December Rate Hike Probabilities:
USD 76.7% − (Getting ever clearer)
EUR 2.4% − (Think December 2019)
GBP 82.5% + (Done deal, probably in November)
CAD 62.5% − (Not as confident as before)
Fed Rhetoric 25bps
Though Spain’s on the cusp of a split
And French growth continues like sh*t
The buck’s in arrears
Vs. all of its peers
As dollar bulls just won’t commit
The dollar is on its heels this morning as recent gains are pared back somewhat through the normal ebb and flow of FX trading. This morning’s data releases showed a mixed picture with Italian IP outperforming expectations (+5.6% vs exp +2.5%), while the same French data disappointed (-0.3% vs exp +0.4%). In what cannot be a great surprise, the German trade data remains robust (€20B vs exp €19.5B) though the same data from the UK showed a much larger deficit than forecast (-£14.245B vs exp -£11.15B). And lurking behind the data is the Spanish situation, where Catalan leader, Carles Puigdemont, is set to speak to his Parliament today and there is a very real prospect that he will declare independence for the province. That would almost certainly cause a severe reaction in Madrid and potentially force Spanish PM Rajoy into more drastic action. Remember the outcry two weeks ago when the secession vote was held and the National police force was attacking voters. My point is not that I agree or disagree with either side of this conflict, just that there remain a number of areas within the Eurozone that are not happy with the current state of affairs. And that, it seems to me, ought to weigh heavier on the currency. For the most part, the FX markets will be driven by monetary and fiscal policies, but it is hard to ignore the constant rebukes to the European experiment. Consider that despite the political animosity that reigns in the US, there is no serious discussion of secession by any area. All I’m saying is that it will be difficult to get excited about the euro as an investor if the members aren’t excited about it themselves.
But that is a much longer-term concept. This morning I would argue we are simply seeing the regular gyrations that are part of FX. While the dollar is weaker across the board today, it was just two days ago that it was stronger across the board. And in the big scheme of things, we really haven’t moved very far over the past week. Rather, the dollar has maintained the bulk of what it gained during the past month when views started to shift regarding the FOMC’s likely future path. One other thing that is getting press this morning is the ongoing political feud between President Trump and Senator Corker of Tennessee. The idea is that if this keeps up, there will be less probability that tax reform will come to fruition and that the US economy will miss out on a potential benefit. While I continue to read that this is an important part of the mix, I find it hard to believe that traders are basing their dollar views on the extremely uncertain outcome of a tax policy debate. So while it may, at the margins, be weakening the dollar slightly, I would contend it has had minimal impact.
So the entire G10 bloc of currencies is stronger this morning, but the biggest mover, SEK has been less than 0.5% with no particular story driving it. This is far more likely the result of some order flow than a change in fundamental thinking. In the EMG space, though, we have had some more impressive movement, notably by CNY, KRW and ZAR. Starting with CNY, today is the first day since September 29 that the markets there were opened and the renminbi’s 0.9% rally is actually quite impressive. In fact, during that period, the dollar has generally performed quite well, so if CNY were catching up, I would have expected it to weaken, not strengthen. Rather, I believe that this movement is in anticipation of the upcoming Party Conference next week with expectations that there is the opportunity for policies that aim to allow market forces to have a bigger impact on the currency going forward. The PBOC head, Zhou Xiaochuan, has continued to discuss the need for liberalization of the currency, and given the economy there continues to outperform expectations, and the government has cracked down on international investment, it seems natural that CNY would strengthen. Of course, this is all subject to reverse in the event that the potential banking crisis expands or if there is some other hiccup in the current designs of President Xi.
As to KRW, the movement seems to be a response to the equity market’s strong rally overnight with investment continuing to flow into the country. However, despite the impressive gains overnight, it is important to remember than the won has traded within a 4% range for the past six months and currently sits right in the middle of that range. It seems that the improving economic situation is simply being offset by tensions from the North, thus keeping the currency in check. Finally, the ZAR story is easy, with its Manufacturing Production data printing at a much better than expected +1.5% (exp -0.1%) thus encouraging those investors who continue to seek yield that the currency won’t collapse.
As to US data today, the NFIB Small Biz index fell to 103.0, it’s worst showing in a year, as the hurricanes seemed to have sapped some of the recent giddiness in this sector of the economy. We also hear from the ultra-dovish Neel Kashkari this morning at 10:00, and he will almost certainly tell us that there is no reason for the Fed to act until inflation is much higher. But the market knows what he will say and thus would only react to anything sounding hawkish. A quick look at the market probabilities for rate hikes shows that they have edged lower overnight in general, but remain on course for the US, the UK and Canada to all raise rates again this year. As I have maintained for a long time, the narrative is falling behind the times with its insistence that the Fed is going to do less than they say and the ECB more. For now, I will go with the rhetoric. Receivables hedgers, sell rallies in euros and pounds, it is still the best long run bet.