Despite All His Schemes

In Europe the growth story seems

In line with what Mario dreams

Alas prices still

Have yet to fulfill

His targets despite all his schemes


If pressed, I would say the dollar is under mild pressure today, although the session has seen mixed price action across both G10 and EMG currencies. The standout performer this morning is clearly the euro, rallying nearly 0.7% after a run of strong macroeconomic data was released. GDP growth in Germany surprised on the high side, jumping 0.8% in Q3, far better than the expected 0.6% outturn and pushing the past four quarters growth rate to 2.8%. Similarly, Italian GDP growth improved, albeit not quite as much, with the past four quarters ticking over at 1.8% after a 0.5% reading in Q3. Interestingly, this improving growth trajectory has not yet impacted prices as they continue to underperform the ECB’s target of just below 2.0%. For example, German CPI is running at 1.6% while in Italy, it is just 1.1%. In other words, the disconnect between growth and inflation continues apace on the Continent as well as here in the US. Of course, as I have written many times, that view ignores the spectacular increase in asset prices we have seen during the grand monetary experiment known as QE. But for the market’s purposes today, what we have is continuing strong growth increasing the prospects that the ECB will continue along its painfully slow path of removing accommodation. Hence the euro’s solid performance.

On the flip side, there have been two G10 losers this morning, with SEK the biggest underperformer, falling 0.5%. CPI in Sweden was released at a less than expected -0.1% in October, which has both pundits and traders now looking for further QE rather than a mooted reduction going forward. Given the juxtaposition of this idea with the current mindset in both Washington and Frankfurt, it is no surprise the SEK has fallen. The other laggard this morning has been NZD, which seems to have borne the brunt of a rally in the AUDNZD cross. There was positive data out of Australia, and nothing from New Zealand, but in this instance, the cross move was driven by NZD selling. As I have written frequently before, sometimes FX markets are simply perverse in their movements.

Away from those three currencies, the rest of the G10 has done little, with both gainers and losers and all the price action contained in narrow ranges. That said, I would be remiss not to mention the pound where CPI printed at a slightly lower than expected 3.0%. This was key because governor Carney is spared the effort of writing to the Chancellor as to why inflation has strayed more than 1.0% from the 2.0% target. This is also key because virtually all forecasts going forward have this level as the peak inflation, with the impact of the pound’s post-Brexit weakness starting to come out of the data. Hence, for UK consumers, perhaps the worst of the inflation squeeze is over, which means that for now, we could see a little relief in the rhetoric on negative real-wage growth in the UK. Of course, with Brexit still on the horizon, and no apparent movement on the negotiations, I continue to look for the pound to decline going forward.

Pivoting to the EMG bloc, the dollar is under more consistent pressure here. It should be no surprise that the CE4 have all rallied alongside the euro, especially as growth in the Eurozone should lead directly to improved prospects in those currencies. Perhaps more surprising is the rally in the ZAR, up 0.7% this morning, after Deputy President, Cyril Ramaphosa, spoke and indicated he was trying to convince the budget chief to remain in his post, thus reducing the turmoil in the Finance department there. In other words, political machinations continue to be the key drivers in this currency, and I see no future where that changes at all. At this point, investors have lost confidence in the Zuma administration and its ability to manage the South African economy effectively. As I wrote yesterday, further downgrades to the credit rating seem likely and eventually a weaker rand alongside it. But not today. In fact, the only EMG currency that is weak this morning is RUB, which seems to be responding to the recent weakness in the price of oil, which after an extended run higher has fallen steadily for the past week. It remains difficult for me to envision oil prices greatly exceeding their current levels without some type of disruptive event, like the hurricanes in the Gulf back in September. However, there is no question that oil prices have momentum higher right now, and so I certainly don’t see a sharp decline in the near future either. For the petrocurrencies (RUB, MXN, NOK, CAD) I expect that we will see a choppy environment until it becomes clear if there is another leg higher on the way, or whether the fracking community will add enough supply to prevent future price hikes.

On the data front, the NFIB Small Business survey improved to 103.8, albeit a couple of tenths short of expectations, but still a very strong number. At 8:30 we will get PPI (exp 0.1%, 0.2% ex food & energy), but generally speaking, the FX market is far more interested in tomorrow’s CPI data than today’s PPI. We also hear from a bunch of Fed speakers, including Chair Yellen, but also Chicago’s Evans, St Louis’ Bullard and Atlanta’s Bostic. Yellen is on an ECB panel with Draghi, Kuroda and Carney that started earlier this morning but I have yet to see any commentary released. And while I am certain that those four are painfully aware of what happens when they make a comment deemed surprising by the market and so will work hard to avoid that occurring, sometimes it just happens anyway. Keep your eyes on the tape for any surprises.

But that’s really the day, with the euro continuing to be the best performer and likely to stay so for now.


Good luck



More Woe

In Parliament forty MP’s

Have questioned Ms May’s expertise

At running the show

Thus adding more woe

To Sterling which trades like feces


The pound is this morning’s key story in the FX markets as it has ceded more than a penny in the London session. The driver appears to be news that forty MP’s have signed a letter indicating a lack of confidence in PM May’s ability to manage the Brexit talks. At the same time, the Labour Party has added to pressure on May by publishing their own letter indicating that they will support transition period legislation even though many Tories may not. The upshot is that May looks weaker than ever and concerns are growing that there may be yet another leadership election in the offing. And we cannot ignore the letter from two of May’s cabinet members, Brexit hawks Boris Johnson and Michael Gove, that is pushing for a clean break from the EU with no payments. All of this intrigue has weighed on the pound and will continue to do so. Arguably, if the UK does not develop a clearer idea of what they are willing to offer in this negotiation during the next month then the odds of a hard Brexit are going to increase substantially. Remember, too, that the UK economy is already the laggard in Europe. They can ill afford a process that adds to future uncertainty and thus reduces growth further.  I have maintained that the pound has further to fall as the Brexit process develops and this morning’s news merely cements that view. Even though the pound is down today, I continue to be an advocate of hedging future receivables. The forward points remain favorable and it is very easy for me to foresee the pound back near 1.20 in twelve month’s time.

But while the pound has been the worst performer overnight, the dollar has rallied against eight of its G10 brethren with only the two haven currencies, CHF and JPY, showing strength. To my eyes, the evidence is slowly building that risk is falling into disfavor. Last week was the first since September that equity markets faltered, albeit slightly. Stories from the US continue to question exactly what will be in the tax reform legislation, which has clearly been an important support for the equity market. The yield curve continues to flatten as the Fed remains on track to raise rates in December, and arguably at least two more times next year. High yield securities continue to tumble with concerns over rising US rates and the historically low spread over investment grade securities beginning to frighten off investors. It just seems to me that when you add it all up, a long-overdue correction may well be in the offing. Lately I have been writing that the euro has become a safe haven in lieu of the dollar, at least relative to other G10 currencies, but perhaps the reality is a bit more nuanced. While the euro is likely to hold its own against the dollar, I still believe that the commodity and Scandinavian currencies will suffer more significantly. And EMG currencies will all falter on a risk-off move.

Speaking of EMG currencies, it should be no surprise that the local political scene has once again undermined the South African rand, leading it to a 1.1% decline thus far this morning. Pulling a page from the Bernie Sanders platform, President Zuma is apparently set to announce free higher education for all in what will be another blow to an already fragile fiscal situation. It seems to me that if Zuma continues on course, he will be able to push South Africa’s debt ratings to B- before he’s done. And the investor community will continue to sell ZAR denominated equities and bonds, along with the ZAR. Be careful in this one. But away from the rand’s demise, while most EMG currencies are softer, the movements have been well within normal trading ranges and don’t appear to point to significant changes in sentiment. However, if the risk-off meme starts to gain traction this week, look for this entire bloc to come under significantly increased pressure.

There is much more data this week on which to focus as well as a plethora of Fed speakers to hear, so while I think December is a done deal for the Fed, perhaps we can learn more about their views for 2018.



Monthly Budget Statement                              -$58.0B



NFIB Small Business Optimism                      104.0

PPI                                                                        0.1%

-ex food & energy                                              0.2%



CPI                                                                        0.1% (2.0% Y/Y)

-ex food & energy                                              0.2% (1.7% Y/Y)

Empire Manufacturing                                    25.0

Retail Sales                                                          0.0%

-ex autos                                                              0.2%

-control group                                                    0.3%

Business Inventories                                        0.0%



Initial Claims                                                      235K

Philly Fed                                                            24.1

IP                                                                          0.5%

Capacity Utilization                                          76.3%



Housing Starts                                                   1190K

Building Permits                                               1250K

Leading Indicators                                           0.5%


On top of all that we have nine Fed speakers on the slate for this week, some of them several times, and it includes Ms Yellen (along with Draghi, Carney and Kuroda at an ECB event) on Tuesday evening. So by the end of the week, we should have an even better understanding of the economy along with Fed views on the next steps. While the market has finally accepted the December move by the Fed, it remains skeptical of next year’s activity. I have a feeling that new Fed Chair, Jerome Powell, is going to be a bit more hawkish than the market currently expects and that over time we will see further upward pressure on US rates, a flatter if not inverted US yield curve, and a stronger dollar on a broad basis. But today, I imagine we have seen the bulk of the movement already, and anticipate a relatively quiet session. The one caveat here is if the equity market starts to show further cracks, we could see a bit more risk-off dollar buying.


Good luck




Less Than Forthright

From China the news overnight

Was foreigners may have the right

To start to invest

In banks, but when pressed

The timing was less than forthright


FX markets continue in the doldrums with limited price action overnight. Despite concerns that risk is generally coming under pressure (just look at equity prices yesterday and today), movement in this market remains lackluster at best. In fact, within the G10 space, the biggest mover overnight was the pound, which has rallied just 0.3% on the strength of a surprisingly good IP report (+0.7%, exp +0.3%). Otherwise, the rest of the activity can be measured in scant pips of movement.

It is this lack of activity that has led market participants to focus on the announced changes in Chinese policy regarding foreign investment in financial firms. Historically, there have been strict limits on the percentage of control any foreign person or entity could have over a Chinese bank or securities firm. Certainly, there was no ability to be a majority owner, and in practice, ownership had been constrained below 25%. In fact, in the wake of the financial crisis, the largest investment stakes by American banks had been liquidated as Citi, BAML and Goldman all sought to reclaim capital to address their own domestic issues. Of course, since then, Chinese banks have expanded significantly and now find themselves hugely leveraged and heavily reliant on Wealth Management Products for financing which leaves them subject to significant funding risk. Non-performing loans also continue to climb, and the government continues to direct the largest banks to lend where the government deems appropriate.

With that as a background, President Xi addressed the Asia-Pacific Forum regarding his vision of the future, which included multi-lateral agreements and much investment into China. Subsequently, the government announced a loosening of restrictions on investment in financial companies, claiming they will allow majority ownership by foreign entities within three years. Alas, it is easy to look at China’s history of foreign investment strictures and remain skeptical of the potential benefits available to any foreigner. Remember, just a year ago, when the renminbi was under pressure and capital was flowing out of China like a river, they were quick to establish capital controls and prohibit ‘non-strategic’ foreign investment by Chinese companies. And this despite their recent inclusion into the SDR where they claimed a freely convertible currency!

My point is, the Chinese do nothing that is not directly beneficial to their own country, which is completely fine, but which also means they want something specific from this action. My gut tells me that they are simply looking for foreign capital to help clean up the mess that is the Chinese banking system, and once they have it, there will be no compunction in changing the rules again. How, you may ask, will this impact the CNY? In the short run, I expect that it will have limited impact, although as we go forward, I would look for the renminbi to continue its gradual strengthening. Ultimately, I continue to believe that the PBOC will need to allow the currency to weaken as a relief valve for the strictures on the economy, but that is a politically fraught decision there, and so the timing of any future weakness remains extremely cloudy. Quite frankly, were I in a payables position in China, I would be actively hedging here, taking advantage of the positive forwards and what I believe will be ongoing mild appreciation of the yuan. And for those of you who pay USD to your Chinese suppliers, consider asking to pay in CNY, it may be far more advantageous over time.

Away from the China story, the only EMG currency to move significantly overnight was ZAR, which has fallen 1.0% after comments by the central bank Governor, Lesetja Kganyago, that despite rising inflation, the central bank would be able to continue to support the economy. In other words, don’t look for policy to tighten very much to fight that rising inflation. It should be no surprise that the rand has fallen on those comments. But away from that, EMG remains dull as well.

This morning’s only data is Michigan Sentiment (exp 100.9), which has been in a steady climb since bottoming back in the middle of 2011 at 55.8. There are no Fed speakers on the calendar until Monday, and so once again, the FX market will be looking elsewhere for its direction. If we continue to see equity prices under pressure, that could well lead to a fuller risk-off session, but the past several years have shown that the ‘buy the dip’ mentality remains extremely robust, and so despite futures pointing lower this morning, I expect those losses to be reversed before the session ends. If they are not, however, beware. Anything that occurs opposite to the narrative is going to have significant repercussions. Risk appetite has been artificially inflated by the Fed’s QE program since its inception, which means that equity positions are far larger, and more leveraged, than they would otherwise be in a more ‘normal’ monetary environment. These things can unwind quite rapidly, as evidenced in 2008-9, so caution is needed. Once again I will say that if there is mild risk aversion, the dollar will likely suffer, but if things begin to really unravel, my money is on the dollar to regain its position as safest haven of all. This is not today’s story, but one, I fear, for the not too distant future.


Good luck and good weekend




Quite Concerned

From Europe today what we learned

Was growth on the Continent’s turned

But in the UK

It’s not the same way

Which should have the Brits quite concerned

The overnight FX session has once again lacked many, if any, highlights. Broadly speaking, the dollar is a bit softer, but we remain well within recent trading ranges in every currency. Perhaps the most salient news overnight was the release of the European Commission’s Autumn economic forecasts in which they highlight the ongoing strength on the Continent as a contrast to lowering expectations for the UK. The new forecasts pencil in growth of 2.2% in 2017 and 2.1% in 2018 for the Eurozone, both of which are higher than the Spring outlook, while they have cut UK forecasts to 1.5% for this year and 1.3% for 2018, the lowest levels since the financial crisis in 2009. It should be no surprise that the market reaction to the news was a short-term sell-off in the pound.

However, in the ensuing two plus hours, the pound has recouped all those losses on what appears to be a reaction to some comments regarding the resumption of the Brexit negotiations. While no substantive progress has yet been made on that front, there was intimation from several EU voices that an extension of the negotiation process was possible, meaning that the March 2019 deadline might be extended. Clearly, both sides need as much time as possible to complete this project, so any opportunity to lengthen the timeline will be welcomed by all involved. However, given the ongoing turmoil in the UK government, it remains a difficult assumption that they will be able to put forth proposals to encourage the process. From everything that I have read, I would estimate that there is still at least a 30%-40% chance the UK exits the EU with no deal in place. In other words, nothing has changed my view that the pound has further to fall over time.

But away from that story, we have seen almost nothing of note. The scant data released overnight showed that the German Trade balance continues to expand, reaching €24.1B in September, closing in on all-time highs. Arguably, the combination of strong German data and the Commission’s updated forecasts has underpinned the single currency today, which has risen 0.3%. The other data overnight showed that Japanese investors continue to liquidate their international bond holdings with limited outward investment in equities. The resultant cash flows are helping the yen recoup some of its recent losses and actually the yen is today’s best G10 performer, having risen 0.5% as I type.

In the EMG bloc, the winners have been largely EEMEA currencies, which seem to be tracking the euro well this morning and have shown little individual impetus. And away from those, we are looking at movement measured at less than 0.2%. This type of price action is indicative of both a lack of interest and a lack of news.   Given the dollar’s general underperformance today, it is no surprise that the bulk of the EMG bloc is slightly firmer as well.

On the data front, we see Initial Claims, as always, this morning (exp 232K) and then Wholesale Inventories (0.3%) at 10:00. There are no scheduled Fed speakers and so the FX market will need to look elsewhere for catalysts.

One possible place of interest will be the equity markets, which are opening on the soft side and have shown increasing divergence between the broad indices and their constituent components. Continued interest in owning the FAANG’s has driven the S&P 500 to steady record highs while the number of companies within the index trading at new 52-week lows continues to increase. My point is that if the long overdue correction in equity prices materializes, we are likely to see an impact on the dollar. Weirdly, despite the historic case of the dollar being one of the ultimate safe haven assets, in the current world, barring another financial crisis type event, I expect the dollar would suffer against the euro, yen and Swiss franc, although would be quite strong vis-à-vis the EMG bloc. I am not suggesting this is going to happen today, just that as the equity market shows continuing internal divergence, the timing of a correction is drawing nearer. Food for thought.

Good luck





What a Treat

For many who wanted to Tweet

Their thoughts would remain incomplete

But Twitter’s been troubled

And so they have doubled

The size of a Tweet. What a treat!

The most noteworthy news I could find this morning was that Twitter would be doubling the number of characters allowed on their app to 280. Personally, I understand the benefits of this as I used to work hard to tweet my limerick by itself and fit it into the allotted space. This often required significant editing or, at the very least, the creative use of character abbreviations. And while this may have absolutely no impact on the FX markets, I think it is indicative of the broad changes that many businesses will need to make going forward in order to remain competitive. After all, the 140-character limit was the very essence of what Twitter was about. Short, pithy comments were its bread and butter. However, as the market evolved, and growth for Twitter was elusive, they needed to do something. I have no opinion on whether this will help the company, but I do think that it represents something much bigger. For the past nine years, companies were able to achieve a level of success by virtue of the fact that financing was dirt-cheap and financial engineering was a viable, low-risk option. Perhaps we are beginning to see that corporate management is going to refocus on the actual business rather than simply the share price. And even more importantly, perhaps investors are going to do the same, look at the long-term prospects of a company as a critical investment criterion. (One can always dream, no?) Only time will tell, but it may well be the first encouraging act.

But as I look at the FX markets, and truly equities and bond markets as well, there is just nothing to discuss today. The dollar is modestly softer this morning against nine of its G10 brethren with only the British pound failing to rally. The story behind the pound seems to be yet more political troubles for PM May as she may be forced to fire her International Development Secretary, Priti Patel, after Ms Patel engaged in some unauthorized diplomacy. The problem is this has the appearance of PM May losing control of her cabinet and may well lead to a shake-up of the Tory leadership. Of course, with the next Brexit talks due to start tomorrow, the last thing May can afford is any sign of weakness. All told, it is no surprise the pound suffered, falling 0.4% after the news hit the tape, and I expect the pressure to remain on the currency. But away from the pound, small gains have not yet offset yesterday’s losses. With a lack of data due and no scheduled commentary from central bank speakers, I expect we will continue to see lackluster trading in the space.

The EMG picture is a bit more mixed with both gainers and losers on the screen, but none showing significant movement. The biggest gainer today is BRL, +0.55%, as news that President Temer is back supporting pension reforms has been taken as a positive. Pension reform is something that is desperately needed throughout the world, so any country that addresses the issue may well see its currency benefit as investors applaud the actions. It is certainly something desperately needed in the US at both the Federal and State levels. And I am quite confident that if Congress were to address it in a meaningful way, we would see the dollar benefit immediately. (More dreaming on my part!) But away from BRL, no other currency in this bloc has moved more than 30bps and despite President Trump’s trip to Asia, there has been nothing of substance on any particular nation to drive trading. In other words, look for limited activity here as well today.

There is no US data on the slate today, nor are there any Fed speakers scheduled. Equity futures are little changed this morning and Treasuries have moved less than 1bp. Adding it all up leads me to believe that there will be very limited action in the FX market today. Arguably, the lack of volatility will provide a good opportunity for hedgers to enter the mix.


Good luck






Group of Nineteen

There once was a group of nineteen

Who met with six weeks in between

But lately we’ve learned

That many have spurned

The chance to meet when they convene


Some days there is less to discuss than others, and this is one of those days. Let me start by explaining that I will no longer produce the interest rate probability table, as it no longer seems likely to add much value. Consider that the BOE just acted last week and is unlikely to do anything until well after Brexit has occurred. Also, the ECB is clearly on the sidelines for a minimum of fifteen months as per their own rhetoric, and likely longer in my view, as inflation will not be making a comeback there soon. The Fed is all but certain to act in December, and the interest there will be about just how many times they hike in 2018 and, finally, Canada has pushed to the sidelines until they have a clearer idea of the US economy and Fed activity. So it seems to me that day-to-day movement in these probabilities are not going to be market drivers for a while.

In the meantime, I would contend the most interesting (puzzling?) thing ongoing is the fact that membership of the FOMC (group of 19) is no longer seen as the perk it once was. Yesterday’s announcement that NY Fed President Dudley will be leaving earlier than anticipated follows the exits of Vice-Chair Stanley Fischer and Governor Daniel Tarullo earlier this year. Obviously, Chair Yellen is being forced to step down, but in my estimation is likely to leave her board seat as well. Other governor’s who reigned during the financial crisis, Kevin Warsh, Sarah Bloom Raskin and Jeremy Stein have since left and their seats have not yet been filled. And on the Regional President side, Richmond President Lacker has resigned and his seat has yet to be filled.

And so, I ask myself, why would so many leave a job with such power and so many perks? The skeptic in me would answer that this group of people, who essentially ruled the financial world for the last decade through their monetary policy decisions, may have figured out that when things turn south, they will be in the crosshairs for all the blame. And they have recognized that the ongoing Goldilocks scenario of improving growth and low inflation is coming to an end. While nobody knows when things will turn, it certainly feels to me like we are much closer than not. This concept would also explain why the Fed Governor seats have been so hard to fill. Who wants to take a job that is going to be blamed by one and all for the next downturn? Of course, the problem is that the Fed is finding itself with a diminished leadership capacity at exactly the time it will need significant and strong leadership. Nothing good can come of this.

Will this impact the dollar? Absolutely! If the Fed loses its luster as the premier central bank in the world, it will not only negatively impact the dollar, but also it will have a significant (and I believe negative) impact on both bond and equity markets. One of the things that has underpinned US economic leadership since the end of WWII has been a strong Federal Reserve. History shows that when politics was driving Fed actions (1971-1979), the dollar was under enormous pressure and the global economy floundered amid stagflation. While today’s macroeconomic situation is clearly different than back then, a lack of Fed leadership in a crisis will be felt around the world. My point is that many of the things about FX that we currently take for granted may be called into question in the future, most notably the dollar as the world’s reserve currency. Again, I am not forecasting that this will happen soon, just that it should now be a risk on the radar. After all, risk management is what every hedger is tasked with.

As to today’s markets, the dollar is generally putting in a good performance, rallying vs. all its G10 counterparts, with the average currency loss about 0.45%. We did see some softer than expected secondary data from the Eurozone but that doesn’t seem to have been the driver. The RBA left rates on hold, as expected, and the statement indicated that they were unlikely to start to tighten policy anytime soon. That certainly has helped undermine AUD this morning. But away from that information, there was precious little else to discuss.

On the emerging market side, the dollar has shown a much stronger general performance with TRY falling 1.0%; and both BRL and ZAR down 0.8%. In fact, the only gainer of note was KRW, +0.3%, which was a reaction to President Trump’s visit and positive comments on the US-Korean relationship. As to the decliners, it seems that the scheduled meeting between Vice-President Mike Pence and Turkish Premier Yildirim was postponed, as visa issues remain unresolved between the two nations. Meanwhile, the rand story seems to be more about its ordinary volatility as there has been neither data nor news of note released. Finally, yesterday saw a substantial BRL rally on the back of the strength of oil and commodity prices in general, and this morning, the lack of follow through there seems to be weighing on the real.

Looking ahead, there is little in the way of data today, just the JOLTS report (exp 6.075M) which has had very limited impact over time. We also hear from new Fed Governor Quarles, but his topic of discussion doesn’t seem to be related to monetary policy. In other words, it is another day with no clear drivers to follow. Equity futures are little changed this morning, offering no clues to direction there, and Treasuries have given up a bit of their recent gains, but remain beneath the key 2.40% level. If pressed, I would say we are likely to see the dollar soften a touch in the NY session, as I can find no real driver for its overnight strength. But don’t look for too much movement overall.


Good luck








Higher Rates Will Soon Vote

December Rate Hike Probabilities:

USD   92.3% + (NFP leaves Fed on track)

EUR     2.9% + (Think December 2019)

GBP    0.2% (Thursday’s move will be last til 2019)

CAD   23.6% = (Middle of next year)

Fed Rhetoric               25bps


Last week we heard two things of note

First that Powell, the Prez would promote

Then the payroll report,

Though the headline fell short,

Showed the Fed, higher rates, will soon vote


FX markets this morning have shown little movement from Friday’s closing levels after a more tumultuous session last week. While the market reaction to the news that Jerome Powell would be the next Fed Chair was limited, the payroll report on Friday morning had the expected impact of boosting the dollar further. Nonfarm payrolls were not quite at the level expected, although there was a significant revision higher to previous months’ data, which offset the headline print. Of more importance, it seems was the fact that the Unemployment Rate fell to 4.1%, its lowest level since December 2000, and significantly below the Fed’s own estimate of full employment, which currently sits at 4.6%. As such, it should be no surprise that the market continues to ramp up their expectations for higher US interest rates at an increasing clip. And that will continue to support the dollar going forward. So since the close of business on Thursday, ahead of the report, only two currencies have shown any gains vs. the USD: CAD and GBP.

The CAD story can be attributed to the ongoing rally in oil prices I believe, as WTI has now rallied nearly 14% in the past month and is at its highest level since February. If we continue to see oil rise, I expect that we will continue to see support for the Loonie. Rig counts in the US have been falling of late and OPEC appears set to extend its own production cuts now that oil prices are moving up. From a technical perspective, we have also seen the Brent market extend its backwardation (when spot prices are higher than future prices), which has historically been a signal of further price rises. This indication of spot shortages is relatively new and I expect will underpin oil prices as well as the petrocurrencies for a while. While we have not seen that price action in MXN or RUB yet, NOK is firmer this morning as well.

The other rally has been in the pound, and that is one that is much harder for me to rationalize. While the BOE did raise rates, as widely expected, last week, as can be seen from the table above, the market remains convinced that they will not act again anytime soon. Adding to that is the ongoing political scandal in the British government, where senior figures are being accused of rampant sexual harassment, distracting PM May from her already difficult task of dealing with Brexit. While the UK data has held its own, given the prevailing view that the BOE is now sidelined, it is hard to make a case for a higher pound. While we have seen Sterling fall sharply since the BOE announcement, my sense is that the price action today simply represents a modest rebound on the unwinding of short positions from that move. Given the combination of the ongoing growth story in the US with the concomitant expectations of further Fed rate hikes, and the belief that the BOE will be sidelined indefinitely, or at least until after the UK exits the EU, it is increasingly hard for me to make a case for the pound to do anything but fall. Selling rallies here remains the best opportunity for hedgers in my view.

But otherwise, the G10 currencies have done little of note overnight. On the EMG side, there are two major gainers, BRL and TRY, both of which have rallied more than 0.8%. The story in Brazil is of higher commodity prices helping to underpin Brazil’s export industries and by extension its currencies. Updated inflation forecasts remain under control (3.08% for 2017, 4.02% for 2018), which has reduced expectations for policy adjustments amid a period of stability. My take is that stability is a positive here. Meanwhile, the TRY story is one of central bank support in the market as a means to slow down its recent, sharp decline. After all, in the past two months, the lira has fallen nearly 14%, and that includes today 0.85% rally. The central bank is becoming concerned and is likely to become more active in the FX market there going forward. But away from those two currencies, stories in this space are sparse.

While the first week of the months tends to bring a great deal of economic data, the second week is just the opposite, with a limited slate. Here’s what to expect:


Tuesday                        JOLTS Job Openings                                    6.053M

Consumer Credit                                         $17.5B


Thursday                      Initial Claims                                                 232K

Wholesale Inventories                                 0.3%


Friday                            Michigan Sentiment                                    100.6


And that’s it! None of these are likely to drive market sentiment, quite frankly. And looking to the Fed shows a limited calendar there as well, with just Dudley and Quarles on the slate for today and tomorrow. One thing I didn’t mention was the news that NY Fed Prez Dudley is set to announce an early retirement today, apparently leaving ahead of schedule, which means that there will be yet another new face at the FOMC meetings going forward. My observation is that given the markets’ generic reliance on central bank activities to support asset prices and constrain volatility, it seems that having this many changes at the Fed in such a short period of time offers the opportunity for some investors to reconsider their current market stance. If money is no longer free, does it make sense to earn just 2.3% for 10-year Treasuries? How about less than 2.0% for European High Yield securities. Perhaps normalization is coming sooner to a screen near you than expected. Benign markets have been with us for almost a decade, since the financial crisis in 2008-09. They will not last forever.


Good luck





To Limit Excess

December Rate Hike Probabilities:

USD   92.3% + (No surprises yesterday, high confidence now)

EUR     1.9% (Think December 2019)

GBP   91.6% + (Done deal this morning)

CAD   21.7% = (Ain’t gonna happen now, maybe July 2018)

Fed Rhetoric               25bps


This morning as I go to press

The Old Lady’s likely to stress

Inflation is rising

And so She’s revising

The base rate to limit excess


While yesterday Janet and friends

Implied that she fully intends

To hike in December

Though not every member

Is likely, this move, to defend


The FOMC meeting went off without a hitch yesterday, with the statement actually upgrading the view on economic growth to “…a solid rate despite hurricane related disruptions.” There is certainly nothing dovish about that comment. The committee’s view on inflation remains less upbeat, and it is clearly still a mystery to them why measured inflation remains below their 2.0% target given consistent GDP growth and the ongoing strength of the labor market. However, there was nothing about the statement that could be construed as dovish in any sense, and while Neel Kashkari may well dissent in the December meeting, it remains abundantly clear that the Fed is going to raise rates by 25bps at the next meeting. If you recall, yesterday’s probabilities showed a substantial decline as some traders bet on a dovish outcome. However, with the market now pricing north of a 90% probability for a December move, it will require a significant downturn in economic data to halt that momentum. In addition, we learned that Jerome Powell is now set to be the new Fed Chair. He is a current governor (who has never dissented on policy votes) and is seen as a moderate. Happily, he is not a PhD in Economics, although unhappily he is a lawyer. However, it appears that the trajectory of monetary policy is not likely to change much, at least initially, and his focus may well be on regulatory issues. I would be quite surprised if the market reacted in any significant way to the formal announcement due later today.

Which brings us to this morning’s key activity, the Bank of England’s monthly meeting. Though there are many pundits who believe it is a mistake, it does seem likely that the BOE will raise rates by 25bps this morning. They have essentially talked themselves into the move as their key concern remains, despite substandard growth (averaging just 1.5ish% since Brexit), inflation caused by the pound’s sharp, post-Brexit decline. I continue to believe that this will be ‘one and done’ with almost no probability that Carney will raise rates again until after the UK leaves the EU. Uncertainties over the potential framework by which this occurs will continue to weigh on business decisions and by extension economic growth. Although the data this morning (Construction PMI at 50.8) was modestly better than expected, there is no indication that growth is picking up significantly. At the same time, nominal wage growth remains desultory and with the elevated inflation readings real wage growth is actually negative. It is just hard for me to see how the BOE will be able to raise rates more aggressively with that economic background. Of course it is not only interest rates that drive currencies, and yesterday saw the pound reverse all of its early morning gains, and then some, after the news that UK Defense Secretary, Michael Fallon, resigned. While I am confident that few FX traders know who he was or what his policy agenda was, it was yet another sign that PM May’s grip on power remains tenuous. Right now, the pound appears to be caught between concerns over a more hawkish than warranted BOE and concerns over further weakness in the government. The one thing of which I am confident is that if PM May were to lose control, and the market believed that Jeremy Corbyn was likely to become PM, the pound would fall further. Socialism is not seen as a benefit for either markets or currencies these days! But for today, it will be all eyes on the BOE, with the statement due at 8:00 this morning.

Beyond the Fed and BOE, there has been much less of interest overnight. Eurozone PMI Manufacturing data was released largely as expected and saw little reaction in the markets. Growth in the Eurozone remains solid, if unspectacular. Meanwhile, the euro continues to trade at the lower end of its three-month trading range, although today it is higher by 0.2%. And beyond that, it is exceptionally hard to find interesting news.

EMG currencies have also been pretty dull although ZAR has rebounded about 0.7% from its recent depths. It doesn’t appear there have been any changes to the political situation on the ground, simply that traders are reducing short ZAR positions.

As to the US this morning, we get more data to add to the mix: Initial Claims (exp 235K); Nonfarm Productivity (2.6%); and Unit Labor Costs (0.4%). Now there are many pundits, myself included, who believe that one of the key problems we have in the US economy is the lack of productivity growth. I think this stems from the fact that since the beginning of the ZIRP era corporate policies have been far more focused on financial engineering (issuing debt to repurchase shares) rather than investment in production facilities. As such, if today’s report meets expectations, it would be good news. But in the end, tomorrow’s payroll report is of far more consequence than today’s data so I wouldn’t expect any FX movement regardless of the release.

One more thing, I will not be writing tomorrow, as I will be out of town. But I strongly believe that the FX market will respond somewhat symmetrically to the jobs release. If pressed, my sense is the post-hurricane rebound will be even larger than currently expected, maybe 350K-375K, and it will simply cement the idea that the Fed is going to be raising rates come December. Look for the dollar to benefit on that type of news.


Good luck and good weekend









None Too Soon

December Rate Hike Probabilities:

USD   66.8% (Worries about a dovish surprise today)

EUR     2.7% = (Think December 2019)

GBP   89.9% + (Done deal, probably tomorrow)

CAD   21.4% (Ain’t gonna happen now, maybe May 2018)

Fed Rhetoric               25bps


At two o’clock this afternoon

The Fed will explain, none too soon,

That rates are on hold

But on the threshold

Of moving ere the next blue moon


In what has to be one of the least anticipated Fed meetings in the past several years, the FOMC will release its latest statement at 2:00 today. As there is no press conference scheduled to follow the meeting, expectations for any rate movement are essentially nil. Interestingly, the Fed Funds futures market rallied pretty sharply yesterday as can be seen by the 20% decline in the probability of a rate hike by December. However, I would dismiss that idea completely.

One of today’s minor narratives is that the Fed statement is far more likely to be seen as relatively dovish given the growing expectations of a December hike and the still notable absence of inflationary pressures. With the most recent core PCE release at 1.3%, the doves want to believe that the Fed could walk back talk of a December move. But I think that hope is misplaced. Given the ongoing strength of the economy as evidenced by recent GDP and PMI data, the Fed is going to cling to its Phillips Curve model and offer no indication that December is in question. While they won’t promise a rate hike then, they will not dispel the idea either. All told, I would fade any moves representative of the Fed changing their ideas.

But this morning, there are precious few of those ideas, quite frankly. The dollar has had a mixed session, with both winners and losers in both the G10 and EMG blocs. The biggest gainer overnight was NZD, which rallied nearly 1.0% after better than expected employment data was released. Remember, kiwi had suffered on the political changes that had occurred after the election several weeks ago, so it was likely a bit oversold as well. While it remains some 3.5% lower than before the election, last night’s move was impressive nonetheless. Away from that, though, the G10 has shown modest movement overall with the yen’s 0.3% decline (risk-on anyone?) the next largest move. We did see one interesting piece of news, UK Manufacturing PMI was released at a better than expected 56.3. This number continues to show that the pound’s post-Brexit depreciation has been beneficial for the sector, especially exports. The data also showed that price pressures continue to rise thus underpinning the BOE’s desire to raise rates tomorrow. While the pound is slightly higher, the 20-pip move is hardly enough to generate excitement.

Pivoting to the emerging markets, the biggest mover was TRY, falling 0.75% after the central bank governor warned of higher inflation in both October and November. This comment hurt Turkish equities and bonds as well as the lira. But away from that news, the other currencies in the group that fell all did so in minimal fashion. On the other side of the spectrum, KRW rallied 0.55% overnight, as relations between China and South Korea seem to be warming somewhat. If you recall, the Chinese were quite upset when the US sold South Korea the THAAD missile defense system in an effort to help protect against North Korean actions. The Chinese claimed it was a threat to them. But after a year, and arguably given just how erratically North Korea has behaved, the Chinese seem to be a bit more forgiving of the action and so economic ties are beginning to warm again. With China as Korea’s largest export destination, those relations are critical to South Korea’s economy. If these problems are now past, I would expect KRW to outperform most of its APAC brethren for a while. But away from that news, the rest of the gainers are unimpressive with no real storylines to follow.

Ahead of the FOMC this morning we will see the ADP Employment number (exp 200K); ISM Manufacturing (59.5) and Prices Paid (67.8); as well as Construction Spending (-0.2%). With yesterday’s blowout Chicago PMI number (66.2, exp 60.0), I would expect that traders are looking for even better data this morning. And it is this data that will continue to underpin the Fed’s drive to raise rates in December. Finally, at 2:00 the Fed statement will be released. I remain firmly in the camp that they will acknowledge the continued improvement in the economy and do nothing to dissuade from the idea that rates are set to move higher soon.


Good luck