Feet to the Fire

December Rate Hike Probabilities:

USD   80.2% + (Still in the cards)

EUR     2.0% (Think December 2019)

GBP   86.6% + (Done deal, probably in November)

CAD   45.8% (Actually falling pretty sharply)

Fed Rhetoric               25bps


Inflation in England’s attained

A level that must be restrained

Another tick higher

And feet to the fire

For Carney, by law its ordained


It’s always difficult to figure out exactly what drives the dollar (or any market) during a particular session. Ultimately, I always revert to the economic fundamentals, as they ought to exhibit the most influence over time. But in any given session, there are any number of things that can do the job. The dollar is generally stronger this morning as pundits point to a meeting President Trump had with Stanford economist John Taylor regarding chairmanship of the Fed. Ostensibly, Trump was quite impressed. Taylor is best known for his eponymous Taylor Rule, which derives the proper rate for Fed Funds based on specific economic and financial criteria. And that rule, right now, signals that Fed Funds should be near 3.75%, not 1.25%. So the idea that the next Fed chair will be more hawkish gained a great deal of credence overnight and the dollar benefitted directly.

One minor exception, however, is the pound, which had rallied a bit after September’s CPI data printed at 3.0% as expected (It has actually started to give back some of this gain but continues to outperform other G10 currencies). UK legislation requires the BOE Governor to write an open letter of explanation if the headline inflation rate moves more than 1% in either direction from the statutory target of 2.0%. So despite the fact that market participants were anticipating this outcome, the reality was still enough to move the market. Essentially, this has made it clear that the UK will be raising rates at their November meeting, removing the emergency 25bp rate cut they implemented immediately in the wake of the Brexit vote in June of last year. What makes this surprising is that given the otherwise desultory UK data, it seems hard to believe that they would go down this path, but it does seem to be highly probable at this time. What is truly interesting, though, is the fact that the market isn’t looking for another move by the BOE for more than a year after this. The point is that a hike in three weeks’ time is not the beginning of a tightening cycle as much as it is a knee-jerk response to recent inflation readings. And of course, the weak pound has dramatically impacted those inflation readings, which despite its recent performance is still lower by 10% since the Brexit referendum.

Speaking of Brexit, I have not seen any news that indicates the current stalemate between sides has changed and so the odds of ‘no deal’ seem to be climbing every day. As I read about the ongoing talks, it almost seems to me that neither side really wants a deal. The EU is terrified that if they give anything away in a deal, other members are going to raise their hands for the same benefits. At the same time, the UK has made it clear that while a financial settlement is possible, they are not going to pay a lot of money without getting something in return. I have suspected for a while that a transitional deal would be highly problematic, and nothing I have heard or read lately has changed that view. We will know for sure when the UK Treasury starts allocating funds for contingency issues in the event of a ‘no deal’ outcome. I think that will be a very negative signal for the pound as the rest of the market will come around to the idea that the UK is about to exit the EU with no contingency plans. I maintain that receivables hedgers need to be taking advantage of this short-term rally.

Away from the UK, the euro has been one of the worst performers overnight as the ongoing Spain/Catalonia saga continues to sap good will from the currency. Spain reduced its own growth outlook for 2018 (2.3% down from 2.6%) due to the repercussions from the secessionist impulse in Catalonia. Since Spain has been an important bright spot for the Eurozone, especially from the southern portion, as long as this crisis remains unresolved I expect further pressure on the euro. At the same time, this morning’s data reconfirmed that inflation is nowhere near the ECB’s target of ‘just below 2.0%’ with core CPI printing at 1.1%. We even saw some softness in the German ZEW figures (17.6 vs. exp 20.0). None of this bodes well for the narrative of an early end to QE or tighter policy and it has resulted in a 0.4% decline in the euro this morning.

In the Emerging markets, we have seen some more significant movement this morning, led by ZAR (-0.65%), whose political machinations rarely seem to be a positive for either the economy or the currency. Today’s story has revolved around Cabinet changes made by President Zuma there as he tries to consolidate whatever power he has remaining. We have also seen a sharp decline in KRW (-0.4%) after North Korea rejected diplomatic talks and said a nuclear war “…may break out any moment.” Finally, CNY has fallen by 0.45% overnight as the Communist Party congress opens in Beijing. Surveying the situation there over the past months shows that President Xi, far from being embracing markets to help the economy, has decided that centralized control is the best way forward. It is an open question, in my mind, whether they will be able to control both the currency and economy in the manner they like, and when push comes to shove, I expect them to let the currency correct, not the economy. So while I am pretty bearish the renminbi in the long term, for now I suspect it will not be allowed to move very far. In fact, last night’s decline is quite surprising to me.

This morning’s data brings IP (exp 0.3%) and Capacity Utilization (76.2%). These generally don’t move the market. Yesterday morning we saw a much stronger than expected Empire Manufacturing print (30.2 vs. exp 20.4) indicating that US industrial growth remains on track. My sense is it is time for the dollar’s uptrend from early September to begin to reassert itself as the combination of ongoing strong data, a potentially hawkish new Fed chair and problems elsewhere in the world all point to strength. Hedgers beware!


Good luck






The Next Global Crunch

December Rate Hike Probabilities:

USD   76.7% = (Still in the cards)

EUR     3.1% = (Think December 2019)

GBP   84.8% + (Done deal, probably in November)

CAD   49.7% (Actually falling pretty sharply)

Fed Rhetoric               25bps


This weekend we heard from a bunch

Of policymakers whose hunch

Is prices will rise

As each of them tries

To stop short the next global crunch


Last week saw the dollar retreat overall as the bullish case was negatively impacted by continued disappointment in the actual inflation data despite the ongoing Fed rhetoric that another rate hike is coming by Christmas. Of course, there were other stories to help the cause including stronger commodity prices underpinning that bloc and comments from several European officials that an interim deal with the UK might be possible. This morning, however, the dollar has regained its footing and has edged higher on balance.


It seems that the mood from the G30 conference in Washington this weekend was somewhat schizophrenic. While the US contingent remained upbeat about economic prospects in the near term, looking at improving growth and the strong employment picture as leading to their desired, if elusive, rise in inflation, both European and Japanese leaders were far less positive in their outlook.


Kuroda-san made clear that the BOJ was not even contemplating the ending of QQE in Japan, nor the targeting of 10-year JGB yields at 0.0%. With inflation in Japan running at 0.7%, well short of the 2.0% goal, Kuroda said, “The Bank of Japan will consistently pursue aggressive monetary easing with a view to achieving the price-stability target at the earliest possible time.  Achieving the 2% target is still a long way off.” 


Meanwhile, Draghi and friends were at pains to point out that inflation in Europe also remains far from its goals but that their current policy settings were doing the job. “Therefore, we’ve got to be persistent with our monetary policy,” Draghi said. “We also have to be prudent” and will maintain “an extraordinary degree of monetary accommodation.” I don’t know about you, but that certainly sounds to me like any changes that are coming will be minimal, at best.


Of course, the ECB hawks couldn’t let Draghi have the last word and commented on the fact that based on the ECB’s current, self-imposed restrictions, they can only purchase another €200 billion or so to add to the €2.3 trillion already purchased. The implication here being that QE doesn’t have much more time in it after all. However, despite this unwelcome hawkish tilt from Jens Weidmann, President of the Bundesbank, the market appears to be more in step this morning with Draghi and the doves, hence the euro’s 0.25% decline.


If I were to sum up the G30, then, I would say that financial officials are not adhering to the prevailing FX market narrative. The G30 sees stronger growth leading to higher inflation and higher rates in the US while the rest of the world continues to see inflation as elusive and will continue to pursue extraordinary monetary policy ease. That is not a prescription for the dollar to fall!


Away from the G3, the biggest surprise to me is the consistent decline in the market perception of Canada’s rate hike prospects. Just a month ago, the market was pricing in a 75% probability that the BOC would raise rates by December. That has fallen to less than 50% today. What’s interesting is that during that time, Canadian data has maintained a solid performance, with growth and employment doing well, and inflation edging ever higher. During that period the Loonie has also weakened nearly 4%, although in fairness, it has done little over the past two weeks. What I would say is that if we continue to see that probability slide lower, USDCAD has room to move higher. It seems that, for now, CAD has disconnected from commodity prices.


In the EMG bloc, the most noteworthy action has been the decline of the Mexican peso, falling 0.75% on renewed concerns that the ongoing NAFTA negotiations are starting to turn negative for the country. This has the added impact of helping the electoral prospects of AMLO, the hard-left Presidential candidate, and that combination will not be a positive for the Mexican economy. With the peso through 19.00 this morning, for the first time in 5 months, I fear there is further room for decline there. Otherwise, this broad bloc of currencies has shown unimpressive activity overnight and has maintained the bulk of last week’s gains vs. the dollar.


On the data front this week, we see the following:


Today                           Empire Manufacturing                        20.5


Tuesday                       IP                                                              0.2%

Capacity Utilization                              76.2%


Wednesday                 Housing Starts                                        1175K

Building Permits                                    1240K

Fed Beige Book


Thursday                    Initial Claims                                            240K

Philly Fed                                                   22.0

Leading Indictors                                     0.1%


Friday                         Existing Home Sales                                5.30M


It strikes me that this list of data is not that likely to drive the FX markets although if everything leans in one direction we could certainly see a cumulative effect. We also hear from six more Fed speakers, including Chair Yellen on Friday evening, but given the timing of her speech, any impact there won’t be felt until Sunday in Asia.


Lately, however, the FX market seems to be all-in on the narrative of slowing Fed activity and imminent policy tightening elsewhere. Certainly equity markets continue to believe that story as there is no evidence the inflating bubble is of any concern to most investors. As such, it is hard to make a case that the dollar will rally in the short term, although if we see strong data across the board this week, it may be enough for a little benefit. That said, nothing has changed my view that the narrative is wrong here, and as it adjusts over time the dollar will strengthen. However, I am hard pressed to make a case that the dollar weakens much from these levels either.


Good luck






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



Truly a Mystery

December Rate Hike Probabilities:

USD   76.7% = (The Minutes should help confirm)

EUR     3.6% (Think December 2019)

GBP   81.0% (Done deal, probably in November)

CAD   59.2% (Not as confident as before)

Fed Rhetoric               25bps


Like any religious consistory

The FOMC looks at history

Though it can’t explain

Why prices remain

So stable, it’s truly a mystery!


In the wake of the FOMC minutes released yesterday afternoon, and ahead of Friday’s CPI release, the dollar has taken a breather overnight, showing very little net movement. While that broad stability masks some individual movement, the big picture remains of a dollar that appears to have halted its year-long slide, but is not ready yet to accelerate higher.


A quick look at the Minutes showed that the Fed’s models are still not doing a very good job in forecasting inflation. The hawks continue to discuss one-off idiosyncrasies, like the decline in cell-phone data charges as a possible hindrance to higher inflation. The doves are coming round to the idea that the inability of wages to rise is a result of the increasing global supply of labor.   In other words, they have no idea why prices are behaving as they are, and are throwing every idea they can against the wall to see which one sticks. The one thing that seems clear, however, is that they will not be deterred from raising rates again in December unless the interim data takes a significant turn for the worse. And given the uncertain impact of the hurricanes on that data, it seems that they will be able to look through any weakness as merely another transitory factor. However, having said all this, it appears that the market’s interpretation of the Minutes was far more dovish than mine, hence the dollar’s late afternoon sell-off.


It is fair, however, to ask if the three rate hikes for next year that the FOMC have, themselves, penciled in are going to see the light of day. I continue to believe that one of the key reasons they are so anxious to raise rates is to have room to cut them when the next downturn arrives, although they cannot actually admit that. My point is that we will need to see extremely weak data in order to derail that plan, and as of now, there is no indication that will be the case. One other thing to keep in mind is that we are fast approaching the announcement of the next Fed Chair, and I keep reading that Kevin Warsh is the front-runner. He is decidedly more hawkish than Ms. Yellen, and would almost certainly seek to push rates higher still. Of course, all of this matters to us in FX because of the current dollar narrative, which despite all evidence to the contrary, continues to assume that the Fed will be less hawkish than their rhetoric and the ECB and BOE more hawkish. Nothing in these Minutes has changed my view that the narrative is wrong and will change with the dollar benefitting over time.


The other story of note this morning is the ongoing angst in the UK over the progress, or lack thereof, in the Brexit negotiations. The latest round of talks, which are due to end this week, have produced nothing of note and it appears that both sides are waiting for the other to crack on something. If forced to handicap this outcome, I am leaning toward a hard Brexit with no transitional deal. Ultimately, the biggest sticking point is going to be money, and the EU is going to continue to insist that the UK owes an astronomical number, which I bet will grow to be €100 billion before the talks are done. At the same time, the UK is going to insist that without a transitional agreement, there will be no payment, and even with one, the number is in the €20 billion range. That’s a pretty big gulf to overcome, and based on the ongoing dysfunction within PM May’s government, I just don’t see a resolution. No matter the long-term potential benefit for the UK to regain its sovereignty, the near term is going to be messy, and the pound is going to suffer. Folks, above 1.30 the pound remains a screaming sale in my view. Ironically, as I was typing this, the pound just fell 50 pips on this BBG headline “*GBP/USD FALLS TO 1.3170; BARNIER SAYS DEADLOCK IN BREXIT TALKS”


Looking elsewhere, the yen continues to edge ever so slightly higher on the back of a series of polls showing that PM Abe is set to win a resounding victory in the upcoming Japanese elections with a chance to capture a two-thirds majority of the lower house, enough to make constitutional changes. The Nikkei has been performing well while the yen has arrested its month-long decline and found a new stability. In the commodity bloc, both AUD and NZD are firmer by about 0.5% this morning as a result of renewed Japanese investor buying of both currencies.


Meanwhile, in the EMG bloc, amid a session with an equal number of gainers and losers, no currency has moved more than 0.3%, and there are no stories of note to reflect.


This morning brings the first real hard data of the week, PPI (exp 0.4%, 0.2% ex food & energy) as well as Initial Claims (250K). The thing is the FX market doesn’t typically pay close attention to PPI, especially with CPI to be released tomorrow morning, and the Initial Claims data continues to be roiled by the aftermath of the hurricanes last month. As such, I don’t see either one having a substantive impact on the FX markets today. That leaves us with Central bank speakers as the most likely catalyst for movement today. It seems the bulk of them are in Washington for the annual IMF and World Bank meetings with Powell and Brainard from the Fed on the schedule as well as Draghi, and we will also hear from Germany’s outgoing FinMin, Wolfgang Schaeuble. While I don’t anticipate too much new news, one can never be sure in these circumstances.


Net, I don’t anticipate much movement overall today, but if I had to guess, the dollar’s corrective fall is likely close to an end.


Good luck











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.


Good luck




Cusp of a Split

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.


Good luck




Diplomats Grumble

December Rate Hike Probabilities:

USD   80.2% + (Getting ever clearer)

EUR     2.5% (Think December 2019)

GBP   81.7% +  (Done deal, probably in November)

CAD   64.0% (Not as confident as before)


A nation that sits in between

Both Asia and Europe has seen

It’s currency tumble

As diplomats grumble

‘Bout visas that once were routine


Ordinarily, the Turkish lira is not a highlight of the FX markets, as the nation’s economy is neither too large (19th largest globally) nor international, thus trade flows remain muted overall. But I would be remiss if I did not lead with the TRY this morning as it has fallen more than 2% (and was previously lower by as much as 6.6%) after a spat between the US and Turkey intensified today. The issue revolves around the arrest of a Turkish employee at the US consulate in Istanbul, and the rights of consulate employees. So while there is no direct financial impact, the market is clearly concerned that if tensions continue to escalate, there could be economic issues down the road. Is this a harbinger for other EMG currencies to see pressure? While anything is possible, it doesn’t seem to be the case as this is very specific to Turkey and the US. However, contagion is a funny thing and one cannot completely rule out a wider impact, however unlikely.


But on this Columbus Day holiday in the US, away from TRY, there is very little going on in the FX markets. The pound has been the biggest mover in the G10 (in fact the only currency to have moved more than a few pips) as it has rallied 0.65%. This rally, breaking a multi-day slide, is on the back of revised Unit Labor Cost data (+2.4% in Q2 up from +1.6% previously reported), which has helped the cause of the BOE hawks. As can be seen above, the probability of a rate hike in the UK continues to grow, and while I have been using December in deference to the Fed, the BOE is likely to go at its November meeting when it publishes new inflation forecasts as well. However, while I understand the positive sentiment today, the reality continues to be that the pound has far more reasons to fall than rise. The politics of Brexit continue to rage in the UK and there continues to be limited progress with negotiations. And no matter the long-term outcome, a hard Brexit, which seems now to be the most likely scenario, will be a decided short term negative for the pound. Rallies are to be sold in the pound.


But with little else on the docket today, we can review Friday’s Payroll data. The headline payroll numbers were shockingly worse than expected (-33K, exp +80K) with similar misses for Private and Manufacturing data. But the Unemployment Rate tumbled to 4.2% and Average Hourly Earnings jumped to 0.5% (2.9% Y/Y) amid growth in the Participation rate. Given the uncertainty surrounding the impact of the two major hurricanes that made landfall in September, it is not surprising that economic models did not forecast the data well. However, the balance of good and bad data was enough to inspire investors, and more importantly, should certainly be enough to keep the FOMC on target for its rate hike in December. Even the Fed Funds futures market, which has been extremely skeptical of the Fed to date, has priced in a greater than 80% probability of Fed action come December. Looking ahead, I continue to see the dollar improving as this market grudgingly accepts the Fed rhetoric and starts pricing in more rate hikes in 2018.


As to the week ahead, it is inflation week here in the US, with both PPI and CPI to be released, following Wednesday’s release of the Minutes of the September FOMC meeting.


Tuesday                        NFIB Small Biz Optimism                        105.0


Wednesday                   JOLTS Jobs Report                                    6160K

FOMC Minutes


Thursday                       Initial Claims                                            252K

PPI                                                               0.4%

-ex food & energy                                    0.2%


Friday                            CPI                                                               0.6%

-ex food & energy                                    0.2%

Michigan Sentiment                                95.0

Business Inventories                               0.6%


So between now and Friday, we will need to find other catalysts to drive markets (my sense is the Minutes will not teach us anything new). Fortunately, Fed speakers have the chance to fill the void. There are six speakers during the week (seemingly more doves than hawks) and with the annual IMF meetings in Washington DC, certainly, headline risk is a real possibility, although it would be shocking if anyone other than Kashkari disagrees with the plans to raise rates in December. Finally, Chair Yellen speaks next Sunday morning at a G30 event, so we will have something to look forward to next Monday morning as well.


All told, nothing has changed that I can see. The Fed is still on track to continue to tighten policy and while both the BOE and the BOC are moving in that direction, neither is likely to be as aggressive as the Fed. I believe it is a mistake to assume the ECB is going to get on board that quickly and the BOJ may never get on board. I still like the dollar overall.


Good luck







Any Rallies to Thwart

December Rate Hike Probabilities:

USD   73.3% + (The hawks are winning)

EUR     4.1% +   (Think December 2019)

GBP   79.6%    (Done deal, probably in November)

CAD   64.9% + (Not as confident as before)


Fed rhetoric       25bps


Ahead of the Payrolls report

The dollar has gained more support

The pound keeps on sliding

While sellers are biding

Their time, any rallies to thwart



The dollar continued its strong performance overnight, especially against the pound, which is making a beeline for 1.30 and below. Yesterday’s US data continued to show that the US economy is performing well, with the Initial Claims report recovering from the hurricane situation more rapidly than expected, while both Factory and Durable Goods orders beat expectations. And despite this strength, the Trade deficit actually shrank a bit more than expected. So on all counts, the US data continues to perform extremely well and the market is becoming increasingly convinced that the Fed will raise rates come December. Of course, my thesis is that the dollar has further to climb because the market is discounting the idea that the Fed will continue their tightening into 2018 despite very clear intentions as signaled by the Fed’s own dot plot. So the US half of the equation continues to pressure those who are short dollars. Adding to that pressure is the technical picture, where the dollar index has breeched a key downward trend line and key Fibonacci resistance. (While I am not a fan of technical studies, there are enough people who are that result in some aspect of self-fulfillment in these situations. So if they think there are dollar-buying signals, they will buy dollars and help drive the market.)


How about the other side of the proverbial coin? Well, certainly, the fallout from UK PM May’s dismal performance at her party conference continues. The pound is trading at its lowest level in a month and appears to have plenty of momentum to continue falling. While housing price data did tick higher last month, there has been enough negative news on the economic front (remember softer PMI data) that combined with growing concerns over ineptitude in the Brexit negotiations, the pound is not the currency of choice to hold any more. I maintain it has much further to fall.


And the euro? Well, the data there continues to show ongoing moderate strength, albeit still somewhat unevenly distributed. Last night’s German Factory Orders data was quite robust at 3.6% in August, but at the same time Italian Retail Sales badly disappointed, falling -0.3% rather than growing, and that was after a downward revision to last month’s number. The point is that while Germany is still going gangbusters, much of the rest of Europe, especially the southern portion, is doing far less well. Add to that the ongoing Spanish crisis and you have the recipe for a weaker currency. So while the euro is little changed this morning, after I wrote yesterday, it declined a further 0.4%.


Away from the pound, which has fallen 1.20% during the past two sessions, the commodity bloc is the next worst performing group, with AUD (-1.15%) and CAD (-0.75%) both feeling the heat. The proximate cause Down Under was a weak Retail sales print yesterday, while north of the border, Canada’s Trade Deficit grew far more than expected. Given the underlying USD strength we have observed during the last two weeks, there need only be a small catalyst to have a large impact on a currency. All told, I see little reason for this bloc to outperform in the current environment.


Pivoting to the emerging markets, MXN has been a significant underperformer, falling 1.3% yesterday and maintaining those losses this morning. The combination of concerns over NAFTA negotiations degrading and a domestic boost for left wing presidential candidate Antonio Manuel Lopes Obrador (AMLO) has weighed heavily on the currency. His platform includes ending international investment in the energy sector, one of the biggest economic successes of the current administration. As to the overnight moves, TRY has been the big loser, down 0.9% as the market continues to react to an increased probability of Fed action in December. Beyond these two currencies though, while the dollar is generally higher, it is not decidedly so.


Which brings us to this morning’s data. Here are the current expectations:


Nonfarm Payrolls                                  80K

Private Payrolls                                     74K

Manufacturing Payrolls                       10K

Unemployment Rate                             4.4%

Average Hourly Earnings                    0.3% (2.5% Y/Y)

Average Weekly Hours                        34.4


Obviously, these numbers will have been impacted by the hurricanes, hence the very low bar. The funny thing is that I think if the data surprises to the upside, something like 100K, that the market will be quick to read that as a much better than expected number and we could see the dollar extend its recent gains. Meanwhile, the opposite is not true. A weak number will be attributed to the hurricane mess, and while there may be a very short term reaction lower in the dollar, I would expect it to rebound quickly.


I will repeat what I have been preaching for a while. The narrative is changing, albeit slowly. The Fed is going to be more hawkish than market pricing, and the ECB and BOE more dovish than market pricing. That combination is going to continue to benefit the greenback going forward. Hedgers, keep that in mind!


Good luck and good weekend












Erstwhile Gains

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.


Good luck
















Inflation Stagnation

December Rate Hike Probabilities:

USD   66.4%  (The hawks are winning)

EUR     0.3%   (Think December 2019)

GBP   80.6%   (Done deal, probably in November)

CAD   63.1%  (Not as confident as before)

Fed rhetoric       25bps


The data continues to show

That Europe continues to grow

However inflation

Keeps showing stagnation

So tight money’s not apropos

Foreign exchange seems to be an afterthought this morning with the dollar under modest pressure, but really just consolidating its recent gains. The ongoing releases of PMI data show that Europe continues to recover from its sclerotic past, although it does not appear to be accelerating further. GDP growth of the 2.0% variety seems to be in store for the continent going forward, which given its history since the European bond crisis, is really not too bad at all. But given that inflation remains quiescent there, I continue to believe that the ECB is extremely unlikely to become hawkish any time soon. This is not to say that they will not begin to taper their QE purchases, which is clearly set for the beginning of next year, but the idea that the ECB will quickly follow up with rate rises remains a fantasy for those long euros. To date, ECB speakers have been consistent in their comments about the sequencing of events, and have not changed their tune regarding the extended period of low rates following the end of QE. I maintain that the ECB will not even adjust the deposit rate there from its current -0.40% until the beginning of 2019 at the earliest, and it could take another year simply to get back to 0.0%! I would argue that the narrative continues to compress this timeline and the longer it drags on the more likely the euro is to give back some of this year’s gains. As such, I wouldn’t read very much into this morning’s 0.25% gain in the euro, which is arguably just trading noise and not representative of any new trends.

If we look elsewhere, we see a similar pattern of price action. For example, the pound has rallied 0.35% this morning, arguably on the strength of a modestly better than expected Services PMI report (53.6, exp 53.2), but then this follows the pound’s 1.65% decline during the past week. So the direction makes some sense in the short run, but it becomes increasingly difficult to remain bullish pounds in the medium and long term in my view. After all, the Brexit negotiations have not been conclusive, at least not the public commentary, and it is easy to argue that a ‘hard Brexit’ with no transitional deal will be a significant negative for the UK economy in the short run at least. In fact, if that grows to be the most likely outcome, I would expect that the pound to suffer quite substantially. But even in the case where some agreement is reached, it appears that the UK is likely to come away with lesser terms, and I would expect further pressure on the pound then too.

The commodity bloc, meanwhile, has also rallied softly this morning, with metals prices seeming to be the key sector today. There was a positive Bloomberg story about increases in iron ore shipments from Australia to China and that appears to have encouraged traders to bet on the Aussie. CAD has been a relative laggard, up just 0.1%, but given the gradual slide in oil prices we have seen over the past week, it is not that surprising that CAD has had trouble making gains. After all, the correlation between oil and CAD remains strong at 0.4%, albeit that is a bit lower than we have seen in the past.

In the emerging markets, the big winner has been INR, which rallied 0.8% after the RBI left rates on hold and a large order to sell dollars entered the market. Despite the Fed’s penchant toward tighter policy, the RBI has been moving in the opposite direction, having cut rates 7 times since the beginning of 2015, with expectations for further declines as inflation remains under control. But given today’s general dollar weakness, we have also seen solid gains from PLN (+0.7%) and ZAR (+0.6%), with the rest of the space firm, but to a much lesser extent. Regarding Poland, the NBP left rates unchanged at 1.50% again, which was widely expected for today, but has seemed to add pressure to the view that they will be forced to raise rates in the not too distant future amid a rising inflation environment. Interest rate markets have been increasing their bets on just such an outcome, and the zloty has benefitted accordingly. The rand, meanwhile, seems to have simply recouped yesterday’s losses, which were fanned by concerns over both the ongoing political turmoil there as well as weaker PMI data.

This morning we get back to data with ADP Employment (exp 135K) and ISM Non-Mfg. (55.5) on the docket. After Monday’s very strong ISM Manufacturing data, hopes are rising for a good print here as well. The ADP number, however, will be skewed by the recent hurricanes and so ought not be seen as indicative of the underlying situation. Friday’s payroll data is also likely to be far less informative than usual because of the hurricanes impacts last month. In fact, I would guess that next month’s numbers will still be somewhat skewed. Interestingly, I think the upshot of that is there will be very little data released between now and December to alter the Fed’s thinking on raising rates then. In other words, December is a done deal!

Chair Yellen does speak this afternoon, but it would be surprising, given the venue of a Community Banking Event, that she would focus on monetary policy. As such, my take is any positive data surprises will be seen as dollar positives, while negative ones can be waved away as hurricane related. All told, a consolidation day seems in the cards, but there has been no change to the story yet.

Good luck