Progress Opaque

Poor Mario can’t catch a break

Despite all his efforts to slake

The scourge of deflation

The last iteration

Of data showed progress opaque


It was a wild and wooly session in equity markets yesterday, with a significant divergence between tech stocks and the rest of the market. Meanwhile, Bitcoin exploded to new heights above $11k before tumbling more than 20%. I mention these to start because a pattern of increased volatility in markets is becoming far more obvious, and I am quite confident if this is the case, volatility in the FX market will be rising as well.

One of the hallmarks of the post crisis era, beginning sometime in mid-2009, was the extraordinary decline in the volatility of asset prices. This was caused by the extraordinary monetary policy decisions that expanded central bank balance sheets by some $15 trillion during that period. In fact, this was the explicit goal of the central banks.

Ben Bernanke explained it thusly in Jackson Hole in 2012, “In using the Federal Reserve’s balance sheet as a tool for achieving its mandated objectives of maximum employment and price stability, the FOMC has focused on the acquisition of longer-term securities–specifically, Treasury and agency securities, which are the principal types of securities that the Federal Reserve is permitted to buy under the Federal Reserve Act.  One mechanism through which such purchases are believed to affect the economy is the so-called portfolio balance channel, which is based on the ideas of a number of well-known monetary economists, including James Tobin, Milton Friedman, Franco Modigliani, Karl Brunner, and Allan Meltzer. The key premise underlying this channel is that, for a variety of reasons, different classes of financial assets are not perfect substitutes in investors’ portfolios. For example, some institutional investors face regulatory restrictions on the types of securities they can hold, retail investors may be reluctant to hold certain types of assets because of high transactions or information costs, and some assets have risk characteristics that are difficult or costly to hedge.”

So in essence, the Fed bought a lot of Treasuries and MBS forcing other investors to buy other assets, driving their prices inexorably higher.   And as long as the Fed reinvested the proceeds from maturing bonds, which they did assiduously until just last month, those assets remained unavailable to other investors. Guess what? All asset prices rose during this period, not just financials, but real estate, collectibles, and even virtual assets. And since the central bank bid was always there, fear of asset price declines disappeared. All told, if you were seeking to reduce volatility in markets, there was no better way to do so than to flood them with excess liquidity.

But now the Fed is turning the ship, reducing its reinvestment of maturing bonds and raising rates simultaneously. The ECB is on the cusp of reducing its purchases and we have seen higher rates in the UK and Canada as well. I assure you, we will be seeing much more volatility going forward as this process continues. After all, there is no way that the expansion of central bank balance sheets can do so many things while their contraction, however slowly, will not reverse those same effects, no matter what they say.

Now back to the headline. Despite Signor Draghi’s best efforts, Eurozone CPI printed at a lower than expected 1.5% with a core reading at 0.9%. This is clearly not the outcome that the ECB was seeking as not only does it draw them slightly further away from their goals, but also it puts their recent decision to begin the tapering under more pressure. The market’s initial reaction was a quick selloff of 0.3% in the euro, but since the release, we have essentially clawed back those losses. The thing is, the dollar is actually having a pretty good day overall, with only the British pound showing any strength vs. the greenback this morning amongst G10 currencies. The dollar strength seems to be predicated on several things; economic data continues to perform well; anticipation of a tax package passing Congress is growing thus boosting the economy further; and the idea that the Fed will respond to the continued growth with tighter policy. Quite frankly, it makes a lot of sense. To my mind, there is one other feature, the idea that if my opening monologue on increasing volatility is correct, then with the shedding of risk will come demand for dollars too.

A quick look at the pound, which has rallied another 0.4% this morning, shows that ongoing positive press about the prospects of a Brexit deal are causing the speculative elements in the FX market to unwind short positions in the pound. This is evident not only in the spot market, but also in the change in relative option prices for both puts and calls, with puts suddenly under significant pressure. After all, if you no are longer worried about the pound collapsing, why would you buy protection against such? This may have further to run for now. Longer term, however, I continue to believe that the pound will suffer, but if a deal is agreed, it may take a while for that to happen.

In the EMG space, KRW was the big loser, down 1.0% overnight despite the fact that the BOK raised rates by 25bps. There was one dissenting vote on the committee, so perhaps that was deemed to be the negative. More likely, however, given the won’s 4% appreciation in the past two weeks, this was simply a case of selling the news after all of those folks bought the rumor. But otherwise, even this space has been uninteresting. There are far more losers than winners, but I am hard pressed to find a critical story to discuss.

On the data front, yesterday saw GDP revised even higher than expected, up to 3.3%, the best quarterly print since Q3 2014, which undoubtedly helped push Treasury prices lower on the day. It also highlighted the schizophrenia in equities as the Dow made new record highs while the NASDAQ fell more than 1%. Today brings a raft of important data as follows: Initial Claims (exp 240K); Personal Income (0.3%); Personal Spending (0.3%); the Fed’s favorite PCE Core Deflator (1.4%); and Chicago PMI (63.0). There was also a story out this morning that the CBO claims that the US economy is now growing at ‘full potential’ for the first time since 2007. What that says is the Fed is not going to slow down its policy direction any time soon, so higher rates and a smaller Fed balance sheet are in our future. As I pointed out above, it was the growth in the balance sheet along with ZIRP that led to the current asset valuations. Things are going to change, and the dollar is going to be a big beneficiary of this going forward!


Good luck



Implied Vol Repression

Two things occurred in Tuesday’s session

That led to implied vol repression

First Powell agreed

There was still a need

For rates to rise with some discretion


Then later a story explained

The UK and EU attained

A framework accord

England could afford

Though different than Brexit campaigned


The North Koreans launched their latest, most sophisticated ballistic missile and it comes third in terms of importance to the market, maybe fourth if you consider the hype surrounding Bitcoin’s breaching the $10,000 level! We live in interesting times.

Arguably, yesterday’s morning session was dominated by Fed Chair-designee Jay Powell’s confirmation testimony before the Senate Banking Committee. In it, he displayed the requisite characteristics of a Fed Chair, he only spoke clearly about what he wanted to discuss, and evaded all other questions effectively. However, he seemed extremely explicit in effectively confirming that the FOMC would be raising rates by 25bps next month, and that the wind-down of the Fed’s balance sheet would continue at a gradual pace, probably draining some $2 trillion from markets over the next few years. He would not be drawn into a discussion of Fiscal policy, and he signaled his belief that there is sufficient regulation of financial markets at this time, perhaps even too much. The dollar response to his comments was generally positive as the broad dollar index rose about 0.4% in the aftermath.

But then, around 12:45, news hit the tape that the UK and EU had agreed a framework for the so-called divorce bill resulting from Brexit. This has been one of the key issues preventing the opening of trade negotiations and so was rightly heralded as a huge breakthrough in the process and a positive for the pound. The market response was an immediate 1.25% jump in the pound. Since then, it has actually traded somewhat higher and is the G10 leader today, up nearly 0.5% vs. the dollar. Of course, there is still the question of the Irish border to be addressed and that is no easy task. While Ireland wants to have no physical border between itself and Northern Ireland, one has to wonder how that can work if both sides are in different economic unions. My point is all the progress can still be scuttled, but for now the market is quite pleased with the terms. An interesting side note is that the probability of a BOE rate hike moved from December to September next year on the news implying tighter monetary policy is coming sooner to a screen near you. While that was arguably part of the reason for the rally in cable, it still makes no sense to me. UK data continues to underwhelm and when the BOE did raise rates earlier this month, it seemed pretty clear this was a one-off event, trying to remove the excess accommodation offered in the immediate wake of the Brexit vote last year. However, the fact that the UK economy didn’t collapse subsequently has convinced them that rate cut was no longer needed. That is a far cry, though, from the idea that they need to raise rates into the greatest economic uncertainty for the UK economy since the financial crisis. I continue to believe that the BOE will not be raising rates until well after March 2019, when the UK actually leaves the EU. As to the pound, it continues to feel overvalued to me here as I believe the market is ascribing too much benefit from this outcome.

Moving on, the market response to the North Korean missile launch was remarkably sanguine, with a short-term rally in the yen of just 0.4%, which eroded steadily throughout the session. In fact, on the back of the Powell dollar bullishness, the yen actually ended the session weaker by 0.35%. Since then, there has been little additional movement. Perhaps even more remarkable was the fact that KRW actually rallied throughout the session, finishing stronger on the day despite the dollar rally and further extending those gains overnight. The point is despite the Nork’s claiming they can now launch a nuke anywhere in the world; neither investors nor traders seem to care. I mean what’s more important, the growing possibility of a nuclear war or the fact that Bitcoin has risen above $10,000? Obviously, it is the latter! (As Bitcoin does not yet qualify as a currency in my mind, it is not likely something I will mention frequently. However, it is important to be aware of the story because if you are looking for a potential catalyst for increased volatility, the bursting of that bubble has to be one candidate.)

And there you have it. Aside from the pound, the G10 has been far less interesting with regard to price movement. The laggard this morning is SEK (-0.3%) after Sweden released softer than expected GDP figures. However, the Riksbank doesn’t seem to have changed its tune regarding policy because of one number. There has also been some discussion about AUD, where two-year yields have crossed under their US counterparts for the first time since 2001. Back then, AUD fell to its historic lows of ~0.50, and while the Fed continues to push rates higher, there is no sign that the RBA is going to follow. Frankly, it seems there is further room for the Aussie dollar to fall. Happily for hedgers, the cost of hedging AUD receivables has collapsed due to the differing rate expectations. So don’t miss out here. Even five year forwards are only a one cent discount.

This morning’s data will be watched carefully, I believe, as the release of the second cut of Q3 GDP (exp 3.2%) along with the concurrent Price data has the potential for an impact if it is off target. We also get the Fed’s Beige Book this afternoon, and quite soon, German CPI is due to print (exp 1.7%) which is a precursor to tomorrow’s Eurozone number. However, if the GDP data is in line with expectations, I imagine that we will continue to see equity markets drive investor sentiment ever higher, which means that risk will continue to be embraced. In this market, that actually means EMG currencies should do well, and ironically, so should the dollar. Interesting times indeed!


Good luck






Too Much of a Good Thing

Kuroda implied

Too much of a good thing might

Not be very good


The best (?) thing about keeping up on the global markets is that you learn so many new things all the time. For example, how many of you have ever heard of the ‘Reversal Theory’? If you haven’t been paying close attention to the arcana of central banking, then my guess is you haven’t.

Here is what BOJ Governor Kuroda had to say recently, “Another issue that has recently gained attention with regard to the impact on the functioning of financial intermediation is the “reversal rate.” This refers to the possibility that if the central bank lowers interest rates too far, the banking sector’s capital constraint tightens through the decline in net interest margins, impairing financial institutions’ intermediation function, so that the effect of the monetary easing on the economy reverses and becomes contractionary.”

This ‘theory’ sounds a great deal like the wisdom of the masses with regard to zero and negative interest rates, to wit, if the returns I earn on my savings are zero, then I need to save more money to achieve my retirement goals, therefore I will spend less money now. For banks replace ‘spend’ with ‘lend’. In fact, this is exactly the behavior that we have seen around the world since the initiation of ZIRP and NIRP, especially in those nations with the highest savings rates like Germany and the Netherlands. And yet it has been one of the ‘mysteries’ to central bankers who don’t seem to understand why with rates at zero, people don’t simply spend more money boosting economic activity! The fact that governor Kuroda needed to concoct a theory to explain simple rational behavior is ample proof of just how out of touch the central banking community is with the way the rest of us live.

But there is a larger point to this idea, and that is that the BOJ is publicly warning that QEternity, which has defined their policy stance for the past eight years, may actually be coming to an end at some point. This is not to say it is going to happen this month, but economists estimates are now pointing to a raising of the target for 10-year JGB yields from the current 0.0% to 0.25% sometime next spring or summer as well as a reduction in asset purchases to just ¥40 trillion next year down from this year’s ¥60 trillion. And while that will still represent extraordinarily easy monetary policy, it will be tighter than the current situation. So despite the fact that inflation in Japan remains pegged at 1.0% or below, and has shown no signs of moving up toward their 2.0% target, it seems that the BOJ is preparing the ground for tighter policy. The Fed is already actively tightening; the BOE and BOC have both recently raised rates as well, although are currently on hold; the ECB has already described its path toward tighter policy which is to begin in January; and now the BOJ is moving in that direction. The message I take from this activity is that after nearly a decade of free money, which has led to generally anemic GDP growth alongside virtually no inflation but excessive rallies in asset prices, the central banking community has figured out that they need to try something else. If we see a concerted tightening effort by all the major central banks, even at an extremely slow pace, then I assure you that asset prices are going to suffer. The question is not ‘if’ it will happen but ‘when’ it will happen.

This matters for the FX markets because anything that results in significant asset price adjustments (a euphemism of sharp declines in the stock markets around the world) is going to change the risk profile of the market. And the outcome will be ‘risk-off’ in spades. If you recall how far and fast the dollar rallied during the financial crisis in 2008 and 2009, I would estimate you can look for similar type of price action. I am not saying this is going to happen right away, but my experience has been that it will happen much more quickly than most investors or traders expect. It is for this reason that I remain a strong advocate of maintaining hedge ratios, if not increasing them. I assure you that when things start to get out of hand, there will be no opportunity to address risks then!

With that discussion of the future behind us, a look at the overnight activity shows a very desultory market. Arguably, the dollar is a bit stronger this morning, albeit not excessively so. In the G10, the weakest currency has been NOK (-0.5%), which looks to be following the price of oil lower. WTI has fallen 2.3% since Friday’s closing levels as the mooted extension of the OPEC production cuts have been called into question by Russia’s lack of agreement. As such, it should be no surprise to see the krone fall. But the rest of the G10 space is trading +/- 0.25% of yesterday’s closing levels and so hardly telling much of a story. Interestingly, yesterday after early weakness, the dollar did rebound slightly and this morning’s prices are merely adding to that trend. The point is there is no strong conviction currently about the next significant move in the dollar.

In EMG space, TRY continues to vie with ZAR as the least desirable currency, and today is winning the race by falling 0.6%. It seems that a Turkish banker is going on trial this morning for helping Iran evade economic sanctions. I guess the concern is that if found guilty, the US may impose further sanctions on Turkey and negatively impact the economy and lira by extension. But away from that, this bloc has not shown much life to it, with the daily fluctuations well within the ordinary course of trading.

On the data front, arguably the most interesting numbers are CaseShiller Home Prices (exp 6.04%) and Consumer Confidence (124.0), but I am hard pressed to believe either will change views. More importantly, Jerome Powell will be testifying to the Senate in his confirmation hearings for Fed Chair. Based on the statement he released last night, it doesn’t appear that he is planning significant changes at the Fed in the near term, but it is possible that some Senator could ask an interesting question. In the end, I don’t anticipate any issues for his confirmation on either side, and expect very little in the way of new news from this. So once again, it is shaping up as a pretty uninspiring day in the FX markets, and that’s not necessarily a bad thing. Quiet markets are the best time to update hedges. Don’t miss out!


Good luck




Some Delays

The holiday season is here

A time of good will and good cheer

Thus traders are starting

Positions departing

As we near the end of the year


And so for the past thirty days

(While Bitcoin has been all the craze)

The dollar’s been sinking

As traders are thinking

That rate hikes may see some delays


Since I last wrote before Thanksgiving, the dollar has fallen steadily against virtually all its counterparts. In fact, since that time, the euro has managed to rally 1.7% while even the worst performing G10 currency, NOK, has risen 0.75%. In the EMG sphere, it has been the CE4 currencies leading the way, but given their link to the euro this should be no real surprise. I am hard pressed to believe that there has been any substantive change in views on the Fed, which is still seemingly assured to raise rates in a few weeks’ time. Nor have there been any seeming changes to the ECB framework, which continues to point to a reduction in QE purchases starting in January, but no rate action for at least another year, maybe two. Treasury yields are within two basis points of their levels pre-Thanksgiving, so that doesn’t seem like the driver, and equity markets have continued to edge higher, which doesn’t scream out as a rationale to sell the dollar. It is only partially with tongue in cheek that I point to the Bitcoin mania, which is as classic a bubble performance as has been observed in markets since the Dutch Tulip mania in 1636-7. (If you read about Bitcoin, the bulls would have you believe that it will be replacing the dollar and thus given its limited supply is worth far more than even the current valuation. I disagree, but I digress.) In fact, I believe that the dollar’s recent weakness is nothing more than traders and investors reducing their long dollar positions, which they rebuilt starting back in September when it became clearer that the Fed would, indeed, raise rates before Christmas. And while that may be a dull explanation, I believe that it neatly sums up the situation.

We continue to exist within a market framework that is very willing to downplay potential risks, assume that volatility is a thing of the past, and has taken to heart the underlying premise of QE, namely that central banks are going to prevent anything untoward from happening and therefore investing in the riskiest assets on a leveraged basis is the road to ruin success. In this framework, the carry trade remains a key feature of investment returns, and we continue to see it implemented on a highly leveraged basis every day. After all, if you think that the global economy is growing with a stable underlying basis, why wouldn’t you seek out the highest yielding assets available? And of course, the answer is you would. You simply need to believe in the growth story. And certainly, the recent economic data has reinforced the idea that all is well. As long as this remains the case, then I imagine the dollar will remain under pressure. I guess the issue is how long will it remain the case. That is a much tougher question, and one whose answer will only be clear in hindsight. The one thing I do know is that when markets price to extremes, the reversals tend to happen more suddenly and dramatically than investors anticipate. In other words, while everything seems under control right now, it can change very quickly. And that is why you hedge! Do not let the recent lack of volatility impinge on long term hedging programs. I assure you they will be of critical value as we go forward.

But for now, the dollar does seem to have a negative bias and that seems unlikely to end soon. I don’t think it will retrace all of its gains made from early September, but certainly a trip to 1.20 in the euro is not out of the question. Perhaps it will be the data this week that will drive us there:


Today                                    New Home Sales                                    625K


Tuesday                        Wholesale Inventories                        0.4%

CaseShiller Home Prices                        6.00%

Consumer Confidence                                    124.0


Wednesday                        GDP (Q3)                                                3.2%

GDP Price Index                                    2.2%


Thursday                        Initial Claims                                                240K

Personal Income                                    0.3%

Personal Spending                                    0.3%

PCE Core                                                1.4%

Chicago PMI                                                62.5


Friday                                    ISM Manufacturing                                    58.3

ISM Prices Paid                                    67.8

Construction Spending                        0.5%


To my eyes, the most attention will be paid to any significant miss on GDP or failing that, the Core PCE data on Thursday. Remember, this is the inflation data point that the Fed follows and uses in their models, so any difference here is the one likely to have the biggest impact on their reaction function. My gut tells me that if anything, it will print slightly higher, maybe 1.5%, but certainly not high enough to change the narrative at this point. And that’s the real point, the narrative doesn’t seem to be in danger of changing right now. The lack of measured inflation, based on Core PCE, is going to continue to assuage any Fed concerns about being behind the curve. As I pointed out about changes in markets and the speed with which they occur, I believe it to be true in this case as well, the Fed will figure out they are behind the curve quite late in the process and react far more aggressively than currently priced by the market. You can expect more volatility in all markets at that time, as well as a bump in the dollar. I just don’t know exactly when that will be…but then who does?


Good luck






Filled With Dread

The conundrum that’s facing the Fed

Is joblessness is flashing red

But prices won’t rise

Despite all their tries

Thus rate hikes have them filled with dread


With Thanksgiving nearly upon us, the one truism we will see today is that market activity in the US is likely to be extremely quiet. Despite the fact that we will be getting a concentrated dose of data, the reality is that probably half of the market has already gone on holiday and will not be concerned until next Monday when they return. It is with this in mind that a discussion of the FOMC Minutes, to be released this afternoon at 2:00, needs to be taken.

If you recall back to November 1st when the Fed met, the outcome was no change in rates, and an upgrade of the description of the economy to rising at a “solid rate” from “moderately”. They passed off any impacts of the hurricanes as temporary and penciled in a rate hike for December. It is hard to believe that the data and comments we have received since then have changed that view substantially. Perhaps the one issue is that the continued slow rise in measured inflation may result in a few of the more dovish FOMC members (Kashkari, Brainerd) dissenting from the vote to raise rates next month. But from our perspective, the important question is what can they do to impact the dollar?

While I have stopped posting the rate hike probabilities, they are still out there, and this morning the market has priced in a 100% chance that the Fed will raise rates by 25bps in three weeks’ time. This means that if (when) they do raise rates, any market reaction is likely to be quite muted. I guess if several members do dissent then the dollar could suffer somewhat as traders would start to price in the chance that the Fed will be less active next year. Arguably, though, this is exactly what the Fed wants, no market response to their actions. On the flip side, if they leave rates unchanged, I would expect to see the dollar come under instant pressure, with a sharp rally in the bond market and arguably a sell-off in stocks as well. The key question then would be, ‘what do they know that we don’t about the economy that would cause them to change their view?’ And the implication would be there was some problem that would have a negative impact. Now I don’t expect this to be the case and fully well anticipate them to raise rates as they have promised.

Which brings me to the second point I’d like to make, does the Fed (or any of the central banks for that matter) continue to drive the currency market in the short term? This is a much tougher question to answer. On the one hand, market participants are keenly aware of every utterance made by a member of this august group of policymakers. But one need only look at the complete lack of volatility evident in markets to question just how much direct impact they have, or at least the magnitude of any impact. I might argue that the FX markets have moved on from following short-term rate differentials to being more visibly impacted by relative long-term interest rates.   So if the 10-year Treasury yield rises to a more than 250bp differential to that of JGB’s or Bunds, then we are going to see investment flows turn more aggressively toward the dollar to earn that extra yield. Meanwhile, relative changes in the shorter dated yields seem to be having a smaller impact. Now I know that the central banks had been having a direct impact on bond yields via QE, but as those policies change, and remember the Fed is already starting to shrink its balance sheet while the ECB slows its pace of buying, I expect that the central banks are going to find themselves with less direct impact on FX.

Personally, I think this is a very positive outcome, but I wonder how happy they will be if they figure out they have ceded control of one corner of the market to investors and traders rather than their own brilliance. In fact, they may have put themselves in a position where the only impact they have on markets is by surprising traders with unexpected actions, rather than by trying to simply affect the policies they believe are appropriate. And history shows us that surprising markets is not the best long run solution to manage the economy. FWIW, this is a direct result of their policy of forward guidance, which resulted in almost every investor and trader being positioned in the same direction. I fear the central banks have painted themselves into a proverbial corner and have reduced their own set of tools needed to address policy concerns. This also puts a premium on insuring that they make ‘correct’ policy decisions, because mistakes can snowball quickly. Consider if inflation started to show up more aggressively and the market determined the Fed was behind the curve. That would not be a pretty outcome for investors! Food for thought.

At any rate, once again today’s markets have been mixed, although I would characterize the dollar as slightly softer overall. But the reality is that overall activity remains light ahead of the holiday. We get a bunch of data this morning as follows: Initial Claims (exp 240K); Durable Goods (0.3%, 0.5% ex transport); Consumer Confidence (-0.8) and Michigan Sentiment (98.0). It seems hard to believe that in this market environment any of those will drive markets. With equity markets making new highs again, there continues to be a sense of complacency that is unlikely to change in the short run. As such, I expect the dollar to remain range bound for now, although as it consolidates its recent gains from the September lows, I still expect the next leg to be somewhat higher.

Good luck and have a great holiday. FX Poetry will be back on Monday.


A Lady, White-Haired

There once was a lady, white-haired

Whose policies, many thought erred

The hawks won’t be grieving

‘Cause now she is leaving

The FOMC that she chaired


Another late November day, another lack of activity in the FX markets. Looking at my screen this morning, only one currency has moved more than 0.5%, the Turkish lira, which continues its long-term decline and has fallen a further 0.75% as I type. The ongoing problems in the country revolve around President Erdogan’s unorthodox belief that the high inflation plaguing the country (it is up to 11.9% at the latest reading) is caused by high interest rates and he is pressuring the central bank chief to cut rates. Not surprisingly, the central bank has taken a more traditional view and wants to raise rates to slay the inflation dragon. Certainly, history is on the central bank’s side (see US 1979-82 with Paul Volcker at the helm), but politics may not allow that outcome. In the meantime, it seems to me that the lira has further to fall. This morning’s levels are already at historic lows for the currency, but as long as Erdogan remains president, it is hard to believe that he will change his views and so will continue to restrict the central bank.

But away from that, the overnight session has shown very little activity of note. There were two big stories yesterday afternoon although the market impact was less than I would have anticipated. First we heard that Chair Yellen confirmed she would be stepping down from the FOMC as soon as her successor is sworn in. There had been some speculation that she would stick around until the end of her Fed governorship term, which expires in 2022, in order to help insure all her actions would not be dismembered. But as I wrote last week, my suspicion is that every one of the big four central bank leaders, all of whom see their terms of office ending within the next 18 months, will be quite keen to not only vacate the seat, but to hide from the press, and more specifically the politicians. My rationale is that we are going to see some more substantial negative economic news over time and I assure you that the new central bank chiefs will be quick to point fingers at the current lot and explain that it was the unorthodox and experimental policies implemented by their predecessors that have caused the problems. So if I were Janet Yellen, I would likely become a hermit. The same is true of Draghi, Carney and Kuroda. They have literally no upside once they are out of the office.

Perhaps more surprisingly, the news from Germany didn’t have a bigger impact. There, Frau Merkel said she would sooner face the voters again than govern with a minority government. In fact, she essentially challenged her erstwhile coalition partners to get back to the table under that as a threat. However, I don’t believe they see it as much of a threat and my take is that we are going to see much less leadership from Germany for the foreseeable future. That bodes ill for the EU as a whole, as without the Germans there is nobody to lead the way, and it bodes ill for the UK, as if Germany is gazing at its own navel, it will be less inclined to express its views on the Brexit debate. The euro did respond to the news yesterday afternoon, falling ~0.50% after the comments hit the tape, but there has been no follow through overnight.

Of more interest to me is the fact that the pound has not shown any benefit from the report that PM May has gotten internal approval to increase the UK offer for the divorce bill to £40 billion if necessary, and that there is a willingness to allow the European Court of Justice to have input in cases involving EU citizens. While I understand the payment question, I cannot, for the life of me, understand why the UK would allow certain residents to have access to a different court system than the rest of the country based solely on the passport they carry. After all, EU citizens who reside in the US don’t get the benefit (?) of the ECJ to help decide matters of law in the US. Isn’t that a key feature of sovereignty, the determination of the laws that impact your citizens and resident aliens? The UK government was quick to deny the second part of the report, but one has to wonder if PM May is starting to get cold feet given how weak her governing position has become. It strikes me that the pound would suffer even more over time if they ceded the very sovereignty they ostensibly voted for last year.

A final scan of the screen shows that the commodity bloc is performing reasonably well today, with AUD, CAD, NZD and NOK all firmer vs. the dollar. And of course, a quick look at the commodity screen shows that the entire space there is somewhat firmer this morning. However, in keeping with the holiday week’s theme of limited activity, none of these movements have been substantial.

The only data point today is Existing Home Sales (exp 5.4M) which doesn’t feel like it will drive markets very much. Chair Yellen will be speaking with ex BOE Governor Mervyn King at the NYU Stern Business School this morning, but it would be surprising if she were to offer up any changes in opinion on the current state of monetary policy. I mean, not only is the December move baked in the cake, but she is getting ready to leave the party completely. Why would she shake things up at all?

All of this leads me to believe that there is very little likelihood of significant movement on the horizon. Certainly not before next Monday, as the US market is already seeing a reduction in staffing ahead of the Thanksgiving holiday. Hedgers, remember a lack of volatility is generally a good time to establish hedges. But I will admit that current levels may not seem overly attractive in the long run, except in the pound!


Good luck



Uncommon Ineptitude

With uncommon ineptitude

Frau Merkel has failed to conclude

Her efforts to build

A new German guild

Thus Germany’s now largely screwed


An eloquent testimony to the current market malaise is this morning’s price action. Despite the news that Chancellor Merkel’s attempts to form a coalition government, after nearly two months of talks, have finally failed, the DAX is actually higher on the day by 0.3%. While it is true that the euro has edged lower by 0.1%, that seems a remarkably blasé reaction to what I believe is extremely important news. From Germany, it seems that the economically minded FDP wouldn’t agree to close every coal-fired power plant along with all the German nukes just to join the government. Given that Germans already pay the highest electricity prices in the developed world ($0.36/KwH compared with the average US price of $0.13/KwH), the FDP simply couldn’t countenance further hamstringing of German industry. Meanwhile, the Greens were also strongly advocating for loosening the immigration restrictions recently put in place, which was poison to the CSU portion of Merkel’s party. After all, the far-right AfD party now holds 12.6% of the Bundestag having campaigned largely on that issue alone. It strikes me that this effort was doomed from the start and so it cannot be a great surprise that it has failed. There are now two potential outcomes for Germany; either Merkel continues her rule with a minority government (a historical first in Germany), and one that will quite obviously be much weaker than in the past; or snap elections need to be held in the next several months. Since she was first named Chancellor twelve years ago, Merkel has never been so weak. This is a distinct negative not only for Germany, but also for the whole of the EU, and by extension the Eurozone. When the largest member of your community is weak, what does it say about the rest of the community?

And yet, the market continues to look at the recent growth story from Europe and remains convinced that the ECB is going to taper, and eventually end, QE on schedule next year, and that prospects in Europe remain solid overall. Once again, political imperatives don’t seem to be having much impact on market activities. Perhaps this is the biggest change that we have seen since the financial crisis in 2008-09 and the central bank response. Historically, when governments fell, or other political crises erupted, financial markets were thrown into disarray, at least temporarily. But the great QE experiment of the past decade has anesthetized investors so completely, that anything short of a nuclear war seems insignificant (and let’s hope we don’t find out that impact!) It is with this in mind that I once again am forced to ask, how can it be that QE can support markets but QT (quantitative tightening) will have no impact? I fear both central bankers and investors are deluding themselves with the idea that the Fed’s shrinking their balance sheet and the end of ECB QE will not matter. If it mattered on the way up, it is going to matter on the way down!

Which brings me to my other point this morning, the remarkable increase in the number of commentators who are concerned that a significant correction is not only long overdue, but likely to occur within the next twelve months. While I have been in this camp for a while, it is becoming a much more popular stance. Certainly the price action in some corners of the market (high-yield bonds anyone?) has started to look a little less euphoric. Similarly, a look at some less followed data shows that mortgage delinquencies are rising, as are those of credit cards and student loans. Despite a rip-roaring bull market in equities this year, and actually for the past eight years, under-funding for public pensions remains significant nationwide. The point is that even though the headline GDP data has perked up lately, there are numerous issues extant that can come back to haunt the market. Remember, this is a market that hasn’t seen a 3% correction in more than a year, a highly unusual circumstance due solely to the central banks’ ongoing monetary policy stance. As that stance changes, so will price action. Mark my words!

Which brings us to today’s markets. As Thanksgiving week opens in NY, the market is uninspired. The dollar is mixed, with both gainers and losers, however the only notable mover was CLP, which has opened this morning lower by 1% after weekend elections left the market’s favorite son, Sebastian Pinera, with a smaller than expected (hoped for?) lead ahead of the final round of voting next month. Otherwise, movements have been well within 50bps across both G10 and EMG blocs. The data story this week is similarly uninspiring with the following on the docket:

Today                                 Leading Indicators                                       0.7%

Tuesday                             Existing Home Sales                                    5.40M

Wednesday                        Initial Claims                                                240K

Durable Goods                                              0.4%

-ex transport                                                0.5%

Michigan Sentiment                                    98.0

FOMC Minutes


And that’s it. Arguably, the FOMC Minutes would be the most watched event, except for the fact that they are released at 2:00pm on the day before Thanksgiving, which means that most of the market will be gone for the holiday already. We also hear from Chair Yellen tomorrow, and then next week, Jerome Powell will be testifying at his confirmation hearings at the Senate. But the reality is that this week is shaping up to be extremely dull in the US. Equity futures are little changed this morning after a less than inspiring week last week. Treasuries remain in a tight range and oil has found a top around $56/BBL. It is hard to see something changing views this week short of a miraculously positive outcome from the tax reform debate in Congress. And I wouldn’t bet on that!


Good luck





Wage Gains Are Pending

While viewing his new crystal ball

Signor Draghi told one and all

More wage gains are pending

So go on, start spending

Lest growth heads back to a slow crawl


First a mea culpa: yesterday I wrote that the Da Vinci painting sold for the equivalent of 175 tons of gold. Well, early in the morning, apparently my math skills were somewhat impaired. A much better estimate is 12 tons of gold, still, an awful lot of money! My apologies for any confusion.

As the week comes to a close, a review of FX price action in the G10 shows a tale of two themes. On the plus side, the euro rallied more than 1% as economic data continues to perform well and confidence in the Eurozone economy’s growth improves despite the potential political pitfalls on the horizon. These pitfalls include the possible (likely?) failure of the German governing coalition talks leading to the need for an unprecedented second election, and the improving poll numbers of the Five Star Movement in Italy leading up to the general elections there due in March. But thus far, all economic signs continue to point to gathering strength in the economy as the employment situation there is rapidly improving. In fact, despite the highest labor force participation rate in two decades, the unemployment rate has fallen to its lowest level since 2009. So more people are working than ever before, clearly a positive sign for the economy. Yet wage gains remain elusive continent-wide (as they do elsewhere in the developed world), and so Draghi was once again beating the drum as to why ECB policies have been successful and why wage gains are sure to follow. We also saw strength in the haven assets, JPY and CHF, albeit not quite to the extent of the euro, with weekly gains of 0.4% and 0.8% respectively.

Commodity currencies, on the other hand, have suffered greatly this week, with NZD leading the way lower, down more than 2.1%, AUD -1.5%, NOK -0.85% and CAD -0.5%. This is in keeping with weaker commodity prices overall. For example, despite a 2% rally this morning, WTI is still down almost 3% in the past week. We have seen similar price action in base metals and agriculturals as well. The only currency I’ve left out is the pound, which is essentially unchanged on the week as mixed data and the ever-changing Brexit debate conspire to confuse investors.

The weekly view in the emerging markets showed far more winners than losers, which contradicts the idea that risk was being jettisoned. The biggest mover of the week was ZAR, rallying 3% on the idea that its inclusion as a carry trade by Goldman Sachs as a ‘top ten trade for 2018’ will overshadow the ongoing political miasma that is impairing efforts at improving the economy there. The other large gainers were KRW, +1.8%, on the back of potentially reduced tension with North Korea after a high-level Chinese delegation visited for the first time in two years; and of course, the CE4 all performed well on the back of the euro’s strength. Notably absent from the move were LATAM currencies, none of which moved more than 0.25%, and the rest of APAC, where only the THB was able to muster gains greater than 0.5% after economic growth looked to be catching up to the rest of SE Asia led by a booming export sector.

To sum it up, it appears more like we are witnessing USD weakness rather than a risk-off move, with the commodity currencies the outlier on the back of weakening prices there. After all, despite all the gnashing of teeth earlier in the week, the S&P 500 is essentially unchanged this week, not demonstrating any major liquidation of assets.

On the data front, yesterday’s IP and Capacity Utilization data were both far more robust than expected and Philly Fed, although not quite achieving expectations, remains quite strong at 22.7, remaining within the top decile of its historical readings. This morning brings us Housing Starts (exp 1190K) and Building Permits (1250K) which if realized would continue the gradually improving trend in the housing sector. Of course the other big story in the US is the tax reform legislation saga, which yesterday passed a milestone as the House approved their version of the legislation. However, as it is quite different in some areas than the Senate version being discussed, we are not yet that close to a finished product and there remains ample opportunity for nothing to be accomplished. If pressed, I would anticipate that something will get passed along party lines, but the end result will not have nearly the positive impact that was hoped for at the time of President Trump’s election last year. However, as yesterday’s sharp rally in the stock market shows, investors clearly see the glass as half full!

The dollar is an afterthought in markets these days, with far more attention being paid to politics and its impact on equity prices. Even Fedspeak doesn’t seem to excite much, probably because the comments we have heard lately tend toward the technical rather than being policy focused. For example, when SF President Williams talked about changing the way the Fed communicates, (which I personally think is a good idea), traders don’t react. The interest rate debate remains on hold, with the Fed still talking three hikes next year and the market still pricing in just more than one. But until we start seeing the economic data unfold, there will be no way to determine who is right. As to today, with equity futures a touch softer and Treasury yields down 1bp, it is difficult to get excited about any potential large moves. Rather, I expect with the US going into holiday mode (can you believe Thanksgiving is next Thursday?), a quiet session with limited further movement is on the cards.


Good luck and good weekend




Assets’ Allure

There once was a painting obscure

With provenance largely unsure

But last night when sold

‘Twas worth tons of gold

As ZIRP adds to assets’ allure


On a day where there is precious little to discuss regarding the currency market, it seems the most noteworthy story was that of the sale of Leonardo Da Vinci’s Salvador Mundi, painted around 1500, for a record $450.3 million (~175 tons of gold at today’s prices). Without entering into any discussion of whether the painting is actually a Da Vinci (there are claims both ways, but it was certified as such), it is certainly a testimony to what ZIRP and NIRP can do to asset prices. While nine of the G10 central banks fret over the lack of inflation (obviously the BOE is not in that camp), asset prices continue to rise with no end in sight. The price for this painting was more than double the previous record price for a painting, once again showing that there is too much money chasing too few goods. It’s just that right now, the goods in demand are financial and collectable assets, not everyday merchandise. In a similar vein, there was a story this morning decrying the 1.5% decline in stock prices over the past several sessions as wrong and unacceptable on the basis that earnings remain robust and there is no reason to sell stocks. I cannot help but look at these, admittedly anecdotal, stories and grow even queasier over the eventual resolution of the current bubble economy.

Speaking of inflation, yesterday’s US CPI data showed that even goods and services inflation is picking up. The core reading unexpectedly rose to 1.8%, certainly not a level of major concern, but also a surprise to almost all the economic pundits out there. Alongside a solid, if unspectacular Retail Sales report (+0.2% headline, +0.1% ex autos), it has simply added to the case for the Fed to raise rates by 25bps next month. Arguably, the big question is what will happen next year, as the Fed continues to have three rate hikes penciled in and the market continues to look for either one or two. Encouragingly, comments from a number of FOMC members have indicated a willingness to reevaluate the current definitions in the Fed’s mandate. Perhaps one of the outcomes of this analysis will be recognition that inflation is more than just the price of gasoline or milk, but also the price of financial assets. Clearly, had they been considered earlier, interest rates would be far higher now than their current level.

And what does this have to do with the dollar? Well, given that the overnight price action can only be described as mixed, it is a much longer-term discussion. But looking at the overnight price action, there is very little to discuss overall. The biggest mover overnight was KRW, rallying 1.0% and trading below 1100 for the first time since September of last year, as sentiment regarding the North Korean situation improves. The news that a high level Chinese delegation will be visiting Pyongyang is seen as a chance that the level of rhetoric will be ratcheted down more permanently. But it’s not just KRW that is performing well in the EMG bloc; we have also seen gains across a majority of these currencies, albeit not to the same extent. ZAR and BRL have both rallied more than 0.5% and RUB and MXN are not far behind. It seems that commodity prices have found a near-term floor after several sessions of weakness, and this group of commodity currencies is benefitting accordingly.

Meanwhile, the CE4 is little changed on the day, as the euro has been unable to add to recent gains. In fact, it is down about 0.25% this morning. The most noteworthy story from the Eurozone, where CPI data was released exactly on point, is that the German coalition discussions continue to drag on and there appear to be at least three key sticking points preventing the parties from coming to an agreement. Certainly, if Germany winds up with a minority government, or even worse if there is the need for another election that will not be seen as a positive for the currency. Of course, the German economy continues to grow robustly, so in the end, it may not matter, but in the near term it can hurt sentiment. And otherwise, there is nothing of true importance to tell in FX today.

We see a bunch more data this morning starting with Initial Claims (exp 235K) and Philly Fed (24.6) at 8:30 the IP (0.5%) and Capacity Utilization (76.3%) forty-five minutes later.   The thing is, especially on a decidedly uninteresting day, none of these are likely to have any real impact on the conversation. We also have four Fed speakers (Mester, Kaplan, Brainard and Williams) today, so perhaps there will be an opportunity for a new twist on the policy debate. But as I wrote earlier, it seems highly unlikely that the debate is about December, rather it has moved on to 2018.

Equity markets seem to have also found a floor after the (gasp!) 1.5% decline we experienced in the past week, and so while risk never really felt like it was being reduced that much, it seems far more likely that in today’s world, it will be embraced heartily once again today. Look for Treasury yields to rally further (already up 4bps today) and perhaps a solid rebound in stocks. That should help the dollar these days.


Good luck





Timely Actions

The heads of the four central banks

Said really, we ought to give thanks

For their timely actions

Ignoring distractions

Like bubbles or voters’ great angst


Meanwhile in his recent oration

Charles Evans said this ‘bout inflation

Our target’s no ceiling

But it’s quite revealing

Investors expect vindication


As I mentioned yesterday, the heads of the four major central banks were speaking at an ECB forum and while we had not heard much when I wrote then, it would have been too much to ask to not hear anything at all. The essence of their commentary was that they saved the world with their policies and that their critics need to understand that without their actions, things would have been much worse. As there was no Q&A, there was no chance to ask about issues like the bond bubble or the rise in inequality globally leading to things like Brexit, the election of President Trump and the repudiation of the entire French party system along with the rise of Germany’s AfD party. Notably, all four of them are likely to be leaving their seats within two years, and I’m sure they will be keen to go. After all, when the next markets correction comes, especially if it is combined with the inevitable recession, these four don’t want to be in the spotlight at all.

The other notable comments yesterday came from Chicago Fed President Charles Evans, who once again focused on the idea that the Fed’s target inflation rate of 2.0% was not a ceiling, but a symmetrical target. And more importantly, that he was concerned that the market was misinterpreting the Fed’s goals and thus mispricing assets. Once again I will ask the question, why is it that central bankers are so keen to see prices rise faster than 1.5%, or 1.0% or whatever the low inflation number is in a particular country. I am becoming of the opinion that their rationale is when inflation is high, they know how to respond to address things and nobody calls their actions into question. But when inflation is low, doing nothing is hard, because their very existence can be called into question. After all, if inflation is low and stable, why have a central bank at all? Clearly, that last comment is tongue-in-cheek, but may have more truth than you know. At any rate, Evans is a known dove and the fact that he is talking down prospects for rate hikes next year is hardly new news. Ultimately, I don’t imagine his comments are actual market movers given his known bias.

Meanwhile, risk is being called into question this morning as evidenced by the universal decline in global equity prices today following similar price action yesterday. Treasury yields are falling along with oil prices and gold is rising but the FX market is much less clear in its behavior. Under the heading of this makes sense, the yen is the best performing currency of the evening, rising 0.65% despite a slightly softer GDP outturn in Q3 than anticipated. In addition, the Swiss franc has performed reasonably well, rising 0.3%. As to the euro, it is up a further 0.4% this morning after a more than 1.1% rally yesterday. So far, so good. But NZD is the second best performer in the G10 today, rising 0.41% in what is counterintuitive to the general risk sentiment. It seems that yesterday’s sharp rally in the AUDNZD cross was unwound overnight, this time benefitting the NZD, after weaker than expected wage data was released from Australia. As to the rest of the G10, they are all falling with NOK down a substantial 0.75% on the combination of risk sentiment and declining oil prices.

The confusion really stems, though, from the emerging market bloc, where almost all currencies have rallied vs. the dollar. This is most certainly not risk-off behavior. If we go down the list, KRW rallied 0.5% allegedly on optimism that President Trump is going to try using carrots rather than sticks with the North Koreans, thus reducing tensions. RON has rallied more than 0.6% on comments of a lower budget deficit and expectations of future rate hikes being accelerated. MYR rallied on a better than expected GDP print, while INR seemed to benefit from a theme of broad dollar weakness. And that is the conundrum. If risk is being jettisoned, which certainly seems to be the case in the equity and commodity markets, and government bond yields are falling, how is it that this bloc of currencies is rallying? My gut tells me that if today’s US equity markets indicate a more significant risk-off stance in markets, then tomorrow, these currencies will reverse all of last night’s gains and then some.

Turning to the economic data, yesterday’s PPI print surprised on the high side, with the Y/Y number at 2.8%. Of course, very few traders or investors pay attention to that number. However, this morning brings CPI (exp 2.4%, 2.2% -ex food & energy), which if it follows suit and prints higher will arguably bring a much greater reaction by markets. In fact, it would effectively repudiate Evans’ concerns expressed above. We also see Retail Sales (exp 0.0%, 0.2% -ex autos), which in my mind will not have nearly the impact of the inflation data today.

Generally speaking, the dollar is under pressure today, which remains at odds with the performance in both equities and Treasuries. If this is truly the start of the long awaited equity correction, I expect that the dollar will regain some adherents quickly. So to me, all eyes are on the Dow today in order to determine what will happen to the dollar.


Good luck