There once was a fellow named Fate
Who’s Monday last week wasn’t great
His boss said bye-bye
With no reason why
But stick wth me, it’ll be worth the wait!
As some of you may now know, as of last Monday, I am no longer employed by RBC, hence the lack of poetry since then. However, that was then, and this is now. Unfortunately, I do not have a complete list of contact details at this time, so if colleagues who had received FX Poetry before are not on this list, please have them reach out to me at firstname.lastname@example.org and I will be happy to add them back.
Now onto the markets
December Rate Hike Probabilities:
USD 69.9% (The hawks are winning)
EUR 1.1% (Think December 2019)
GBP 84.6% (Done deal, probably in November)
CAD 58.8% (Not as confident as before)
Fed rhetoric 25bps
The euro is feeling the strain
From voters in Catalan, Spain
Two million plus voted
And most there promoted
A split from the Spanish domain
When I last wrote, I had been discussing the idea that the dollar had further to climb, and I continue to expect that to be the case. As this morning’s price action shows, my thesis remains in play. The narrative almost certainly remains that the Fed is not going to be as hawkish as Fed rhetoric and that the ECB is going to be more hawkish than ECB rhetoric. That change in view from twelve months ago has been the key feature of the dollar’s decline this year. Alas for the narrative, it is not actually playing out that way. Last week, Chair Yellen once again sounded hawkish alarms in her speech. A growing concern amongst FOMC members is that the Fed is inflating an asset price bubble (duh!) and that if they maintain ultra-easy monetary policy, it will continue to grow larger. And even the Fed knows that the popping of an asset bubble is not a good thing for either markets or the economy. So look for a continuation of Fed discussion of tighter policies, and then for those tighter policies to materialize. And one other thing that will help that cause is the growing likelihood that President Trump will name Kevin Warsh the next FOMC Chair. He was a hawk when he was a Governor, and he has been explicit that current policy is no longer appropriate for the economic situation. All told, barring a collapse in US economic data, the Fed is going to continue to tighten, and with Warsh, probably faster than people think. And the ECB is not about to rock the boat, especially given the latest story from Spain. All this continues to point to dollar strength going forward. Receivables hedgers beware!
As to the overnight session, it has been broad based dollar strength vs. both G10 and EMG currencies. Interestingly, while bond yields continue to rally (US 10-years now up to 2.34%) we continue to see the equity juggernaut roll on. In fact, throughout Europe, only Spain is suffering today (for obvious reasons), and US futures are pointing higher. I guess that investors are now looking at the US tax proposals and ascribing both a high probability of successfully being implemented and that they will have a large impact. I remain skeptical of both claims, but then I can be skeptical.
We did see some PMI data showing German manufacturing remains robust, UK manufacturing is sliding, but still strong, and Italian manufacturing is looking peaky. But the Spanish story has dominated the single currency today. As to the pound, it has fallen back to its lowest level in two weeks and certainly has the look of a currency that has seen the top. 1.30 anyone?
Given it is the first week of the month we will be inundated with US data culminating with payrolls on Friday. This is what to expect:
Today ISM Manufacturing 58.0
ISM Prices Paid 63.5
Construction Spending 0.4%
Wednesday ADP Employment 143K
ISM Non-Manufacturing 55.5
Thursday Initial Claims 265K
Trade Balance -$42.7B
Factory Orders 1.0%
Friday Nonfarm Payrolls 85K (hurricane impacted)
Private Payrolls 73K
Mfg. Payrolls 10K
Unemployment Rate 4.4%
Average Hourly Earnings 0.3% (2.5% Y/Y)
Average Weekly Hours 34.4
So obviously, the payrolls number is the big story. Do not read too much into the large decline from last month as all the hurricanes will be accounted for in this number. Certainly the drop will not concern the Fed this month, although if it persists for a few more months, that may cause some concern. And as I wrote above, it seems to me that the hawks are ascendant there. We also hear from 10 more Fed speakers this week, although Yellen’s comments at a community banking event don’t seem likely to be ripe for new policy discussions.
As I consider the events of the past week, I feel my arguments have been reinforced and that the dollar is set to continue to gain going forward.