December Rate Hike Probabilities:
USD 76.7% = (Will CPI drive this higher?)
EUR 3.2% = (Think December 2019)
GBP 81.2% = (Done deal, probably in November)
CAD 59.1% = (Not as confident as before)
Fed Rhetoric 25bps
The word out of Brussels was that
The EU just might arrive at
An interim deal
With modest appeal
For each Eurozone bureaucrat
The pound, on that news jumped to highs
But then, in what’s no real surprise
The Germans said ‘nein!,
We have a timeline’
It’s money first, then compromise
As we walk in on this Friday the 13th, FX markets are little changed on a broad basis. If pushed, I would say the dollar is a bit softer, but we continue to lack a strong short-term theme for now. The one place we have seen movement is in the British pound, where an article yesterday afternoon indicated that EU Brexit negotiator, Michel Barnier, may be willing to offer a two year transitional deal to help smooth the break-up. Not surprisingly, the pound rallied sharply on the news, jumping more than a penny in minutes. Alas, earlier this morning, after a bit more euphoria that had driven the pound back above 1.33, European Commission President Jean-Claude Juncker dismissed that idea out of hand, repeating his mantra of no trade discussions until they agree the money owed. The pound quickly gave back most of this morning’s gains and is now just slightly higher on the day. I guess the idea that the EU is now allegedly discussing a transition deal is seen as a positive for the pound, although it appears to me that it will be difficult to agree anything here. Remember too, that Germany, the most critical EU country, is not really focused on these issues for now as Chancellor Merkel is too busy trying to create her governing coalition after last month’s inconclusive elections. The point is I believe it would be a mistake to assume a more significant boost in the pound on the basis of the EU giving ground at this stage. And there has certainly been nothing out of the UK that indicates they are on track to make concrete proposals. All told, I remain a committed seller of pounds at these levels as the odds of a hard Brexit seem to grow every day.
Elsewhere, the annual IMF and World Bank meetings brought nothing but platitudes from the likes of Mme LaGarde, although the IMF did raise its global GDP forecast by 0.1% for 2018. However, despite a plethora of central bank speakers at the event, nobody really said anything noteworthy, and so markets have largely moved on.
The one constant this morning is that commodity currencies are modestly firmer on the back of stronger commodity prices in general. WTI is back above $51/bbl and both the base metals complex and agricultural prices are firmer. A key driver here seems to have been the Chinese Trade Data from overnight that showed a continued surge in import growth (+18.7%) and, surprisingly, a sharp narrowing in the Trade Surplus to $28.5B down from $41.9B last month. The skeptic in me would point out that the Party Conference is next week and, while I have no knowledge or proof of this, the idea that the Chinese government might manipulate this data for what they perceive is a beneficial political effect cannot be ruled out. After all, a shrinking Chinese Trade surplus will certainly play well in the White House, and growing imports would indicate that the Chinese transition away from its mercantilist past is proceeding apace. Interestingly, there was essentially no impact on the renminbi, although the firmer commodity prices have helped both AUD and NZD to rise by about 0.3%.
For volatility traders, the gift that keeps on giving is South Africa, where the rand has rallied a further 0.65% this morning (3.6% this week) after a court ruled that President Zuma would be able to face corruption charges after all. My take is that the market would like to see him deposed and someone less venal in his place. Or at least someone more market friendly. But away from the rand, the EMG bloc has been quite dull as well.
Yesterday’s PPI data was exactly on expectations, and the Initial Claims number actually fell further than anticipated. Given this week is the Survey week for the monthly NFP report, that bodes well for what we will see in early November. This morning we get CPI (exp 0.6%, 0.2% ex food & energy); Retail Sales (1.7%, 0.9% ex autos); Michigan Sentiment (85.3) and Business Inventories (0.7%). Clearly it will be the two 8:30 numbers that matter, and given the robust expectations, one would expect the chance to fall short is great. What does seem clear is that the market will respond in a logical manner to the outcome so strong data will result in higher interest rates and a stronger dollar and vice versa. While the Fed’s official focus is PCE, which isn’t released for another two weeks, a strong print in today’s CPI would not be ignored and I think we could easily see the market probability for the December rate hike pick up further alongside the dollar. Plus a strong reading this morning would give ammunition to Chair Yellen that the transitory factors are beginning to fade away. And that would strengthen her hand against the remaining doves on the board.
Net net, I still like the dollar story better than others and remain convinced that hedgers need to take advantage of current levels in the dollar for better long-term performance.
Good luck and good weekend