take advantage before the move starts in earnest.


Good luck




Draghi Keeps Trying

December Rate Hike Probabilities:

USD   87.1% + (Increasingly likely)

EUR     2.6% (Think December 2019)

GBP   90.0% (Done deal, probably in November)

CAD   30.2% (Ain’t gonna happen now)

Fed Rhetoric               25bps


The ECB, yesterday, stressed

Inflation continues depressed

So bonds they’ll keep buying

As Draghi keeps trying

To show how much Europe’s progressed


The dollar has been the main beneficiary of yesterday’s ECB meeting, with a sharp rally against every currency in both the G10 and EMG blocs since then. The euro is lower by more than 1.6% in the interim, with the Skandies even worse off, down more than 2% each, as their central banks are now seen as more likely to delay any policy tightening until the ECB gets started. As I suggested, while the ECB reduced the QE purchase program to €30 billion/month for at least the first nine months of 2018 with the option to continue beyond that, Signor Draghi was emphatic in his description of the interest rate trajectory, which will remain at current levels well beyond the end of QE. I have been adamant that the ECB will not touch the interest rate structure for another two years, and it appears that Signor Draghi is in the same camp. Given this outcome, it can be no surprise that the euro fell sharply, nor that the dollar rose overall. After all, as I have also been discussing, the narrative took a hit on the news. Policy divergence remains the order of the day (Fed tightening, ECB still adding stimulus) rather than policy convergence. And the euro’s vaunted 12% rally since the beginning of the year, which has largely been predicated on the policy convergence story, is now likely to reverse somewhat further. As of now, the euro is at its lowest level since late July. Look for further declines. 1.12 anyone?

Looking to the pound, it too continues to suffer as the market becomes increasingly certain that the 25bp rate hike, that seems almost assured next week, is the only one for a long time. UK data has had a bad run lately everywhere except on the inflation front, with prices the only thing showing upward momentum. There is no way that Governor Carney can raise rates next year, or any time ahead of the Brexit resolution in Q1 2019 for that matter, as the UK economy will be gripped with uncertainty during that period. With the Fed still in tightening mode, the pound will find itself under increasing pressure going forward. As I have said repeatedly, receivables hedgers need to take advantage of prices above 1.30 because we are going to spend a long period of time below that level in the near future.

The last noteworthy story in G10 space has been in Australia where the High Court there ruled that five of the ruling party’s lawmakers were ineligible to serve because of their hitherto unknown dual citizenship status. While the issue seems technical, what happened is that PM Turnbull has lost his majority in Parliament and his ability to govern effectively has now called into question. As such, policy prescriptions that the market had seen as favorable and leading to more economic growth have been called into question, reducing the chances that the RBA will raise rates any time soon and undermining the currency further. Aussie has had a bad run of it lately, falling more than 2.25% in the past week. Given the evolving narrative, I think it has further to fall as well.

Pivoting to the emerging markets, it should be no surprise that the worst performers since the ECB meeting have been the CE4, all of which are down at least 1.7%. Given the tight relationship between these currencies and the euro, it is only natural they have followed the single currency lower. Away from this space, BRL has been the biggest loser in the EMG bloc, falling 1.7% since then, and 3.5% this week, on a combination of factors. Arguably, the big picture policy divergence story is giving an underlying bearish tone to all EMG currencies. But we also had the BCB cut its benchmark Selic rate to 7.5% yesterday, taking it below the rates of both Turkey and South Africa, two competitors for carry trade flows. Meanwhile, the Brazilians are trying to address their own pension crisis, with policy outcomes there likely to have an important impact on the economy and the currency by extension. The recent break above the 3.20 level has traders scrambling to cover exposures, further pressuring dollar short positions, and on top of it all, there is the hawkish Fed backdrop. It is not hard to envision a move back toward 3.50 in USDBRL as these issues play out.

This morning brings the most important US data of the week, with our first look at Q3 GDP (exp 2.6%) and its concurrent subcomponents, as well as Michigan Sentiment (100.7). Yesterday’s data was largely in line with expectations, although interestingly, the Pending Home Sales number I had highlighted came in much worse than expected at 0.0%, which is more in line with the trend we had been seeing prior to the hurricanes’ collective impact. Nonetheless, I continue to look for the US data to be sufficient to allow the Fed to maintain its hawkish tone and stay on track for a December rate hike and more next year. If pressed, my sense is that President Trump will name John Taylor as the next Fed chair, which will be perceived, at least initially, as hawkish as well. US Treasury yields continue to rise, helping to underpin the dollar as spreads to other government debt widen in the US’ favor. All signs still point to a higher dollar in my view. Hedgers, keep that in mind.


Good luck and good weekend






Wise Men

December Rate Hike Probabilities:

USD   83.6% (Increasingly likely)

EUR     3.3% + (Think December 2019)

GBP   91.5% + (Done deal, probably in November)

CAD   32.5% (Ain’t gonna happen now)

Fed Rhetoric               25bps


This morning Signor Draghi tries

To find a path forward that’s wise

How much and ‘til when

Will Draghi’s wise men

Buy bonds ere the program’s demise?


Markets in general have been fairly quiet as traders across all asset classes await the ECB decision this morning. Expectations are for the ECB to reduce the amount of bonds it buys each month, to between €30 billion and €40 billion, with a promise to continue buying those bonds for at least six more months and potentially longer if deemed necessary. There is no expectation for a change in either interest rates, or even in the forward guidance regarding the potential timing of interest rate changes. In fact, expectations are that Draghi will seek to lean toward the dovish side of the spectrum to prevent the euro from rallying further. Remember, that although the euro is higher by some 12% this year, it hasn’t actually moved at all in the past three months. Draghi’s fear of a higher euro stems from the concern that it will negatively impact both Eurozone inflation and corporate earnings and the export sector of the Eurozone economy going forward. All told, I agree with the consensus here, as the ongoing lack of any true inflationary impulse in Europe will force the ECB to continue QE for longer than they may want to do so. In fact, the area in which I disagree with consensus is that of interest rate expectations, with my view that the ECB, even after they have stopped adding to their balance sheet, will not raise rates for far longer than currently expected. Net, it should be no surprise that the euro has barely moved overnight amid an extremely tight trading range.


I failed to mention the Bank of Canada meeting yesterday, but it actually resulted in a somewhat surprising outcome as Governor Poloz backed away from the more hawkish rhetoric of late and not only passed on a third consecutive rate hike, but indicated that going forward policy was likely to be somewhat less hawkish than previously assumed. The market reaction was swift with the Loonie falling 1% on the news and essentially maintaining those losses overnight. As you can see at the top of the note, the probability for a December rate hike continues to fall, and even if (when) the Fed moves in December, the BOC is likely to stay put.


The most notable G10 mover overnight was GBP, falling 0.3%, after a much weaker than expected retail sales report. In the UK, there is an organization, the Confederation of British Industry (CBI), which surveys its membership with regard to different economic variables. Their October report on Retail Sales fell to its lowest level since the financial crisis in 2009, and the pound declined immediately. Clearly, the combination of Brexit uncertainty and lack of real wage growth in the UK is having an impact. Once again I will reiterate my strong belief that the pound has much further to fall as the Brexit saga plays out. Hedgers take note.


Away from the G10, the biggest mover was, once again, ZAR, which has declined 1.7% this morning after the new FinMin, Malusi Gigaba, described a bleak outlook for the country’s fiscal picture during the next three years. Concerns of yet another credit ratings cut for the nation’s growing debt load are weighing on the currency. But away from the rand, there is precious little happening in the EMG bloc as well.


Aside from the ECB meeting, we see some more US data including Initial Claims (exp 235K); Wholesale Inventories (0.4%); and Pending Home Sales (0.5%, -4.2% Y/Y). I bring up the last because of the blowout number in New Home Sales yesterday, rising by 667K, well above the expected 554K. It seems this is a direct impact of the hurricanes, as almost 20% of these sales have not even broken ground. Generally that percentage is much lower. Yesterday also saw Durable Goods print at a higher level than anticipated, 2.2% vs. 1.0% expected, as hurricane related growth there was also evident. While I am certain the Fed will recognize that this data has been distorted by the hurricanes, it also serves a great purpose in helping them argue for their continued tightening cycle despite the lack of measured price inflation.


At this point, markets remain dependent on both central bank activities as well as the US fiscal/political story. I have not mentioned Treasuries of late but during the past two months, yields on the 10-year have climbed almost 40bps. At the same time, yields on the 2-year have climbed 30bps. Historically, as US yields climb, the dollar gathers support and I see no reason for this time to be different than any of the past situations where this has occurred. Again, I continue to disagree with the narrative and believe that the Fed will remain more hawkish than the market currently expects while the ECB remains more dovish. I still like the dollar higher over time.


Good luck




On Threadneedle Street

December Rate Hike Probabilities:

USD   87.1% + (Increasingly likely)

EUR     2.7% (Think December 2019)

GBP   90.0% + (Done deal, probably in November)

CAD   43.6% = (NAFTA uncertainty impact)

Fed Rhetoric               25bps


In London on Threadneedle Street

The BOE, monthly, does meet

The data today

Could certainly sway

Next week, a rate hike, to complete


The pound is the big winner this morning, rallying more than a penny after Q3 GDP data was released showing better than expected growth of 0.4%. While that still equates to an annual growth rate of just 1.6%, the market was looking for worse, hence the pound’s sharp reaction. Interest rate traders have taken the news as a reaffirmation that the BOE will raise rates at their meeting next week. Alas, the BOE remains caught in a tough situation. GDP growth at 1.6% is just not that impressive on a historical basis, and ordinarily would not result in a central bank considering rate hikes. But the ongoing impact of the pound’s sharp deterioration since the Brexit vote in June of last year has led to inflation running well ahead of the bank’s mandate of 2.0% (last printed at 3.0%). Thus Governor Carney and his colleagues find themselves between the proverbial rock and hard place. They need to address inflation but they don’t want to undermine a soft growth pattern. Thus my view remains that while the BOE will act next week and raise the base rate by 25bps, it will be the last rate hike for a number of years. As long as there is uncertainty due to the Brexit outcome, which should last until the UK leaves the EU in March, 2019, the BOE will not be able to consider raising rates again. All told, I see today’s rally as a gift to receivables hedgers.

On the other side of the spectrum, today’s biggest loser has been the Aussie dollar, falling nearly 1.0% after weaker than expected CPI data (1.8%, exp 2.0%) undermined any thoughts that the RBA would consider raising rates in the near future. While the base rate in Australia remains at historically low levels of 1.50%, the ongoing lack of inflationary pressures has allowed the central bank to watch from the sidelines as growth Down Under picks up. But traders continue to be more focused on interest rate policy than growth, per se, and so with policy tightening the order of the day elsewhere in the world (notably the US and Eurozone), the lack of tightening here will continue to weigh on the currency.

But away from those two currencies, there is truly not much of a story to tell in FX today. The yen continues its weakening pace, but last night’s movement was meaningless. Meanwhile, the euro has edged higher again this morning, just 10 pips though, ahead of tomorrow’s ECB announcement. The debate on exactly what the ECB is going to do with regards to tapering QE continues, but with no further clarity until tomorrow, there is no reason to consider establishing a position here. It is uniformly expected that the amount of bonds purchased each month will decline, but by how much remains unknown. Of more importance, at this stage, seems to be the wording around when interest rates might start to rise. The current guidance explains that, “We expect them [interest rates] to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases.” So any changes to that line will be closely watched by the market. Personally, I don’t believe Draghi will adjust that wording while he is explaining the changes in QE. It will be easy for him to wait until the December meeting to start adjusting those expectations, especially given just how persistently low inflation remains in the Eurozone. But until we hear from Signor Draghi, I can’t imagine the euro will show much movement.

As to the Emerging markets, it has been a rather dull session with an equal number of gainers and losers and no currency making any significant headway in either direction. The end of the Chinese Communist Party Congress resulted in President Xi consolidating his power without naming a likely successor. Arguably, this means that we will see further state control of the economy there which means that in the short run, currency activity will be closely managed. Therefore, it may well be time to reconsider my belief that the renminbi would weaken more substantially going forward. Rather, my take is that Xi will want a stable currency as part of his legacy, and given both the ability and willingness of the PBOC to essentially fix the currency, I’m guessing that is the most likely outcome going forward. For hedgers, payables ought to be hedged to earn those points while receivables are probably best left alone.

This morning brings the first real data of the week with Durable Goods (exp 1.0%, 0.5% ex-transport) and New Home Sales (554K). The thing about Durable Goods is that the series is so volatile it is difficult to draw any conclusions about the economy from any one data point. Meanwhile, the housing market continues to exhibit the behavior of a market that has peaked with all of the indicators somewhat lower than they were earlier this year. Perhaps the Fed’s actions to date have had a bigger impact than generally believed. But at the end of the day, I don’t believe either of these numbers will be sufficient to change views by Fed policymakers, or by the traders and investors who are watching them. So two surprising numbers brought two opposite reactions in the markets overnight, but for the rest of the day I don’t expect much additional movement. We will need to wait until tomorrow’s ECB statement for the next really big piece of news.


Good luck





December Rate Hike Probabilities:

USD   83.6% = (Still in the cards)

EUR     4.4% + (Think December 2019)

GBP   84.6% + (Done deal, probably in November)

CAD   43.8% + (NAFTA uncertainty impact)

Fed Rhetoric               25bps


The focus in markets is turning

To central bank meetings concerning

How fast they may tighten

And still fail to frighten

Investors who are quite discerning


The ECB will be debating

The pace for their recalibrating

Of purchasing bonds

As Draghi responds

To markets he feels need placating


FX markets have done little overnight, though if pressed I would say the dollar continues to perform well overall. While the euro has edged higher after mixed PMI data, both the yen and pound are weaker as I type. The thing is, given the lack of significant movement I would contend we are simply seeing positions adjusted ahead of Thursday’s ECB meeting and then the BOE’s meeting next week.

At this point, the market is certain that Draghi will announce a reduction in QE although there is debate as to exactly what form it will take. Numerous economists have estimated that there are only about €300 billion of eligible bonds left for the ECB to buy which means that the program will need to end some time next year. Either that or they will need to change their self-imposed guidelines on purchases. Draghi’s problem is that core CPI continues to run far below their target of ‘just below 2.0%’ with the most recent print at just 1.1%. So despite a clearly recovering economy, the actual ECB mandate is in no danger of being met in the near term. In fact, even the ECB’s own estimates claim the target won’t be reached until 2020! And yet reducing QE is clearly the direction in which they are heading, or in the vernacular, they will be ‘recalibrating’ QE as the last thing they want is to ‘taper’ purchases. A rough and ready way to determine the impact on the euro is to calculate the total amount of purchases they promise and compare that outcome to €200 billion. The larger their number, the more euro negative the outcome. For example, if the promise is €30 billion/month for at least six months, that would be seen as mildly hawkish and I would expect the euro to rally, while if they extend that to nine months or one year, it should be somewhat dovish. My view remains that they will be more dovish than expected and, when combined with the Fed staying the course, I still like the euro lower.

Meanwhile, the pound continues to suffer from a lack of clarity on the Brexit story with growing concerns that the mooted transition period may not materialize. British industry is clamoring for some idea of what to expect as well as a two-year period in which to make the necessary changes. But if the latest news is accurate, it seems there will be no clarity on how things will evolve for quite some time. This ought continue to be a negative for the UK economy and will prevent the BOE from doing more than the single rate hike they are seemingly determined to implement next week. If anything, I expect this hike will need to be rolled back sometime next year and the BOE’s credibility will be dented further. All in, the pound still looks too rich to me.

Finally, in Japan the BOJ has not been active in the equity market for most of this month. Remember, their ETF purchase target was ~¥500 billion per month, but they would only by when the Nikkei was lower in the morning session in order to support the market. However, the market there has risen for 16 consecutive sessions, thus eliminating the BOJ’s raison d’etre in this space. In the wake of PM Abe’s landslide reelection, foreign investors have been actively buying Japanese equities while the yen has remained under pressure. For now, there is nothing to suggest this will change, although one has to expect that the Japanese equity market will correct somewhat in the near term.

The emerging market space has been far more mixed, with both winners and losers, but in truth, only the Czech koruna has moved more than 0.25%. It seems that expectations are growing that the central bank there is increasingly likely to raise rates next week as inflation pressures build in the country on the back of a stronger economy. But away from that, there is really nothing in the space to discuss.

There is no first tier data today, with only the Richmond Fed Mfg. Index (exp 17) to be released. As the Fed is also in its quiet period ahead of next Wednesday’s meeting, the FX market will need to look elsewhere for catalysts. I would keep an eye on the ongoing strife in Spain as both the Spanish government and the Catalans prepare for a more contentious period later this week when the Spanish federal government will allegedly attempt to strip the region of its autonomy completely. Meanwhile the tax reform debate in the US could see some headlines with the ability to move markets, or perhaps President Trump will surprise us with an early Fed chair selection. However, my gut tells me that we are likely to remain in tight ranges ahead of the ECB’s press conference on Thursday morning.

Good luck




More Yen

December Rate Hike Probabilities:

USD   83.6% + (Still in the cards)

EUR     2.2% (Think December 2019)

GBP   83.6% + (Done deal, probably in November)

CAD   38.8% (NAFTA uncertainty impact)

Fed Rhetoric               25bps


Japan reelects

Abe-san in a landslide

Prepare for more yen


The dollar is firmer this morning, rising against all its G10 counterparts as well as most of the EMG bloc. The weekend brought us the Japanese general election where PM Abe cemented his grip on power with his LDP party winning more than 60% of the votes in yesterday’s election and his coalition claiming more than two-thirds of the seats. This result may open the way for the first amendments to the Japanese constitution since US General Douglas MacArthur imposed it some seventy years ago. At the top of the list for Abe-san is to allow Japan’s Self-Defense Force to be upgraded to armed forces with the ability to project power and participate in peacekeeping missions outside of Japan. This is clearly an area where Japan’s neighbors are somewhat concerned given the history from the first half of the twentieth century. But it is also in keeping with what we have seen all over the world during the past two years, wherein homogenous groups of people want to have more authority over their lives and nations. It is this urge that drove the Brexit vote, that seems to be fueling the Spanish crisis in Catalonia, and underpinned the less well-known votes in Lombardy and Veneto that occurred this weekend where both Italian provinces voted, in non-binding referenda, for more independence.

So why does this matter, you may ask. Generically, I would say that the currencies of nations feeling these internal pressures are likely to weaken over time as the very nation’s existence may be called into question. But for today, specifically, it is all about the increased probability that Abe will reappoint Haruhiko Kuroda as BOJ Governor and that means that QQE is alive and well in Japan. Kuroda-san is a one trick pony who’s strong belief is that if he prints enough yen and buys enough assets the Japanese economy will power ahead and create inflation. In fairness, Japan has seen six consecutive quarters of GDP growth, its best performance since the late 1990’s. His problem is that the BOJ’s mandate is to generate 2.0% inflation, something that has not been achieved since the early 1990’s. But a long track record of failure is no reason for a government to change its approach, and I fully expect that the BOJ will continue to expand its balance sheet until at least the end of Abe-san’s time as PM. After all, if purchasing $2.5 trillion of assets hasn’t had an impact, the reason must be they simply haven’t done enough yet!

In the end, we have seen the yen trade back above 114 this morning, back to its weakest (strongest dollar) point since July and I would contend that there is more room to run. The high for USDJPY this year has been 118.60 and I expect that we are heading back to that direction, and potentially beyond. If you consider the simple fact that the BOJ are going to continue to run an easy money policy while the Fed remains on track to tighten further this year and next, a higher dollar should be the result.

As to the rest of the G10 this morning, the Swedish krona is the worst performer, falling 0.65%, although the euro (-0.4%) and Swiss franc (-0.3%) are all leaning in the same direction. In fact, the pound is holding its own (-0.2%) after PM May seems to have garnered some support after last week’s EU summit in Brussels. While infighting by the Tories remains rampant, at least there seems some possibility that the UK will move forward in Brexit negotiations.

In the emerging markets, TRY is the laggard, falling 0.8%, after a story in a local newspaper there raised the possibility that the US would impose sanctions against Turkish banks because of Iranian sanction violations. While the Turkish government denied the story, it has clearly impacted the lira. But the dollar is generally firmer, with the all of the CE4 falling between 0.2% and 0.4%, ZAR down 0.4% and even CNY falling 0.3%. This has been all about broad-based USD strength this morning, although there are a number of stories with modest individual impacts around.


Shifting to the data front, while the volume this week is limited, we do get the first look at Q3 GDP here in the US, which will certainly have the market’s interest piqued.

Wednesday                        Durable Goods                                     1.0%

-ex transport                                          0.5%

New Home Sales                                    554K

Bank of Canada Rate Decision            1.00% (unchanged)


Thursday                        ECB Rate Decision                                    -0.40% (unchanged)

Initial Claims                                               235K

Wholesale Inventories                             0.4%


Friday                             Q3 GDP                                                          2.5%

Q3 Price Index                                             1.8%

Michigan Sentiment                                   100.8

Aside from the US GDP data, the most widely anticipated feature of the week is the ECB meeting, where while no changes are expected for actual policy, Signor Draghi promised to outline the next steps beyond the current QE program. Expectations are for the current €60 billion/month of purchases to be reduced to between €30 billion and €40 billion and promised for another six to nine months (or longer if necessary). The smaller the promised total amount (monthly x minimum number of months promised) the better the euro should perform. After all, that will be seen as confirmation by the narrative that the ECB is tightening policy more rapidly.   But I continue to take issue with the entire narrative and expect that Fed actions will continue to dominate expectations, meaning tighter policy here will lead to a higher dollar. That’s just the way it works.

Good luck





December Rate Hike Probabilities:

USD   80.2% = (Still in the cards)

EUR     2.5% (Think December 2019)

GBP   81.9% (Done deal, probably in November)

CAD   44.7% (NAFTA uncertainty impact)

Fed Rhetoric               25bps


Excitement is sweeping the Street

As Congress seems set to complete

Reform that’s elusive

Which might be conducive

To helping the US compete


So how will this impact the buck?

I tell you it clearly won’t suck

It should free the Fed

To tighten ahead

For dollar shorts this is bad luck


Arguably the biggest news overnight has been that the US Senate has passed a budget resolution that may pave the way for the President’s mooted tax reform. While the procedures to get from here to enacting a law are still complex and there is no certainty they will be completed, this is certainly the best fiscal news we have heard in a while. Under the circumstances, it is not surprising that the dollar, as well as US equity futures, are higher this morning, nor that Treasuries yields have risen almost 5bps. If Congress is able to agree a deal and put it on the President’s desk, it is increasingly likely that the Fed will feel far more comfortable in following through with their current policy path. Remember, the Fed has penciled in not just a rate hike in December, but also three more next year. The market, while it has finally come around to believing in the December move, remains skeptical of further action in 2018, with barely half that amount priced for next year. As I have written consistently, at some point, there will be a convergence between market pricing and Fed rhetoric. I continue to believe the Fed is going to stay the course, which means the market is going to need to reprice their expectations. Higher US interest rates will continue to underpin the dollar going forward. Add to this the imminent announcement of a new Fed chair, who will almost certainly be more hawkish than Janet Yellen and it simply reinforces that view.

So looking at G10 currencies, the euro has fallen a quick 50 pips this morning, essentially unwinding yesterday’s gains completely. The news from Europe was not data driven but rather focused on the outcome of the EU summit meeting where UK PM May continues to try to move the Brexit talks forward while the rest of Europe wants her to commit to a payment before anything else gets done. Chancellor Merkel did sound upbeat on the prospects for movement by December, but I remain skeptical that anything of note will happen even then. Interestingly, the pound is not following the script this morning, trading slightly higher (+0.1%) after its Public Sector Accounts data showed surprising strength. Comments from BOE member Cunliffe seemed to cloud the issue, but net the market is taking it all in stride. Whether the BOE does hike rates in November or not, the one thing that is clear is it will be a single, isolated rate hike and not the beginning of a tightening cycle. The pound has further to fall.

The yen has actually underperformed significantly this morning, falling 0.7%, after new polls from Japan showed the most likely outcome of Sunday’s general election is that PM Abe will lose his two-thirds majority in the Diet. While he should still cruise to victory, it means that constitutional change will be exceedingly difficult and that even the ordinary act of governance will be somewhat impaired. Finally, in the commodity bloc, both AUD and NZD are under pressure, with the former feeling the weight of commodity price declines across both energy and metals, while the latter continues to suffer from the ongoing fallout of the elections bringing the Labour Party to power. In fact, Kiwi has fallen below 0.70 cents for the first time since late May. Adding it all up and I feel like the dollar is set to gain momentum as we head into the weekend.

In the Emerging markets, it can be no surprise that ZAR is the biggest decliner; falling 1.45% this morning after further political ructions roiled the market. Today’s slide stemmed from rumors that Deputy president Cyril Ramaphosa, a strong candidate to succeed President Zuma, and someone widely respected, is tipped to be fired. The ongoing internal strife within the ruling ANC party has been a millstone around the currencies neck and does not seem likely to end soon. It is hard to be bullish the rand. Away from ZAR, the CE4 currencies have all followed the euro lower this morning, and we have seen similar magnitude declines from both the MXN and BRL as the markets there wake up. While neither of the key LATAM currencies has made a new low here, both are trading near the bottom of their recent trading ranges and seem poised to break lower (dollar higher). Stay tuned.

Yesterday’s US data showed a remarkable plummet in Initial Claims, falling to 222K, its lowest level since 1969, and also saw Philly Fed print at a better than expected level of 27.9. So we continue to see a seemingly strong US labor market and strong manufacturing sector as well. In many ways it is remarkable that GDP growth in the US remains so desultory. Of course, counter to that good news was the Leading Indicators printing at -0.1%, potentially a harbinger of a future slowdown. This morning brings Existing Home Sales (exp 5.30M), which seem likely to disappoint slightly, as they have for five of the past six months. Despite what appears to be a fairly strong manufacturing sector, the housing market in the US has not been along for the ride.

Nonetheless, barring an outright collapse in the US data over the next six weeks, it seems to me the Fed remains on track to raise rates and that the short term correction in the dollar is ending.

Good luck and good weekend




Sure To Get Rougher

December Rate Hike Probabilities:

USD   80.2% (Still in the cards)

EUR     3.9% + (Think December 2019)

GBP   85.6% + (Done deal, probably in November)

CAD   46.1% + (NAFTA uncertainty impact)

Fed Rhetoric               25bps


The UK continues to suffer

As May seeks an interim buffer

‘Gainst Brexit’s effects

While Europe rejects

Her pleas thus its sure to get rougher


The dollar is mixed this morning, gaining against a handful of currencies while falling against a similar amount. In fact, I would say that the dollar is the least interesting currency today with markets focused on other individual currency stories. For example, the largest movement has been seen in NZD, which has fallen by 1.65% after a government coalition was finally formed. The reaction was due to the fact that the Labour Party was the one that led the coalition, despite winning only ~37% of the vote, as they brokered a deal with the New Zealand First party, an upstart nationalist leaning group that entered Parliament there for the first time. The party platform included planks on reforming the central bank and addressing social issues, neither of which have been seen by the market as a harbinger of future economic or monetary strength. So a far less certain future has resulted in a sharp decline in the Kiwi. While New Zealand is generally too small to have any substantive global impact, this reaction does highlight the ongoing market belief set that a strong economy and independent central bank are two keys for currency stability.

The other notable loser in the G10 space was the pound, falling 0.35%, after it released much weaker than expected Retail Sales figures (-0.8%, exp -0.1%). So some of the first hard data that will be part of Q3’s GDP reading is extremely disappointing. It is interesting to me that while the pound suffered (and has more to come) the market probability of a rate hike next month actually rose slightly. If anything I believe this signals the market sees the BOE move as a ‘one and done’ concept and not the beginnings of a policy tightening program. In fact, I would estimate that the BOE, if they move in November, will not adjust policy for at least another two years following. And if they do, it will be to ease it again as the UK exits the EU rather than to take another tightening step. All of this continues to play to my view that the pound has much further to decline.

On the other side of the ledger, both the Swiss franc and Japanese yen are the best performers in the G10, rising 0.6% and 0.4% respectively. As both of these currencies are seen as haven assets, and given that US equity futures are actually quite a bit lower this morning alongside equities throughout Europe and Asia, we may well be looking at a bit of a risk-off reaction. There has been precious little other news to drive these two currencies, and it is certainly reasonable to expect at least some correction in the equity markets. I’m not saying this is the beginning of a major move, simply that as investors shed some of their risk, these currencies are prone to benefit. Otherwise, the G10 space has been rather dull with the ongoing Spanish drama having little impact on the euro and no substantive news from the US.

In the EMG world, we have also seen a mixed picture although if forced to choose I would say there are probably a few more gainers than losers. What makes this confusing is that in a risk off scenario, I would have expected things to be the other way round. It is this conundrum that prevents me from calling, at this time, that the market is ready to moderate its risk appetite, even temporarily. Of course, if equity market declines continue or accelerate that would certainly change my view.

Arguably the most noteworthy thing happening in this space is the Chinese Communist Party Conference, where President Xi has outlined his plans to stay in office until he dies and all the while strengthen state control over the economy. Interestingly, PBOC governor Zhou claimed that they are going to continue to focus on making the renminbi a more freely convertible currency, but there is no plan to either widen the trading band or reduce intervention. It seems to me that, like the Cheshire Cat, words mean exactly what Zhou wants them to mean, regardless of a more conventional definition elsewhere. At any rate, CNY has given up all of its gains since the week-long national holiday at the beginning of October, and seems simply to be continuing its slow decline vs. the dollar that began back in early September. Ultimately, I believe that a weaker CNY is in our future, but I don’t expect anything to happen quickly.

Yesterday’s US housing data was not very inspiring with both Housing Starts and Building Permits falling well short of expectations. As I wrote yesterday, it certainly appears to me that this part of the economy has plateaued and may be rolling over. This morning we see Initial Claims (exp 240K), Philly Fed (22.0), and Leading Indicators (+0.1%). Given the robust reading from the Empire Manufacturing data earlier this week, I wouldn’t be surprised to see Philly surprise on the high side. Yesterday afternoon’s Beige Book told us that the economy continues to grow at a moderate pace, and that the Hurricane trio of August/September is unlikely to have very long lasting effects. Despite the Housing plateau, I believe the Fed remains on track to raise rates in December and that my underlying thesis remains intact. This points to the dollar ultimately gaining further ground going forward.

Good luck





They Lack Fortitude

December Rate Hike Probabilities:

USD   83.6% + (Still in the cards)

EUR     3.1% + (Think December 2019)

GBP   84.9% (Done deal, probably in November)

CAD   44.2% (NAFTA uncertainty impact)

Fed Rhetoric               25bps


As government’s try to conclude

The series of talks they’ve pursued

Enhancing relations

On trade betwixt nations

They’re finding they lack fortitude


Thus most trade agreements in place

Have lately been labeled disgrace

While market reactions

Have caused more distractions

And made outcomes hard to embrace


It couldn’t have been ten minutes after I finished writing yesterday about how the pound was outperforming its peers on the back of the high inflation readings in the UK that BOE Governor Mark Carney disappointed markets in his testimony to Parliament by saying policy adjustments would likely be made in the coming months rather than pinpointing November. This was seen as far less hawkish than anticipated and the pound suffered immediately, falling 50 pips in minutes and ultimately nearly a big figure. It simply goes to show that there are myriad potential catalysts for movement and many come out of the blue. This morning’s UK Labor market data was largely in line with expectations as the Unemployment Rate remained at cycle lows of 4.3% while wages grew slightly faster than expected at 2.1%. The problem is that Inflation is still running near 3.0%, so real wages continue to shrink. Adding to this is the ongoing impasse in Brexit negotiations, where the EU’s chief negotiator, Michel Barnier, claimed that no progress would be made at this week’s summit thus making December the earliest point for a substantive breakthrough. As I type, the pound is little changed on the day, although it did trade lower by as much as 50 pips earlier this morning. And as I have consistently written, the pound is going to suffer further during the Brexit process and I continue to look for it to fall well below 1.30 and test even the 1.20 level over time. Receivables hedgers need to take note.

But Brexit is not the only trade pact in the news these days, NAFTA is still front and center as well. The renegotiation of that pact is going through its own ups and downs, which has been evidenced by the peso’s underperformance during the past month, having fallen 5.5%. And that decline has been flattered by yesterday’s 1.4% rally on the news that despite tough going, the original December deadline that had been mooted by the US has been extended into next year. NAFTA is also having a direct impact on the Canadian dollar, which has seen its own gyrations based on headlines on the subject. There is a secondary impact as well, on the BOC’s reaction function. Recent comments from BOC Governor Poloz have cast doubt on how rapidly he will tighten policy because of the uncertainty of any potential outcome in those trade talks. Thus, as the rate probabilities at the top of the note point out, what had seemed a sure thing for one more rate hike this year has now fallen to less than a 50/50 chance. Let me say that if the BOC is going to react to NAFTA, I am not going to try to opine on the likelihood of any action there. However, given the fact that the Fed still seems slated to raise rates in December, I believe USDCAD probably has some short term upside potential.

Away from these specific stories, the dollar continues to perform relatively well, rising against all its G10 counterparts and most EMG counterparts today, as the Fed has shown no signs of backing off their December move. Adding to that is the belief that President Trump may appoint a more hawkish Fed Chair, with three of the five on the short list (Warsh, Taylor and Powell) seen as hawks. The other two are arguably just one, reappointing Chair Yellen, as I believe that Gary Cohen has virtually no chance. So if I am correct about Cohen, and you consider that Yellen is the one currently advocating further rate hikes, despite her history of dovishness, it seems to me that US policy is going to continue to tighten, narrative be damned. And that is going to support the dollar against all comers going forward. We will need to see other central banks start to become far more hawkish to change that dynamic, and I continue to believe we are just not close to that situation. No matter what the narrative says about the ECB on the cusp of tightening, the reduction in QE is likely more a technical problem than a statement of intent (they are running out of bonds to buy) and they are not going to actually raise rates for at least another 18 months, if not longer. Look for the dollar to continue to gain.

This morning brings Housing Starts (exp 1175K) and Building Permits (1245K), with both those expectations modestly lower than last month’s outcomes. After a long slow rebound in housing, it seems that this sector may be leveling off. We also get the Beige Book this afternoon, which ought to provide some insights into the ongoing economic situation. Of late, it has pointed to continued moderate growth with only small signs of wage price pressures. We shall see.

As I wrote earlier this week, my sense is the dollar is gathering itself for the next leg higher as the Fed remains resolute while other central banks falter.

Good luck