Monthly Archives: October 2019

Get Out of My Face!

Posted on by

“The economy’s in a good place”
Which means we can slacken the pace
Of future rate cuts
No ifs, ands or buts
So Donald, ‘get out of my face’!

Reading between the lines of yesterday’s FOMC statement and the Powell press conference, it seems abundantly clear that Chairman Powell is feeling pretty good about himself and what the Fed has achieved. He was further bolstered by the data yesterday which showed GDP grew at a 1.9% clip in Q3, far better than the expected 1.6% pace and that inflation, as measured by the GDP deflator, rose 2.2%, also clearly around the levels that the Fed seeks. In other words, although he didn’t actually say, ‘mission accomplished’, it is clearly what he wants everybody to believe. The upshot is that he was able to convince the market that the Fed has no more reason to cut rates anytime soon. But more importantly from a market perspective, he explained at the press conference that the bar was quite high for the Fed to consider raising rates again. And that was all he needed to say for equity markets to launch to yet another new high, and for the dollar, which initially had rallied on the FOMC statement, to turn tail and fall pretty sharply. And the dollar remains under pressure this morning with the euro rising a further 0.15%, the pound a further 0.45% and the yen up 0.5%.

Of course, the pound has its own drivers these days as the UK gears up for its election on December 12. According to the most recent polls, the Tories lead the race with 34%, while Labour is at 26%, the Lib-Dems at 19% and the Brexit party at 12%. After that there are smaller parties like the DUP from Northern Ireland and the Scottish National Party. The most interesting news is that the Brexit party is allegedly considering withdrawing from a number of races in order to allow the Tories to win and get Brexit completed. And after all, once Brexit has been executed, there really is no need for the Brexit party, and so its voting bloc will have to find a home elsewhere.

Something that has been quite interesting recently is the change in tone from analysts regarding the pound’s future depending on the election. While on the surface it seems that the odds of a no-deal Brexit have greatly receded, there are a number of analysts who point out that a strong showing by the Brexit party, especially if Boris cannot manage a majority on his own, could lead to a much more difficult transition period and bring that no-deal situation back to life. As well, on the other side of the coin, a strong Lib-Dem showing, who have been entirely anti-Brexit and want it canceled, could result in a much stronger pound, something I have pointed out several times in the past. Ultimately, though, from my seat 3500 miles away from the action, I sense that Boris will complete his takeover of the UK government, complete Brexit and return to domestic issues. And the pound will benefit to the tune of another 2%-3% in that scenario.

The recent trade talks, called ‘phase one’
According to both sides are done
But China’s now said
That looking ahead
A broad deal fails in the long run

A headline early this morning turned the tide on markets, which were getting pretty comfortable with the idea that although the Fed may not be cutting any more, they had completely ruled out raising rates. But the Chinese rained on that parade as numerous sources indicated that they had almost no hope for a broader long-term trade deal with the US as they were not about to change their economic model. Of course, it cannot be a surprise this is the case, given the success they have had in the past twenty years and the fact that they believe they have the ability to withstand the inevitable economic slowdown that will continue absent a new trading arrangement. Last night, the Chinese PMI data released was much worse than expected with Manufacturing falling to 49.3 while Services fell to 52.8, both of which missed market estimates. However, the latest trade news implies that President Xi, while he needs to be able to feed his people, so is willing to import more agricultural products from the US, is also willing to allow the Chinese economy to slow substantially further. Interestingly, the renminbi has been a modest beneficiary of this news rallying 0.15% on shore, which takes its appreciation over the past two months to 2.1%. Eventually, I expect to see the renminbi weaken further, but it appears that for now, until phase one is complete, the PBOC is sticking to its plan to keep the currency stable.

Finally, last night the BOJ left policy unchanged, however, in their policy statement they explicitly mentioned that they may lower rates if the prospect of reaching their 2% inflation goal remained elusive. This is the first time they have talked about lowering rates from their current historically low levels (-0.1%) although the market response has been somewhat surprising. I think it speaks to the belief that the BOJ has run out of room with monetary policy and that the market is pricing in more deflation, hence a stronger currency. Of course, part of this move is related to the dollar’s weakness, but I expect that the yen has further to climb regardless of the dollar’s future direction.

In the EMG bloc there were two moves of note yesterday, both sharp declines. First Chile’s peso fell 1.5% after President Sebastian Pinera canceled the APEC summit that was to be held in mid-November due to the ongoing unrest in the country. Remember, Chile is one of the dozen nations where there are significant demonstrations ongoing. The other big loser was South Africa’s rand, which fell 2.9% yesterday after the government there outlined just how big a problem Eskom, the major utility, is going to be for the nation’s finances (hint: really big!). And that move is not yet finished as earlier this morning the rand had fallen another 1.1%, although it has since recouped a portion of the day’s losses.

On the data front, after yesterday’s solid GDP numbers, this morning we see Personal Income (exp 0.3%); Personal Spending (0.3%); Core PCE (0.1%, 1.7% Y/Y); Initial Claims (215K) and Chicago PMI (48.0). And of course, tomorrow is payroll day with all that brings to the table. For now, the dollar is under pressure and as there are no Fed speakers on the docket, it appears traders are either unwinding old long dollar positions, or getting set for the next wave of weakness. All told, it is hard to make a case for much dollar strength today, although strong data is likely to prevent any further weakness.

Good luck
Adf

A Christmas Election

Posted on by

Prime Minister Johnson’s achieved
The goal that had had him aggrieved
A Christmas election
To change the complexion
Of Parliament, so they can leave

Meanwhile today all eyes have turned
To Washington where, when adjourned,
The Fed will declare
A rate cut that they’re
Not sure’s been entirely earned

Yesterday morning the UK Labour party finally caved and agreed to an election to be held in six short weeks. Boris has got exactly what he wants, an effective second referendum on Brexit, this time with a deal in hand. At this point, the polls have him leading handily, with 38% of the vote compared to just 23% for Labour and its leader Jeremy Corbyn. But we all know that the polls have been notoriously wrong lately, not least ahead of the original Brexit referendum which was tipped for Remain by a 52-48 margin and, of course, resulted in a Leave victory by that same margin. Then Theresa May, the newly appointed PM in the wake of that surprise thought she had the support to garner a strong mandate and called an election. And she lost her outright majority leading to two plus years of pusillanimous negotiations with the EU before finally reaching a deal that was so widely despised, she lost her job to Boris. And let us not forget where the polls pointed ahead of the US elections in 2016, when there was great certainty on both sides of the aisle that President Trump didn’t stand a chance.

So, looking ahead for the next six weeks, we can expect the pound to reflect the various polls as they are released. The stronger Boris looks, meaning the more likely that his deal is ratified, the better the pound will perform. For example, yesterday, upon the news that the election was finally agreed, the pound immediately rallied 0.5%, and subsequently topped out at a 0.75% jump from intraday lows. While it ceded the last of those gains before the close yesterday, this morning it has recouped them and is currently higher by 0.25%. A Johnson victory should lead to further strength in the pound, with most estimates calling for a short-term move to the 1.32-1.35 area. However, in the event Boris is seen as failing at the polls, the initial move should be much lower, as concern over a no-deal Brexit returns, but that outcome could well be seen as a harbinger of a cancelation of Article 50, the EU doctrine that started this entire process. And that would lead to a much stronger pound, probably well north of 1.40 in short order.

With that situation in stasis for now, the market has turned its attention to the FOMC meeting that concludes this afternoon. Expectations remain strong for a 25bp rate cut, but the real excitement will be at the press conference, where Chairman Powell will attempt to explain the Fed’s future activities. At this point, many pundits are calling for a ‘hawkish’ cut, meaning that although rates will decline, there will be no indication that the Fed is prepared to cut further. The risk for Powell there is that the equity market, whose rally has largely been built on the prospect of lower and lower interest rates, may not want to hear that news. A tantrum-like reaction, something at which equity traders are quite adept, is very likely to force Powell and the Fed to reconsider their message.

Remember, too, that this Fed has had a great deal of difficulty in getting their message across clearly. Despite (or perhaps because of) Powell’s plain-spoken approach, he has made a number of gaffes that resulted in sharp market movement for no reason. And today’s task is particularly difficult. Simply consider the recent flap over the Fed restarting QE. Now I know that they continue to claim this is nothing more than a technical adjustment to the balance sheet and not QE, but it certainly looks and smells just like QE. And frankly, the market seems to perceive it that way as well. All I’m trying to point out is that you need to be prepared for some volatility this afternoon in the event Powell puts his foot back into his mouth.

As to the markets this morning, aside from the pound’s modest rally, most currencies are trading in a narrow range ahead of the FOMC meeting this afternoon, generally +/- 0.15%. We did see a bunch of data early this morning reinforcing the ongoing malaise in Europe. While French GDP data was largely as expected, Eurozone Confidence indicators all pointed lower than forecast. However, the euro has thus far ignored these signals and is actually a modest 0.1% higher as I type. And in truth, as that was the only meaningful data, other market movement has been even less impressive.

This morning we also hear from the Bank of Canada, who is expected to leave rates unchanged at 1.75%, which after the Fed cuts, will leave them with the highest policy rates in the G10. Now the economy up north has been performing quite well despite some weakness in the oil patch. Employment has risen sharply so far this year, with more than 350K jobs created. Inflation is running right around their 2.0% target and GDP, while slowing a bit from earlier in the year, is likely to hold just below potential and come in at 2.0% for the year. Over the course of the past two weeks, the Loonie has been a solid performer, rising 2.0%. If the BOC stays true, it is entirely reasonable to expect a bit more strength there.

This morning begins this week’s real data outturn with ADP Employment (exp 110K) kicking things off at 8:15, then the first look at Q3 GDP (1.6%) comes fifteen minutes later. Obviously, those are both important in their own right, but with the Fed on tap at 2:00, it would take a huge surprise in either one to move the market much. As such, I doubt we will see much of consequence until 2:00, and more likely not until Powell speaks at 2:30. Until then, things should remain sleepy. After? Who knows!

Good luck
Adf

 

Flummoxed

Posted on by

Kuroda flummoxed
As inflation fails to rise
How low can rates go?

You know things are tough in Japan, at least for the BOJ, when a sales tax hike, that in the last go-round increased inflation by nearly two percentage points, had exactly zero impact on the latest CPI readings. Last night’s Tokyo CPI data was released at 0.4%, unchanged from the September data and well below the 0.7% expected. And that’s an annual number folks, not the monthly kind. It seems that the government’s efforts to help young families by reducing tuition for pre-school and kindergarten to zero was enough to offset the impact of the rise in the Goods and Services Tax, essentially the Japanese VAT. However, the upshot is that CPI inflation, at least in Tokyo which is seen as a harbinger for the nation as a whole, remains nonexistent. Now for the average Japanese family, one would think that is a good thing. After all, who wants the prices of the stuff they need to buy rising all the time. But for the BOJ, who doggedly continues to believe that unless inflation rises to 2.0% the economy will implode, it is merely the latest sign that central banks are out of ammunition.

The yen’s response to this ongoing futility was to rise ever so marginally, not quite 0.1%, but that has not changed its more recent trend. In the past two months, the yen has weakened a solid 4.4%. But the picture changes if you step a bit further back for more perspective. Over the past six months, since late April, the yen has actually strengthened nearly 3.0%. So, which is it; is the yen getting stronger or weaker? In fact, I would argue that it is doing neither, but rather the yen is in a major long-term consolidation pattern (a triangle formation for the technicians out there) and that barring a major exogenous shock like a GFC2, the yen is likely to continue trading in an even narrower range going forward, perhaps for as long as the next year. The thing is, these triangle patterns tend to resolve themselves with a very significant break-out move when they end. At this stage, there is no way to discern which direction that will follow, and , as I said, it is probably a year away, but it is quite realistic to expect that the doldrums we have experienced in the yen for the past many years is likely to end. Perhaps the US presidential election will be the catalyst to cause a change, at least the timing will be right.

For hedgers, the best advice I can offer is to extend the tenor of your hedges as much as you can. This is especially true for receivables hedgers, where the carry is in your favor. But the reality is that even a payables hedger needs to consider the benefits of hedging in an extremely low volatility environment as opposed to waiting until a breakout, which may result in the yen jumping higher by as much as 5%-10%, completely outweighing the current cost of carry.

Three Latin American nations
Have populist administrations
Brazil, on the right
Of late’s shining bright
But fear’s grown ‘round Argie’s relations

For the past two weeks, the story in Brazil has been one of unadulterated joy, at least for investors. The real has rallied more than 5.0% in that time as President Jair Bolsonaro, the right-wing firebrand, has been able to push pension reform through congress there. That has been warmly received by markets as it implies that Brazil’s long-term finances are likely to remain under control. The pension system had been massively underfunded and was far too generous relative to the government’s ability to pay. Correcting these problems is seen as crucial to allowing Brazil to move forward with other investments to help the nation’s economy and productivity. Again, a glance at the charts shows that USDBRL has formed a triple top formation and is already accelerating lower. Quite frankly, it would not surprise to see BRL strengthen to 3.70 before this movement is over.

Turning to Mexico, it too has performed extremely well over the past two months, rallying more than 5% during that time. It is interesting that the markets have been extremely patient with AMLO as, since his initial action to cancel the Mexico City Airport construction, which was seen in an extremely negative light, his policies have been far less disruptive than most investors feared. Clearly, Mexico has been a beneficiary of the ongoing US-China trade war as companies seek low cost manufacturing sites near the US and given the (still pending) USMCA trade agreement, there is more confidence that companies will be able to set up shop there with fewer repercussions.

However, as with the yen, I might argue that what we have seen over the past five years is an increasingly narrowing consolidation in the peso’s exchange rate, albeit with a tad more volatility attached. And the thing about this pattern is its culmination is likely to occur much sooner than that in the yen. A quick look at MXN’s PPP shows that the peso remains significantly undervalued vs. the dollar, and in truth vs. most currencies. All this points to the idea that barring any surprisingly anti-business actions from AMLO, the peso may be setting up for a much larger rally, especially with the carry benefits that continue to exist.

Argentina, on the other hand, with newly elected left-wing President Fernandez, has its work cut out for itself. If you recall, the preliminary vote back in August, saw the peso decline more than 35%, and while it was choppy for a bit, the price action of late has been for steady depreciation. It is too early to know what Fernandez will do, but given the dire straits in the Argentine economy, with inflation running north of 50% while growth is shrinking rapidly and the debt situation is untenable, it seems the path of least resistance is for ARS to continue to weaken.

A quick look at the majors sees the dollar generally firmer this morning as there is a mild risk-off sentiment in markets. However, the news moments ago that the Labour party agreed to an early election has helped bolster the pound specifically, and risk in general. I expect that the pound will now be reacting to the polls as it becomes clearer if Boris can win with a majority, or if he will go down to defeat and perhaps an even more beneficial outcome for the pound will arise, the withdrawal of Article 50. My money remains on a Johnson victory and a Brexit with the recently negotiated deal.

This morning we get two minor pieces of data, Case Shiller Home Prices (exp 2.10%) and Consumer Confidence (128.0). Yesterday we did see a weak Dallas Fed manufacturing index print, but equity markets made new highs. I can see little reason, beyond the ongoing Brexit story, for traders to alter their positions ahead of tomorrow’s FOMC meeting, and so anticipate another quiet day in the market.

Good luck
Adf

New Brexit Day

Posted on by

In Britain and in the EU
They finally made a breakthrough
Three months from Thursday
Is New Brexit Day
Will England, at last, bid adieu?

So French President Macron finally agreed what we all knew he would agree, that the UK will get another three-month Brexit extension. The question now is whether or not the UK will be able to figure out how to end this saga. It is abundantly clear that Labour leader, Jeremy Corbyn, is terrified of a general election because he knows he and his party will be decimated, and he is likely to lose his role. However, it is also abundantly clear that Parliament, as currently constructed, is completely unable to finalize this process. Later today we will know if Boris will be able to convince two-thirds of the current Parliament to vote with him and prepare the ground for an election. Already, the Scottish National Party and Lib-Dems are on board, but that will not get the job done, Labour has to agree.

Throughout all these machinations, FX traders find themselves constantly searching for a clue as to the outcome but the big picture remains the same. A hard Brexit is still seen as resulting in a very sharp decline in the pound. Meanwhile, a smooth Brexit transition, where the negotiated deal is put in place, is likely to add a few cents more to the pound’s current value, at least in the short run. Finally, in the event that an election led to a Parliament that not only voted against the deal, but decided to withdraw Article 50, something not getting very much attention at all, then the pound would very likely head back north of 1.40. Of the three, my money is still on a negotiated withdrawal, but stranger things have happened. At any rate, we ought to no more before the end of the day when Parliament will have ostensibly voted on whether or not to hold the new election.

Moving on to the other stories in the market, there really aren’t very many at all! In fact, markets around the world seem to be biding their time for the next big catalyst. If pressed, I would point to Wednesday’s FOMC meeting as the next big thing.

On Wednesday the FOMC
Will issue their latest decree
While Fed Funds will fall
They don’t seem in thrall
To more cuts, lest growth soon falls free

As of this writing, the probability of the Fed cutting rates 25bps on Wednesday, at least according to futures market pricing, is 91%. This is a pretty good indication that the Fed is going to cut for a third time in a row, despite the fact that they keep exclaiming what a “good place” the economy is in. One of the interesting things about this is that both the Brexit situation and the trade situation seem to have improved substantially since the September meeting, which seemingly would have reduced the need for added stimulus. However, since the stock market continues to rely on the idea of ongoing stimulus for its performance, and since the performance of the stock market continues to be the real driver of Fed policy, I see no reason for them to hold back. However, inquiring minds want to know if Wednesday’s cut will be the last, or if they will continue down this slippery slope.

According to Fed funds Futures markets, expectations for another cut beyond this one have diminished significantly, such that there is only a 50% probability of the next cut coming by March 2020. And, after all, given the reduction in global tensions and uncertainty, as well as the recent hints from CPI that inflation may finally be starting to pick up, it seems that none of their conditions for cutting rates would be met. However, if Chairman Jay sounds hawkish in his press conference, and the result is that equity markets retreat, do not be surprised if those probabilities change in favor of another cut in December. So, we have much to look forward to this Wednesday.

Ahead of that, and after the UK parliament vote later today, though, I think we will rely on Wednesday morning’s data for the next opportunity for excitement. Here’s the full slate:

Tuesday Case Shiller Home Prices 2.10%
  Consumer Confidence 128.0
Wednesday ADP Employment 110K
  GDP 3Q 1.6%
  FOMC Decision 1.75% (-0.25%)
Thursday Initial Claims 215K
  Personal Income 0.3%
  Personal Spending 0.3%
  Core PCE 0.1% (1.7% Y/Y)
  Chicago PMI 48.0
Friday Nonfarm Payrolls 85K
  Private Payrolls 80K
  Manufacturing Payrolls -55K (GM Strike)
  Unemployment Rate 3.6%
  Average Hourly Earnings 0.3% (3.0% Y/Y)
  Average Weekly Hours 34.4
  Participation Rate 63.1%
  ISM Manufacturing 49.0
  ISM Prices paid 50.0

Source: Bloomberg

So, the back half of the week can certainly produce some excitement. Remember, the employment data will have been significantly impacted by the General Motors strike, which has since been settled. Expect to see a lot of analysis as to what the numbers would have been like absent the strike. But still, the Fed remains the dominant theme of the week. And then, since the press conference never seems to be enough, we will hear from four Fed speakers on Friday to try to explain what they really meant.

For now, though, quiet is the most likely outcome. Investors are not likely to get aggressive ahead of the Fed, and though short positions remain elevated in both euros and pounds, they have not been increasing of late. Overall, the dollar is little changed on the day, and I see little reason for it to move in either direction. Quiet markets are beneficial for hedgers, so don’t be afraid to take advantage.

Good luck
Adf

Choler on Display

Posted on by

There once was a large group of nations
Whose common goal was trade relations
But then as time passed
More rules they amassed
Which caused, for the Brits, complications

So three years ago, the UK
Decided to go its own way
Then Europe was miffed
Lamenting the rift
And put their choler on display

Along then came Boris the blond
Who’s tried to move Britain beyond
The uncertain ways
Of Brexit delays
But Europe’s now scared to respond

Alas, we are back to Brexit as the key story this morning. In a nutshell; the EU indicated they would offer a three-month extension, to January 31, 2020 but has not confirmed that; Boris called for an election to be held on December 12 in order to consolidate what he perceives to be his current power, but Labour leader Jeremy Corbyn insists that, though he wants to have an election, he will not do so until it is guaranteed there is no hard Brexit. Boris’s argument is that he has a deal that has been approved in principal by Parliament, so there should be no hard Brexit. However, Corbyn seems to realize that an election before Brexit is likely to lead to a significant Tory victory, so he won’t allow it. Meanwhile, the jellyfish in Brussels can’t make up their collective mind as to how long the extension should be and are claiming they ‘don’t want to get involved in UK politics’! Are they kidding? They have been involved in UK politics since the vote in June 2016. I tell you, the next decision they make will be their first. At any rate, we are now in a catch-22 where the EU doesn’t want to decide on the length of an extension until the situation in London is clearer, while Labour will prevent an election until they know the situation in Brussels.

All this has been somewhat negative for the pound, which saw quite a bit of volatility in yesterday’s session, falling a bit more than 1.0% during the NY morning as this saga started to play out, although it rebounded and recouped about half of those losses by the end of the day. This morning, price action has been quite choppy, but the range has been much smaller. As I type, the pound is lower by just 0.1%, but it has traded both sides of its trading range today, 1.2825-1.2860 four times. My advice is if you have to trade cable right now, leaving an order at your preferred level is the best practice.

In the end, while the market has priced in a slightly higher probability of a no-deal Brexit, I continue to firmly believe that the outcome will be the current deal will be passed and the pound will be set to trade substantially higher, with a medium term target of 1.35.

Yesterday was also Signor Draghi’s final meeting as ECB President and he kept to the script. He exhorted Eurozone members, who could afford to do so, to increase fiscal stimulus. He said the current monetary policy stance was appropriate and would remain in place until inflation was stable at the ECB’s target of ‘just below 2.0%’, and he insisted there was plenty more the ECB can do if necessary. But now it is Madame Lagarde’s problem going forward, as she will be installed as ECB president one week from today. And the euro? Well it has been pretty dull for the past week, trading in a tight range as it consolidates its 2.5% gains since the beginning of the month. We continue to get pretty lousy Eurozone data, with today’s survey data showing Consumer Confidence continuing to decline while the IFO Business data remained unchanged at its lowest level in more than ten years. There has been some effort to spin this as positive, but that’s a hard case to make.

On the trade front, there has been no real news, although China appears to be relenting with regard to pork imports as some 60% of their swine herd has been decimated by African swine fever and pork prices on the mainland have exploded higher. And remember, the US is not imposing tariffs on their own pork, it is China that is doing so for political reasons. Thus, if the domestic politics outweighs the trade politics, you can be sure there will be no tariffs on pork! So far, it still seems like President’s Trump and Xi are on track to sign a phase 1 deal next month at the APEC conference in Chile, but that is a long way away.

Elsewhere in the FX market, it is dullsville. I cannot find a single currency that has moved even 0.4% vs. the dollar, with most plus or minus 10bps or less from yesterday’s closing levels. Treasury prices are little changed as are equity markets in Europe and US futures. In other words, there is not a lot ongoing right now.

Looking at the data story, yesterday’s Durable Goods data was a bit disappointing, but not horrifying. This morning we are awaiting Michigan Sentiment (exp 96.0) but that hardly seems likely to move markets. For now, given the lack of Fedspeak, earnings data and its impact on equity markets are likely to be the biggest influencers of spot FX. That is, of course, unless we hear something unexpected from London, Brussels or Washington. However, it is shaping up as a day of consolidation ahead of next week’s FOMC and BOJ meetings, as well as the pending decision by the EU on the length of any Brexit delay. Enjoy the quiet while it lasts!

Good luck and good weekend
Adf

 

Tempting the Fates

Posted on by

Around the world most central banks
Have, monthly, been forced to give thanks
That tempting the fates
With negative rates
Has not destroyed euros or francs

And later today we will hear
From Draghi, the man who made clear
“Whatever it takes”
Would fix the mistakes
Investors had grown, most, to fear

With Brexit on the back burner for the day, as the UK awaits the EU’s decision on how long of a delay to grant, the market has turned its attention to the world’s central banks. Generally speaking, monetary ease remains the primary focus, although there are a few banks that are bucking the trend.

Starting with the largest for today, and world’s second most important central bank, the ECB meets today in what is Mario Draghi’s final policy meeting at the helm. Given their actions last month, where they cut the deposit rate a further 10bps to -0.50% and restarted QE to the tune of €20 billion per month, there is no expectation for any change at all. In fact, the only thing to expect is more exhortations from Draghi for increasing fiscal policy stimulus by Germany and other Northern European nations that are not overly indebted. But it will not change anything at this stage, and he has already tied Madame Lagarde’s hands going forward with their most recent guidance, so this will be the farewell tour as everybody regales him for saving the euro back in 2012.

But there have been a number of other moves, the most notable being the Swedish Riksbank, which left rates unchanged, but basically promised to raise them by 25bps in December to return them to 0.00%. Apparently they are tired of negative rates and don’t want them to become habit forming. While I admire that concept, the problem they have is growth there is slowing and inflation is falling well below their target of 2.0%. The most recent reading was 1.5%, but the average going back post the financial crisis is just 1.1%. SEK gained slightly after their comments, rallying 0.15% this morning, but the trend in the krone remains lower and I think they will need to raise a lot more than 25bps to change that.

Meanwhile, other central bank activity saw Norway leave rates unchanged at 1.50% as core inflation there remains above their 2.0% target. NOK’s response was essentially nil. Indonesia cut rates by 25bps, as widely expected, its fourth consecutive rate cut, and although the rupiah is ever so slightly softer this morning, -0.2%, its performance this year has been pretty solid, having gained 2.3% YTD. Finally, the Turkish central bank cut rates by a surprising 250bps this morning, much more than the 100bps expected. If you recall, President Erdogan has been adamant that higher interest rates beget higher inflation, and even fired the previous central bank head to replace him with someone more malleable. Interestingly, a look at Turkish inflation shows that it has been falling despite (because of?) recent rate cuts. And today, despite that huge cut, the initial currency impact was pretty modest, with the lira falling 0.5% immediately, but already recouping some of those losses. And in the broader picture, the lira’s recent trend has clearly been higher and remains so after the cut.

On the data front we saw PMI data from the Eurozone and it simply reinforced the idea that the Eurozone is heading into a recession. Germany’s numbers were worse than expected (Manufacturing 41.9, Composite 48.6) which was enough to drag the Eurozone data down as well (Manufacturing 45.7, Composite 50.2). It seems clear that when Germany reports their Q3 GDP next month it will be negative and Germany will ‘officially’ be in a recession. It is data of this nature that makes it so hard to turn bullish on the single currency. Given their economic travails, the Teutonic austerity mindset, which was enshrined in law, and the fact that the ECB is essentially out of bullets, it is very difficult to have a positive view of the euro in the medium term. This morning, ahead of the ECB policy statement, the euro is little changed, and I see no reason for it to move afterwards either.

So, there was lots of central bank activity, but not so much FX movement in response. My sense is that FX traders are now going to fully turn their attention to the FOMC meeting next week, as even though a rate cut seems assured, the real question is will the Fed call a halt to the mid-cycle adjustment, or will they leave the door open to further rate cuts. The risk with the former is that the equity market sells off sharply, thus tightening financial conditions, sowing fear in Washington and forcing a reversal. However, the risk with the latter is that the Fed loses further credibility, something they have already squandered, by being proven reactive to the markets, and less concerned with the economy writ large.

For today’s session, we have the only real data of the week, Durable Goods (exp -0.7%, -0.2% ex Transport), and Initial Claims (215K) at 8:30, then New Home Sales (702K) at 10:00. We also see the US PMI data (Manufacturing 50.9, Services 51.0) although the market generally doesn’t pay much attention to this. Instead it focuses on the ISM data which won’t be released until next week.

Without any Fed speakers on the docket, once again the FX market is likely to take its cues from equities, which are broadly higher this morning after a number of better than expected earnings announcements. In this risk-on environment, I think the dollar has room to edge lower, but unless we start to see the US data really deteriorate, I have a feeling the Fed is going to try to end the rate cuts and the dollar will benefit going forward. Just not today.

Good luck
Adf

 

What Exactly Comes Next?

Posted on by

Though Boris did garner a win
Another act’s caused him chagrin
The latest delay
Has kept the UK
Adrift ‘midst an increasing din

The question that has markets vexed
Is just what exactly comes next?
Elections? Could be
And likely a plea
To quantify Brexit’s effects

Brexit noun
brē·gzit

Definition of Brexit
“It is a tale told by an idiot, full of sound and fury, signifying nothing.”

Clearly, William Shakespeare was a man ahead of his time! The Brexit saga continues although it seems to have turned from drama to comedy. However, that is far better than the tragedy that could have come about in the event of a no-deal outcome. At this point, it seems the most likely outcome will be another three-month delay, with January 31st mooted as the target now, to allow the UK to finally (?) solve their internal dilemma. Yesterday’s activity saw Boris win the first vote, which means that he had sufficient support, in principal, for the deal he renegotiated with the EU. However, his attempt to force the second and third readings to occur today and tomorrow such that a final vote could be held was thwarted. Thus, while Parliament has approved what he has done, and that occurred despite lacking DUP support, they want more time to ponder the bill, and likely lard it with amendments for each group’s individual constituencies. Thus, the discussion now is the EU will grant a flexible delay, meaning January 31 is the target, but that if the UK can solve their internal arguments sooner, the date would be moved up.

While I continue to believe that this has played into Boris’s strength, and that any election will see him re-elected with a thumping majority, that remains unclear. But what is clear is that the FX market has adjusted its views on the potential outcomes. At this point I would suggest there are three possible results; a no-deal Brexit; passage of the current deal; or a vote and then new referendum which leads to a Remain victory and no Brexit at all. If we assume the following movements are realistic outcomes:

No-deal => 1.10
Current deal => 1.30-1.35
Remain => 1.45

Then the market has reduced the probability of a no-deal to just 15%, which is substantially lower than what had certainly been at least a 50% probability just a few weeks ago, while the probability of the deal being enacted has risen to nearly 80%, and a Remain outcome just 5%. While hardly scientific, this is one possible explanation for the current level, as well as a possible view of where the pound can go given those three end results. Don’t forget the salt!

A quick look at the pound this morning shows that it has fallen ever so slightly from yesterday’s closing level, just 0.1%, and that it remains quite volatile within its current trading range. My view is that an extension and a successful call for an election will lead to further cable strength as it will reduce the probability of a no-deal outcome even further. In fact, we could well see a growing view that a second referendum will be held and most recent polls seem to imply no Brexit at all. In that event, I think the pound can go much higher, at least until the market starts to pay closer attention to the entire EU’s deteriorating economic fundamentals and the reality that investment inflow is going to be lacking, while outflows pick up. Ultimately, I continue to see the dollar performing well, but for the pound, we may need a reset of the base level given everything that has occurred.

Turning to the rest of the G10 space, the dollar is firmer vs. 9 of them with only the yen holding up today. However, the magnitude of that strength has been extremely modest, averaging about 0.1%. In other words, not much is happening. The same is largely true in the EMG bloc, although the biggest gainer has been TRY with traders shaking off the ongoing Kurdish fighting and seemingly responding to an improvement in Consumer Confidence there. On the negative side, ZAR is under the gun today, down 0.8%, after lower than expected CPI readings (4.1%, 4.0% core) indicated that the SARB will be less aggressive tightening monetary policy, or perhaps, more aggressive loosening it.

In fact, today has all the hallmarks of a modest risk-off session as we have seen both Treasury and Bund yields slip about 3bps, gold prices rise 0.35% and equity markets come under pressure after earnings data has shown at least as many disappointments as beats. As I type, US futures are lower by 0.3% while there is weakness in the CAC (-0.6%) and both Italian and Spanish markets, and the DAX is the outperformer at unchanged on the day.

On the data front, yesterday’s Home Sales were mildly disappointing, falling a more than expected 2.2%, and there is nothing of real note this morning. That points to a day where absent a tweet from the White House, or a significant change in the Brexit debate in Parliament, FX will take its cues from the equity market and the ongoing earnings releases. The better the earnings, the more likely that risk will make a comeback and the dollar drift lower. The reverse is also true. But in the end, we are all beholden to other catalysts while we await next week’s FOMC meeting.

Good luck
Adf

 

Kind of a Treat

Posted on by

For Boris, what looked like defeat
Is actually kind of a treat
For later today
His bill makes its way
Through Parliament, it to complete

The Brexit drama continues today, but it has become clear that Boris is moving toward a win, politically at least. The schedule today is for Parliament to debate and then hold its first vote on the actual legislation that would put Brexit into law. When Speaker of the House Bercow would not allow a second vote on the broad idea of accepting the new terms, it forced the PM to set out the new law’s details for a vote. And that is exactly what he has done. The goal is to get final approval by Thursday evening in the House of Commons, at which point it will go to the House of Lords for final approval. While the Lords have not been supportive of Brexit overall (after all, they have all benefitted greatly from the current situation) if it passes the House of Commons, it is expected to pass there as well. It is unquestionable that if this schedule holds up, the EU will pass the bill as well, and Brexit will be complete.

While there are still many potential pitfalls, the market has become pretty clear that they no longer believe in the idea of a no-deal Brexit. That is why we remain hovering around the 1.30 level instead of the 1.22 level we saw for most of the summer, when it seemed that all Boris wanted was to leave, and he was willing to leave without a deal. But even if there is a delay, it seems to me that Boris has the upper hand in any election that comes. He has done what he promised, negotiated a new treaty with a substantially better outcome than former PM May’s Irish backstop. The new bill puts the power of remaining tied to the EU in the hands of Northern Ireland, not the EU. There may yet be a second referendum, and there will almost certainly be an election before the end of the year, but at this point, Boris outflanked all the opposition. I strongly believe that a negotiated Brexit is coming to a screen near you before the year ends, and that the pound is going to have an opportunity to rally much further. At this point, a move to between 1.35-1.40 seems quite probable, although eventually I expect the dollar to reassert itself globally.

However, this is all speculation about the future, albeit the near future. For today, though, FX markets have continued to digest the news and the pound has been trading either side of yesterday’s closing levels. Currently, it is unchanged on the day, although there is an opportunity for movement this afternoon as the bill wends its way through Parliament’s byzantine process. At approximately 2:00pm, a vote is expected which will determine if the new bill has a chance to get passed. I think a ‘no’ vote will have a temporary negative impact on the pound, but am hard pressed to see Sterling sink below 1.28. If the vote is yes, then look for the pound to start to appreciate further as the market anticipates a conclusion to the process soon.

Away from Brexit, President Trump hinted that the ongoing trade talks are moving in the right direction and the market has assumed that the “initial phase” deal will be signed at the APEC meeting in Chile next month when presidents Trump and Xi are scheduled to meet.

So combined with the positive Brexit vibes, it appears two of the key geopolitical issues that have been hindering the global economy may be coming to a positive resolution. That certainly bodes well for economic growth, but it is unclear if it will be enough to turn the tide. First, neither one is actually complete yet, so this is all anticipation; and second, we have seen a significant slowdown in global manufacturing that will not simply rebound instantly. Even if business confidence improves sharply, it still takes time to formulate and implement new plans for business expansion. This implies that the current monetary policy framework is not going to be reversed any time soon.

Speaking of monetary policy, Thursday Signor Draghi presides over his last meeting as ECB president. After last month’s rate cut and restarting of QE, there are no expectations for further actions at this meeting. The one thing of which you can be sure is that he will complain about the lack of fiscal stimulus being implemented by the nations that can afford it (read Germany). But you can also be sure that the Germans are not about to change their plans.

But let us discuss one of the key problems in the Eurozone for a moment, the inconsistency between fiscal dogma and political will. While it is now de rigeur to claim that nations need to turn on the fiscal pumps, the European Commission has sent letters to Italy, France, Spain, Belgium and Portugal telling them not to spend so much money next year. In other words, despite desperate pleas to increase spending, they are going to prevent five nations seeking to do so, from accomplishing their goals. If you ever wondered why there is such fundamental bearishness on the euro and its construction, this situation could not be more informative. It is a key reason I believe the long term prospects for the single currency point lower.

To markets: FX has had another generally dull session overnight with the dollar just slightly firmer against most counterparts, but with movements generally less than 0.20%. In other words, there is little if any information in the price movement, which is likely a response to recent dollar weakness. Equity markets in Asia flourished after the US rally yesterday, but in Europe they can only be described as mixed. Meanwhile, US futures are pointing slightly lower, although not enough to imply very much. Treasury yields are a few bps lower, as are Bund yields, but the reality is that they have been pretty stable for the past two weeks and traders seem to be looking for the next real catalyst (FOMC anyone?).

Yesterday’s Canadian election had little impact on the Loonie, although PM Trudeau is returning with a weakened mandate in a minority government. That said, north of the border the economy has been performing pretty well, certainly well enough such that there seems to be no reason for the BOC to follow the Fed and cut rates next week alongside the Fed.

As to data this morning, Existing Home Sales (exp 5.45M) are unlikely to quicken any pulses, and with the Fed in its quiet period, quite frankly, I see a very quiet session until this afternoon, when the results of the first Brexit votes in parliament have an opportunity to spice things up a bit.

Good luck
Adf

 

Make Boris Bend

Posted on by

As Parliament seeks to extend
The timeline, and make Boris bend
The market’s decided
The deal he provided
Will ultimately pass in the end

Well, Brexit is still the number one topic in markets, although after a quiet Friday on the trade front, we got more discussion there as well. As to Brexit, Boris lost his fight to get a clean vote on the newly renegotiated deal on Saturday. Instead, Parliament voted to force a request for an extension, which at this moment the EU is considering. Interestingly, in the EU there are a number of countries that seem ready to be done with the process and no longer care if the UK exits. However, as sweet as that would be for the Brexiteers, in the end that would require courage by the country(ies) who voted no. And courage is something in short supply at the top of European (and most) governments. At any rate, given the speed with which this story changes, this morning the word is that Johnson has found the votes necessary to get his deal through Parliament, but it means that he has to get another vote. The roadblock there is in the form of John Bercow, the Speaker of the House of Commons, who has proven himself to be a virulent Bremainer, and wants nothing more than to see Boris fail.

With that as background, one might have thought the pound would have suffered, but the market has looked through all the permutations and decided that a deal is forthcoming in the near-term, or perhaps more accurately, that the odds of a no-deal Brexit have been significantly reduced. This is evident in the fact that as I type, the pound is essentially unchanged since Friday’s optimistic close at 1.2980, and has traded above 1.30 earlier in the session for the first time since May (the month, not the former PM).

However, I think the euro’s performance has been far more interesting lately. Consider that despite an ongoing run of generally awful data, showing neither growth nor inflationary impulse, the single currency continues to climb slowly. A part of this is likely a result of what has been mild dollar weakness amid increasing risk appetite. But I think that the market has also begun to recognize that a Brexit deal will remove uncertainty on the continent and the euro will benefit accordingly. From the time of the referendum in 2016 I have made it clear that Brexit was not just a British pound story, but a euro one as well. And this slow appreciation (EUR is higher by 2.7% this month, about 0.7% more than the dollar index) is a belated reaction to the fact that a Brexit deal is a benefit there as well. At any rate, much of this story is yet to be written, and a successful outcome will almost certainly result in further GBP outperformance, but the euro is likely to continue this grind higher as well.

On the trade front, comments from Chinese vice-premier Liu He explaining China would work with the US to address each other’s core concerns and that ending the trade war would be good for everyone were seen as quite positive by equity and other risk markets. In fact, the combination of optimism on the two big issues of the day, trade and Brexit has led to a clear, if modest, risk-on session. Equity markets in Asia performed well (Nikkei +0.25%, CSI 300 +0.3%), and we are seeing modest gains throughout Europe as well (DAX +0.7%, CAC +0.15%). It is certainly a positive that the trade dialog continues, but I fear we remain a very long way from a broad deal.

Another weekend event was the World Bank / IMF meetings in Washington with the commentary exactly what you would expect. Namely, everyone derided the trade war and explained it would be better if it ended. Everyone derided Brexit and said it would be better if it didn’t happen. And everyone explained that it’s time for fiscal policy to step up to the plate to help central banks. What has become very clear is that central banks are truly running out of room to help support their respective economies but it is impolitic to say so. This results in exhortations for fiscal policy pushes by those who can afford it. However, Germany remains resolute in their belief that there is no reason to implement a supplementary budget of any kind and that continuing to run a budget surplus is the best thing for the nation. Look for pressure to continue to build, but unless growth really starts to crater there, I don’t expect them to change their views, or policies.

A look around the rest of the FX market shows that the biggest gainer this weekend was KRW, rising 0.8% on optimism that a trade deal between the US and China was closer. Certainly it was not the terrible data from South Korea that helped the won rally, as exports in October have fallen nearly 20%, making eleven consecutive monthly declines in that statistic. Otherwise, the mild risk-on atmosphere has helped most EMG currencies edge higher. On the G10 front, NOK is the big winner, rising 0.55%, although that simply looks like a reaction to its sharp declines over the past two weeks.

On the data front it is extremely quiet this week as follows:

Tuesday Existing Home Sales 5.45M
Thursday Initial Claims 215K
  Durable Goods -0.7%
  -ex Transport -0.3%
  New Home Sales 701K
Friday Michigan Sentiment 96.0

Source: Bloomberg

Arguably, Durable Goods is the most interesting number of the bunch. And after a two-week deluge of Fed speakers, they have gone into their quiet period ahead of next Wednesday’s meeting. The final comments by Kaplan and Clarida were similar to the previous comments we heard, namely that the economy is in a “good place” and that they are essentially going to play it by ear on the next rate decision. As of this morning, the market is still pricing in an 89.5% probability of a rate cut.

Speaking of low rates, Signor Draghi presides over his last ECB meeting this week and while there are no new policies expected, it is universally anticipated that he will renew his call for fiscal stimulus to help the Eurozone economic outlook. Quite frankly, I think it is abundantly clear that the ECB has completely run out of ammunition to fight any further weakness, and that Madame Lagarde, when she takes the seat on November 1, will feel more like Old Mother Hubbard than anything else.

For the day, I see no reason for the risk-on attitude to change, and if anything, I imagine we can see more positive news from the UK which will only help drive things further in that direction. While in the end, I still see the dollar performing well, for now, it is on its back foot and likely to stay there for a little while longer.

Good luck
Adf

Pledges Bestowed

Posted on by

In China, the pace of growth slowed
Which highlighted how hard the road
Is going to be
For President Xi
To live up to pledges bestowed

With the Brexit situation now up to Boris Johnson’s domestic political machinations, finding the required 326 votes to pass his agreed deal with the EU, the market’s attention has turned elsewhere. It should be no surprise that China is the topic, this time based on the data released last night. While the trajectory of growth in China has been slowing quite consistently for the past ten years, last night’s 6.0% GDP result was weaker than expected and indicates that perhaps, that slowdown is accelerating. Alongside the GDP data, the other three key monthly data points; IP (5.6% YTD), Fixed Asset Investment (5.4% YTD), and Retail Sales (8.2% YTD) showed a mixed bag versus expectations, although generally all point to continuing slower growth. The trend in China is downward. On the one hand, this should not be surprising. After all, the larger the base size of an economy, the harder it is to grow rapidly. On the other hand, despite significant government control over the entire economy, it is becoming clear that the combined fiscal and monetary stimulus measures China is using are, so far, not up to the job of upholding President Xi’s targets.

Regarding the trade talks, this simply adds to pressure on Xi to find a deal. Despite his title as President for Life, there are clearly still many domestic political issues with which he must deal, and failure to bring about promised growth will be quite problematic. As many pundits have already described, the reality is that both sides need a deal given the fact that the eighteen month long trade spat has started to drag down both the US and China in terms of GDP growth. Interestingly, the PBOC fixed the renminbi stronger last night, although both the onshore and offshore yuan are trading weaker by about 0.1% this morning. Overall, though, the trend for the renminbi has been for modest weakening over time. Regardless of promises to manage the currency, the reality remains that China needs their currency to weaken as a relief valve for internal pressures. An interesting aside is that there is some evidence based on the errors and omissions portion of the Chinese accounts, that capital continues to flow out of China pretty aggressively, despite the capital controls imposed in the summer of 2015. Eventually, if that is true, USDCNY is going to go higher. I continue to look for an eventual move toward 7.40, but it may take longer than the end of this year as I previously thought.

However, beyond the Chinese data story, FX has been a pretty uneventful place to be overnight. G10 currencies are generally slightly firmer vs. the dollar, but we are only looking at the biggest mover, SEK, having rallied 0.3% this morning after a more substantive 1.3% rally yesterday. It seems that despite higher than expected unemployment data, there is concern that data may be faulty and the Riksbank may still have room to raise interest rates at their next meeting, or by the end of the year at the very least. But away from that story, there is nothing of real note in the G10 space.

And in truth, that is pretty much the situation in the EMG space as well. TRY is the leading gainer, higher by 0.85% after the cease-fire on the Syrian border went into effect. Elsewhere, both ZAR and KRW are firmer by 0.5% with the won benefitting from comments by Treasury Secretary Mnuchin that he may request an auto tariff exemption for South Korea. Meanwhile, the rand is the beneficiary of profit-taking after recent weakness in the currency, as traders and investors await the latest information on the Eskom situation in a government briefing later today.

For the rest of the day, while we wait to hear any tidbits from the UK, there is only one data point, Leading Indicators (exp 0.0%), and then we hear from three more Fed speakers, the uber-hawk, Esther George, as well as Richard Clarida and Robert Kaplan. So far this week we have heard the consistent message that the FOMC is watching the data closely but has not yet made up their mind if another cut is necessary right away.

In truth, it is shaping up to be an uneventful day to finish the week. The dollar is a bit soft, equity futures are little changed, as are equity markets throughout Europe, and Treasury yields are within 1bp of yesterday’s levels. Unless there is a tape bomb, it is hard to see a reason for a big more from current levels.

Good luck and good weekend
Adf