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.