December Rate Hike Probabilities:
USD 76.7% = (The Minutes should help confirm)
EUR 4.1% + (Think December 2019)
GBP 81.2% − (Done deal, probably in November)
CAD 62.0% − (Not as confident as before)
Fed Rhetoric 25bps
Though FX has been so quiescent
Most stock markets are effervescent
Investors are thrilled
While skeptics get grilled
To me, markets seem quite tumescent
Once again, ennui is the best descriptor of the FX markets this morning. The overnight price action has been de minimus in the G10 space, with a mixed performance and no currency moving more than 20bps. Yesterday did see the dollar give back a bit more of its recent gains, but the reality is that recent price movement is completely ordinary in terms of the normal ebb and flow of trading. What seem to be, on the surface, major risks to stability have been either accepted or ignored by traders. So the potential split in Spain has been ignored. Possible war with North Korea has been downgraded as an afterthought, and the dominant narrative continues to be the central banks are in control of things. And it is this narrative that continues to drive global equity markets higher as it has become quite clear that the central bank reaction function is now highly dependent on financial market outcomes. In other words, if stock markets start to fall, central banks will immediately stop reducing policy accommodation and in all likelihood start to add to QE. But for now, the everything bubble continues to inflate.
There was an interesting Bloomberg story this morning regarding central bank communication policies, where two economists at the SNB showed that overcommunication (something with which we are all very familiar in the case of the Fed and ECB) is actually detrimental to policy as it reduces clarity. Rather, they propose that ‘less is more’ with regards to central bank communications policy, as the central banks that speak less are more effective at both achieving policy aims and keeping investors and businesses informed. Personally, I am not surprised by this at all, and would be a strong advocate of hearing less from the central bank community on the whole. I think markets would be far less likely to move to extremes as independent opinions would not be coerced into a particular view. In other words, if there was doubt as to the next move in interest rate policy, every bond trader and investor might not be positioned the same way! Alas, if there is one thing we have learned in the wake of the financial crisis in 2008-09, it is that central bankers are particularly enamored of their own voices! So I doubt either Janet or Mario are likely to take this suggestion to heart.
Away from the G10, we have had a few outliers with TRY far and away the leading gainer, higher by more than 1.3%, and ZAR and MXN also having solid performances. On the down side, CNY has given back a slug of its post vacation gains, falling 0.3% overnight. The Turkey story is quite straightforward as US Ambassador to Turkey, John Bass, indicated that talks were ongoing to address the visa spat that started the lira’s downfall. If that were resolved, I would expect TRY to regain the last 2% it ceded during the short-term crisis. In South Africa, the story seems to be a combination of the solid IP data released yesterday morning and a potential calming effect on the political landscape as one of the favored candidates to replace President Zuma, Zweli Mkhize, is claiming the ability to be a unity candidate for the ANC. Certainly the investor community would welcome any reduction in political infighting in South Africa and that is likely to help the currency further.
Finally, south of the border, while the peso has gained some 0.5% overnight, that must be seen in context, as the peso has fallen more than 6% during the past three weeks. The proximate causes here are twofold: first the ongoing NAFTA talks have not been seen as a particular benefit for Mexico; but more importantly, AMLO continues to perform well in the polls and the market is starting to price in the probability that he becomes the next president of Mexico. He is a left-wing populist firebrand who is seen as likely to unwind recent policy changes on both international (read American) access to Mexico’s energy industry and changes in the labor laws that have added freedom to company actions. Neither of these is seen as a positive for Mexico, and if his candidacy continues to gain traction, it is quite easy to believe that USDMXN will head back above 20.00 and beyond.
This morning brings the JOLTS Jobs report (exp 6.125M) at 10:00 and then we see the FOMC Minutes at 2:00pm. Many are looking for the Minutes to be quite informative on FOMC policy for the rest of this year but I disagree. It seems to me that not only were they quite explicit at the September meeting that they would begin allowing the balance sheet to shrink slowly starting this month and raise rates again in December, but that has been the consistent message from every speaker since then. In fact, I think far more attention should be paid to Friday’s CPI data as that will help drive the narrative more ably. Expectations there are for a pretty big jump of 0.6% in the headline number, which translates into 2.3% Y/Y, certainly firm enough to continue with the current rate hike plans.
Until then, look for modest back and forth trading in the G10 currencies as we await the next key piece of information. I still like the dollar over time and continue to believe receivables hedgers need to take advantage of current levels.