December Rate Hike Probabilities:
USD 69.9% + (The hawks are winning)
EUR 1.7% + (Think December 2019)
GBP 81.1% + (Done deal, probably in November)
CAD 63.2% = (Not as confident as before)
Fed rhetoric 25bps
The market is starting to wonder
If voting for May was a blunder
As confidence wanes
The erstwhile gains
Of Sterling have been torn asunder
This morning’s market focus seems to be on the pound Sterling, which has fallen another 0.5% and has now retraced all the gains it made in the wake of the BOE’s decidedly hawkish turn last month. The proximate cause seems to be a negative reaction to PM May’s closing speech to the Conservative Party conference, where she encountered a heckler, a serious coughing spell and some scenery failures. All told, the impression was one of a politician facing serious problems with no good answers at this time. But perhaps of even more concern to the market is the fact that Labour Party leader Jeremy Corbyn, who is essentially a Marxist, continues to gather support in the country and has a realistic chance of becoming the next prime minister. His platform includes renationalizing the utilities and transportation companies while raising taxes and bringing back rent control, all failed policies of the past, just for starters. Certainly, a Corbyn administration in the UK would be a decided negative for not just the pound, but also for UK equities and likely Gilts. It would further confuse the Brexit negotiations and, on the whole, be quite the disaster. It is telling that the pound has fallen 3.5% since it peaked two weeks ago, and that is without any additional hard news. While this morning’s New Car registration data was disappointing, (-9.3% in Sept), the pound is clearly suffering far more from the potential for bigger problems ahead. I continue to believe that receivables hedgers need to be active here, especially in GBP, as there is further weakness in our future.
As to the euro this morning, it is essentially unchanged as the market awaits the minutes of the ECB meeting last month. Signor Draghi gave away very little in terms of details at the press conference last time, and with the next meeting still three weeks away, traders are anxious to know just how the ECB is going to go about reducing QE. Personally, I believe there will be little new information from these Minutes, and that we won’t really know until the end of the month. Mostly, I believe that is because the ECB doesn’t yet know how it will play out exactly, and so will not have had anything to say in the September meeting, even amongst themselves. Nothing has changed my views here for a weaker single currency as the market slowly realizes that the Fed’s not kidding and that they market is way ahead of itself with regard to ECB tightening.
In the commodity bloc, Aussie is having a tough day, falling nearly 0.6% after Retail Sales data disappointed badly. Not only was the headline number down (-0.6%), but last month’s number was revised lower as well, to -0.2% from a previous reading of flat. While the trend is a little less pronounced here, the USD still seems to be ascendant and have further room to rise. CAD, meanwhile, is little changed this morning and continuing to consolidate its losses from last month. My sense here is that while the US dollar has further to run, CAD will be one of the better performers and hold its own for a while. We would need to see either a significant decline in energy prices or some particularly negative news on the NAFTA front to get the Loonie to fall sharply.
Most of the emerging market set has shown little movement, but you can always count on ZAR for volatility, with last night being no exception. The rand has fallen 0.5% this morning, helping to maintain its yo-yo approach to pricing. Ongoing political infighting and concerns over the loss of its investment grade rating next month have been weighing on the currency and are likely to continue to have outsized impacts until we hear from both Moody’s and S&P in November. If either one cuts their rating and joins Fitch below BBB-, as much as $14 billion of government bonds may need to be sold by emerging market bond funds. I assure you that would be a decided negative for the currency. However, away from the rand, the EMG bloc has been quite dull today.
On the data front, yesterday’s ADP number was right on the money while the ISM Non-Mfg. printed at 59.8, its highest level ever, helping to underpin the Fed hawks. This morning brings a bit more data including Initial Claims (exp 265K); Factory Orders (1.0%); and Durable Goods (1.7%). However, even though tomorrow’s NFP data will be corrupted by last month’s hurricanes, it still appears that the market has more interest in that than today’s data. In the end, the strong dollar thesis remains intact, and it will take a significant deceleration of US data or very definitive dovish commentary by numerous Fed speakers in order to change that view. Take advantage of short-term dollar declines to add to your hedges.