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