A New Tune

The Old Lady sang a new tune
Implying two months after June
That rates there may rise
Which was a surprise
To pundits Thursday afternoon

Meanwhile further south it seems Greece
May finally get its release
Though still in arrears
Its tough overseers
Seem ready to settle for peace

The dollar is under pressure this morning, falling against most of its counterparts as it continues the decline begun yesterday. Arguably, the key catalyst yesterday was a more hawkish BOE, where though rates were left unchanged, Chief Economist Andy Haldane surprised the market by voting to increase rates, which took the tally to 6-3 in favor of remaining on hold, rather than the 7-2 expected. In addition, they indicated that they might begin to reduce the balance sheet when interest rates reached just 1.50%, rather than the 2.00% previously indicated. This means that the timeline for asset sales has clearly been shortened, a definitively hawkish sentiment. The pound’s response has been to rally 1.4% since the news, with the last 0.3% coming in this morning’s session. In addition, futures markets are now pricing in a 65% probability of a rate hike in August, up from 43% before the meeting. I continue to believe that Brexit will weigh too heavily on their minds to raise rates, but that is now a minority view.

This further isolates the BOJ, which left rates on hold last week and continues to make no headway regarding its efforts to push up inflation as evidenced by last night’s release that showed CPI continues to creep along at just 0.7% and just 0.3% -ex food & energy. In the end, the fact that the yen has weakened by 0.2% this morning ought not be a great surprise. There seems to be no scenario in which the BOJ is going to adjust its monetary policy anytime soon. In fact, if they do anything, I would argue it would result in additional easing.

But the pound was not the only currency that saw good news, the euro, too, has had a nice run this morning, rising 0.3%, after Flash PMI data showed a rebound in France, Germany and the Eurozone as a whole. The rise came within the service sector as manufacturing in all three readings disappointed further, but given that services is a much larger part of the relevant economies, the overall data still looked quite good. Adding to the good cheer was the announcement that Greece had reached a resolution with its creditors regarding debt relief. Essentially, official European creditors (the EU, Germany, France, etc.) have agreed to extend the maturity on Greek debt by 10 years, reduced interest rates further and offered a 10-year holiday before payments needed to be made. In addition, Greece will be getting one final dollop from the bailout program, totaling €15 billion, which will leave them flush for now and should encourage bond buying from investors other than the ECB. Net, it was a good day in Europe.

But emerging markets, too, have had a pretty good day, with some modest gains recorded across all three regions. For example, while there are still market jitters regarding Mexico’s presidential election slated for next week, the peso has managed to recoup about 0.4% this morning, which makes 3.3% since Monday. While that is certainly an impressive rally, and has largely been in sync with the rebound in oil prices, it is in the context of a currency that has fallen by 12.5% in the past two months. Ongoing NAFTA concerns, as well as investor fears that a victory by AMLO next week will jeopardize many investor friendly policies enacted by the current government, have clearly weighed on the peso.

Elsewhere in this bloc, traders and investors remain quite concerned over the outcome of this weekend’s Turkish election, where a big win for President Erdogan may result in even more unorthodox monetary policies and a much weaker lira.

Other key news is the OPEC meeting in Vienna that is ongoing right now, and where it remains unclear just how much more oil the group will be willing to pump. There is internal dissent because some members (Mexico, Venezuela) do not have the ability to increase output despite increased quotas, and so they are keen to see prices continue to rise. In fact, while oil touched its lowest level in more than two months on Monday, it has already rebounded about 5% since then. I’ve already mentioned the Mexican peso’s rebound in conjunction with that rise, and it is not surprising to see the Russian ruble behave in a similar manner.

However, in the end, the entire EMG bloc remains under pressure from the ongoing adjustments in monetary policy by the Fed, ECB and now the BOE. As developed market riskless returns rise, EMG currencies are going to continue to fall.

There is no US data this morning, and no Fed speakers on the calendar. In fact, today is likely to be a very quiet session as summer Fridays are wont to be. Unless we hear something new from the White House regarding trade, I expect that a modest further drift lower in the dollar is the most likely outcome.

Good luck and good weekend

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