December Rate Hike Probabilities:
USD 69.9% è (The hawks are winning)
EUR 0.6% ê (Think December 2019)
GBP 84.1% ê (Done deal, probably in November)
CAD 63.3% é (Not as confident as before)
Fed rhetoric 25bps
In Europe the construct of nations
Is quaking down to its foundations
The news out of Spain
For Europe with fraught implications
The dollar remains well bid across the board, although in fairness the movement has not been universal. The key themes in the market remain the ongoing positive US story, where yesterday’s ISM data printed at its highest level in 13 years and the Prices Paid data jumped to 6 year highs, while in Europe, despite an ongoing economic recovery, the political picture shows continued angst amongst several segments of the population, as evidenced by both the Catalan vote over the weekend and last month’s German election where the AfD party, campaigning on less European integration, was able to enter the German parliament for the first time ever. Adding to the current theme were comments from ECB Chief economist Peter Praet, describing an extremely cautious view of the removal of policy ease. As I have written repeatedly, there has been nothing in the past several weeks/months of data and information that would have changed the Fed’s clear goal of raising rates, not only in December, but at least several times next year. And there has been nothing during that same time frame that would lead one to believe ECB President Draghi has suddenly become a hawk. So for now, regardless of the minor day-to-day fluctuations, the dollar’s trend is higher. We will need to see a long string of weak US data to shift the Fed, and we will need to see significant price pressures in Europe to change those views. To sum it up, I believe the euro narrative is wrong and that as the market accepts that, however grudgingly, the euro will continue to decline.
As to the rest of the world, the pound remains under pressure as well with this morning’s Construction PMI data (48.1, exp 51.1) showing that confidence in the UK may be ebbing faster than expected. The ongoing Brexit negotiations have offered no positive news for the pound, and the latest round of UK data has been broadly underwhelming. While this morning’s decline is just 0.15%, over the past week the pound has given up 1.5%, and more than 3% since it peaked two weeks ago. There is no reason to think the pound will rebound anytime soon and I expect to see it continue to fall.
In Japan, the yen continues to fall, taking its movement over the past month to -5.5%! Aside from the US side of things, we have seen a combination of increased risk appetite globally, higher US yields and some initial concerns about PM Abe’s electoral prospects. Last week he dissolved the Diet and called for new elections. Any weakening in his current power structure, which based on electoral results from the entire developed world over the past two years seems likely, could result in more concerns about the yen. But ultimately, I think the biggest driver here will be the spread between 10-year yields in the US and Japan. Right now, that gap stands at 2.30%, and historically, when it rises to 2.50%, Japanese investors will shift from JGB’s to Treasuries with corresponding USD buying pressure. I like USDJPY higher as well.
Beyond the G3 overnight, the Commodity bloc has fallen ever so slightly, just adding to its recent run of modest weakness. Again, given the big dollar’s underlying strength, none of these currencies has exhibited anything particularly special.
In the Emerging markets, the biggest loser overnight has been ZAR, where concerns over a government bailout of South African Airways have brought forward concerns about a further ratings downgrade. The rand is lower by 0.5% since yesterday and 7.5% in the past month. On the plus side here, the CE4 lead the way, but the biggest gainer, HUF, is up only 0.3%. There is no clear news story and after its own sell-off vs. the dollar over the past month, this appears to be more profit taking related than fundamental.
There is neither data nor Fedspeak on the schedule for today, which implies, as ever, that the FX markets will take their cues from equity and Treasury markets.
Equity futures are pointing ever so slightly higher at this time, and Treasury prices continue under pressure with the 10-year yield up another 1.5bps at 2.36%. FWIW it seems to me the dollar is ripe for a consolidation after what has been another solid week of gains. With key economic data upcoming the rest of the week, and a slew of Fed speakers still on the calendar, I imagine today will be quiet. However, the underlying USD strength remains in place, in my view, and I expect to see it reassert itself as the week progresses.