The BOE finally sees
That Brexit may not be a breeze
So hawks must beware
As rates they may pare
For doves, though, this act’s sure to please
Two stories from the UK are driving the narrative forward this morning, at least the narrative about the dollar continuing to strengthen. The first, and most impactful, were comments from BOE member, Michael Saunders, who prior to this morning’s speech was seen as one of the more hawkish members of the MPC. However, he explained that regardless of the Brexit outcome, the continuing slowdown in the UK, may require the BOE to cut rates soon. The UK economy has been under considerable pressure for some time and the data shows no signs of reversing. The market has been pricing in a rate cut for a while, although BOE rhetoric, especially from Governor Carney, worked hard to keep the idea of the next move being a rate hike. But no more. If Saunders is in the cutting camp, you can bet that we will see action at the November meeting, even if there is another Brexit postponement.
And speaking of Brexit postponements, Boris won a court victory in Northern Ireland where a lawsuit had been filed claiming a no-deal Brexit was a breach of the Good Friday accords that brought peace to the country. However, the court ruled it was no such thing, rather it was simply a political act. The upshot is this was seen as a further potential step toward a no-deal outcome, adding to the pound’s woes. In the meantime, Johnson’s government is still at odds with Parliament, and is in the midst of another round of talks with the EU to try to get a deal. It seems the odds of that deal are shrinking, although I continue to believe that the EU will blink. The next five weeks will be extremely interesting.
At any rate, once Saunders’ comments hit the tape, the pound quickly fell 0.5%, although it has since regained a bit of that ground. However, it is now trading below 1.23, its weakest level in two weeks, and as more and more investors and traders reintegrate a hard Brexit into their views, you can look for this decline to continue.
Of course, the other big story is the ongoing impeachment exercise in Congress which has caused further uncertainty in markets. As always, it is extremely difficult to trade a political event, especially one without a specific date attached like a vote. As such, it is difficult to even offer an opinion here. Broadly, in the event President Trump was actually removed from office, I expect the initial move would be risk-off but based on the only other impeachment exercise in recent memory, that of President Clinton in 1998, it took an awful long time to get through the process.
Turning to the data, growth in the Eurozone continues to go missing as evidenced by this morning’s confidence data. Economic Confidence fell to its lowest level in four years while the Business Climate and Industrial Confidence both fell more sharply than expected as well. We continue to see a lack of inflationary impulse in France (CPI 1.1%) and weakness remains the predominant theme. While the euro traded lower earlier in the session, it is actually 0.1% higher as I type. However, remember that the single currency has fallen more than 4.4% since the end of June and nearly 2.0% in the past two weeks alone. With the weekend upon us, it is no surprise that short term positions are being pared.
Overall, the dollar is having a mixed session. The yen and pound are vying for worst G10 performers, but the movement remains fairly muted. It seems the yen is benefitting from today’s risk-on feeling, which was just boosted by news that a cease-fire in Yemen is now backed by the Saudis. It is no surprise that oil is lower on the news, with WTI down 1.1%, and equity market have also embraced the news, extending early gains. On the other side of the coin, the mild risk-on flavor has helped the rest of the bunch.
In the EMG space it is also a mixed picture with ZAR suffering the most, -0.35%, as concerns grow over the government’s plans to increase growth. Meanwhile, overnight we saw strength in both PHP and INR (0.45% each) after the Philippine central bank cut rates and followed with a reserve ratio cut to help support the economy. Meanwhile, in India, as the central bank removes restrictions on foreign bond investment, the rupee has benefitted.
But overall, movement has not been large anywhere. US equity futures are pointing higher as we await this morning’s rash of data including: Personal Income (exp 0.4%); Personal Spending (0.3%); Core PCE (1.8%); Durable Goods (-1.0%, 0.2% ex transport); and Michigan Sentiment (92.1). We also hear from two more Fed speakers, Quarles and Harker. Speaking of Fed speakers (sorry), yesterday vice-Chairman Richard Clarida gave a strong indication that the Fed may change their inflation analysis to an average rate over time. This means that they will be comfortable allowing inflation to run hot for a time to offset any period of lower than targeted inflation. Given that inflation has been lower than targeted essentially since they set the target in 2012, if this becomes official policy, you can expect prices to continue to gain more steadily, and you can rule out higher rates anytime soon. In fact, this is quite dovish overall, and something that would work to change my view on the dollar. Essentially, given the history, it means rates may not go up for years! And that is not currently priced into any market, especially not the FX market.
The mixed picture this morning offers no clues for the rest of the day, but my sense is that the dollar is likely to come under further pressure overall, especially if risk is embraced more fully.
Good luck and good weekend