December Rate Hike Probabilities:
USD 80.2% – (Still in the cards)
EUR 3.9% + (Think December 2019)
GBP 85.6% + (Done deal, probably in November)
CAD 46.1% + (NAFTA uncertainty impact)
Fed Rhetoric 25bps
The UK continues to suffer
As May seeks an interim buffer
‘Gainst Brexit’s effects
While Europe rejects
Her pleas thus its sure to get rougher
The dollar is mixed this morning, gaining against a handful of currencies while falling against a similar amount. In fact, I would say that the dollar is the least interesting currency today with markets focused on other individual currency stories. For example, the largest movement has been seen in NZD, which has fallen by 1.65% after a government coalition was finally formed. The reaction was due to the fact that the Labour Party was the one that led the coalition, despite winning only ~37% of the vote, as they brokered a deal with the New Zealand First party, an upstart nationalist leaning group that entered Parliament there for the first time. The party platform included planks on reforming the central bank and addressing social issues, neither of which have been seen by the market as a harbinger of future economic or monetary strength. So a far less certain future has resulted in a sharp decline in the Kiwi. While New Zealand is generally too small to have any substantive global impact, this reaction does highlight the ongoing market belief set that a strong economy and independent central bank are two keys for currency stability.
The other notable loser in the G10 space was the pound, falling 0.35%, after it released much weaker than expected Retail Sales figures (-0.8%, exp -0.1%). So some of the first hard data that will be part of Q3’s GDP reading is extremely disappointing. It is interesting to me that while the pound suffered (and has more to come) the market probability of a rate hike next month actually rose slightly. If anything I believe this signals the market sees the BOE move as a ‘one and done’ concept and not the beginnings of a policy tightening program. In fact, I would estimate that the BOE, if they move in November, will not adjust policy for at least another two years following. And if they do, it will be to ease it again as the UK exits the EU rather than to take another tightening step. All of this continues to play to my view that the pound has much further to decline.
On the other side of the ledger, both the Swiss franc and Japanese yen are the best performers in the G10, rising 0.6% and 0.4% respectively. As both of these currencies are seen as haven assets, and given that US equity futures are actually quite a bit lower this morning alongside equities throughout Europe and Asia, we may well be looking at a bit of a risk-off reaction. There has been precious little other news to drive these two currencies, and it is certainly reasonable to expect at least some correction in the equity markets. I’m not saying this is the beginning of a major move, simply that as investors shed some of their risk, these currencies are prone to benefit. Otherwise, the G10 space has been rather dull with the ongoing Spanish drama having little impact on the euro and no substantive news from the US.
In the EMG world, we have also seen a mixed picture although if forced to choose I would say there are probably a few more gainers than losers. What makes this confusing is that in a risk off scenario, I would have expected things to be the other way round. It is this conundrum that prevents me from calling, at this time, that the market is ready to moderate its risk appetite, even temporarily. Of course, if equity market declines continue or accelerate that would certainly change my view.
Arguably the most noteworthy thing happening in this space is the Chinese Communist Party Conference, where President Xi has outlined his plans to stay in office until he dies and all the while strengthen state control over the economy. Interestingly, PBOC governor Zhou claimed that they are going to continue to focus on making the renminbi a more freely convertible currency, but there is no plan to either widen the trading band or reduce intervention. It seems to me that, like the Cheshire Cat, words mean exactly what Zhou wants them to mean, regardless of a more conventional definition elsewhere. At any rate, CNY has given up all of its gains since the week-long national holiday at the beginning of October, and seems simply to be continuing its slow decline vs. the dollar that began back in early September. Ultimately, I believe that a weaker CNY is in our future, but I don’t expect anything to happen quickly.
Yesterday’s US housing data was not very inspiring with both Housing Starts and Building Permits falling well short of expectations. As I wrote yesterday, it certainly appears to me that this part of the economy has plateaued and may be rolling over. This morning we see Initial Claims (exp 240K), Philly Fed (22.0), and Leading Indicators (+0.1%). Given the robust reading from the Empire Manufacturing data earlier this week, I wouldn’t be surprised to see Philly surprise on the high side. Yesterday afternoon’s Beige Book told us that the economy continues to grow at a moderate pace, and that the Hurricane trio of August/September is unlikely to have very long lasting effects. Despite the Housing plateau, I believe the Fed remains on track to raise rates in December and that my underlying thesis remains intact. This points to the dollar ultimately gaining further ground going forward.