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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At Best, Second Rate

The firm that defined what was great
Has run into trouble of late
GE used to be
A great company
But now it’s, at best, second rate

Maybe the biggest headline overnight was the fact that GE, an original member of the Dow Jones Industrial Average in 1907, is being dropped in favor of Walgreens at the end of the quarter. Oh how the might have fallen! This is stunning in that in 2000, it was the most valuable company in the world with a market cap of $548 billion. And while this is not likely to have a broader impact on anything, I think it is indicative of the changes that the global economy has undergone, especially recently.

The other story that really jumped out was the agreement between German Chancellor Merkel and French President Macron that the EU ought to have a common budget, a huge change for Merkel, as the two of them seek ways to prevent the entire bloc from falling apart. This has been a key sticking point for the Germans as they are concerned that they will be forced to fund the profligate habits of Italy, Greece, Spain, Portugal and even France. However, given the unraveling of the post WWII order that seems to be under way, and Merkel’s intense desire to maintain that order given how much it has benefitted Germany, I guess the time was right to concede a major point. If the entire EU ratifies this, then I see it as a significant long-term positive for the single currency. And while there is a long way to go before that happens, it is at least a first step.

Given the dearth of news, it ought not be surprising that markets overnight have been quiet. The dollar is little changed overall with gainers and losers about equally split. Treasury yields are higher by a single basis point and equity markets have rebounded very modestly from a run of negative days.

Looking at specific news, the UK leads with a better than expected CBI Industrial Trends report printing at 13, well above expectations of just 1 and a large jump from last month’s -1. It seems that the recent weakness in the pound has once again encouraged UK manufacturing. Speaking of the pound, it continues to be undermined by the declining probability of a rate hike in August, now estimated at just 43%, and by the ongoing Brexit bill debate in the House of Commons, where a loss for PM May might well bring down her government.

The euro has not had any data released of note, but ECB President Draghi, speaking at the Sintra conference, made a surprising statement indicating that the ECB could restart QE if the economy reversed course and weakened again. This is a far cry from last week’s discussion of the end of QE by December, and speaks to the fact that the doves on the ECB are still a voice to be reckoned with. The euro dipped when the statement hit the tape, but given how much it has fallen lately, and the positive possibilities from the Merkel-Macron announcement, it is only down 0.15% this morning.

However, beyond that, there is precious little to discuss today. Existing Home Sales from the US (exp 5.52M) is the only data point and rarely a market mover. Chairman Powell will be speaking in Sintra in a few hours, so the market will be very focused on his speech. However, there has been no data to suggest that he is going to change his view on the US economy nor his attitude about normalizing monetary policy. It appears that policy divergence will remain the driving force in currency markets for a little while yet.

Taking everything into account, while today doesn’t augur any significant movement, continued gradual strengthening of the dollar seems to still be the best bet. Manage your risks accordingly.

Good luck
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Ten More Percent!

Said Trump in his latest lament
That his tariffs, he soon would augment
If China reacted
So they then enacted
Their own. Trump said ‘ten more percent!’

Clearly the biggest story overnight was the announcement by the Trump administration that they would seek to enact a 10% tariff on a further $200 billion of Chinese goods. The president remains adamant that China does not play by the rules and that the US is bearing the brunt of their mercantilist policies. This is not the venue for that discussion, but certainly the numbers show that US companies have been unable to expand their market share in any meaningful way on the mainland, hence the $376 billion trade deficit in 2017.

Market reaction to the announcement was immediate. Asian markets saw equities fall sharply (Nikkei -1.9%, Shanghai -3.8%), Treasuries rally (US 10yr yields -6bps to 2.87%) and the dollar move higher (EUR -0.65%, CNY – 0.4%) against virtually all currencies except the yen (+0.6%), which benefitted from safe haven flows. US equity futures are pointing lower as both Dow and S&P futures are down more than 1.2%. Commodity prices have also suffered, with energy and base metals lower and only gold holding its own this morning. If you didn’t remember what a risk-off scenario looked like, this is it. My observation is that the market reaction appears to be in the right direction, but I wonder just how much further things can move at this time. It strikes me that we have seen quite an exaggerated move thus a retracement seems more likely in the short run than an extension. Granted, if the latest set of tariffs are actually enacted markets are likely to suffer more, but for now, I kind of think we have seen the worst.

The Lords said a “meaningful vote”
Is a must as they seek to promote
A Brexit that’s gentle
And not detrimental
To constituent interests of note

The other story that has impacted markets was a successful vote in the House of Lords requiring that Parliament have a “meaningful vote” in any Brexit outcome. The intent is to prevent the UK from exiting the EU with no deal, but the May government claims it will hinder their negotiating leverage. The bill in question now heads back to the House of Commons where the vote is expected to be extremely close. In the meantime, the pound has taken it on the chin, down 0.5% and now trading at its lowest level since November. Interest rate futures in the UK have now reduced the probability of an August rate hike by the BOE to less than 50%, which given the increased uncertainty over the Brexit situation makes a great deal of sense. I have maintained that the BOE would not be raising rates because of Brexit, and now that the UK data seems to be showing a slowdown in the economy, and reduced inflationary pressures, I expect to be proven correct. There is just no way that Governor Carney can raise rates with Brexit hovering over the UK economy like the Sword of Damocles. The pound has further to fall, count on it.

Beyond that, I need to catch up on one thing, USDBRL, which fell sharply during last Friday’s session after the central bank, once again, aggressively intervened in the market adding dollar liquidity. Yesterday saw limited movement, but ultimately, the issue remains that the combination of underlying economic weakness and the uncertainty caused by the upcoming presidential election is encouraging international investors to withdraw funds. At some point, the central bank will realize that wasting reserves to protect the currency is a bad idea, but for now, they are clearly keen to prevent too much further weakness. If I had BRL receivables or assets to hedge, I think I would take advantage of the current levels as I expect that a move in spot to 4.00 and beyond is inevitable.

Also, I would be remiss if I didn’t mention a speech by Mario Draghi at the Sintra conference, explaining that the ECB would be patient as they determine the timing of the first rate hikes. That was an even more dovish spin to his press conference last week, and traders did sell the euro further when the comment hit the tape. But really, those are the key stories. Other than the yen, the dollar is stronger vs. all its major counterparts. And while some have seen larger moves than others, there was very little other news of note. So oil-linked currencies (RUB, MXN) have fallen more than those with less exposure to that sector, but really, that is all part of the same story.

This morning brings US housing data with Housing Starts (exp 1.31M) and Building Permits (1.35M) both released at 8:30. But that’s really it. St Louis Fed president Bullard speaks early and there are a few ECB speakers, but with Draghi out of the way and Powell not until tomorrow, I actually expect that today’s price action will be consolidative.

Good luck
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Trying To End Doublespeak

A recap of actions last week
Shows Draghi maintains his mystique
While Powell, Jerome
Seems much more at home
In trying to end doublespeak

It is a remarkably dull session this morning, with both the dollar and most major government bond markets little changed. Market participants are still coming to grips with last week’s three central bank actions, and their ramifications going forward.

In essence, we learned that the Fed will not be deterred in its efforts to normalize monetary policy as the US growth story remains quite robust, and more importantly, both inflation and unemployment, the Fed’s two key metrics, are now at levels that represent an economy with the potential to overheat soon. And while there are a growing number of voices that are concerned that the Fed’s ongoing balance sheet reduction is having a particularly severe impact on certain emerging market economies, the Fed, thus far, remains unconcerned.

We also learned that the ECB is still highly uncertain over the future, but is dealing with a great deal of internal turmoil due to the two-speed economy they oversee. Northern Europe continues to significantly outperform the southern periphery and has seen its economic metrics improve to the point where a more normal monetary policy stance is appropriate. However, the PIGS are still wallowing in their domestic-led problems, with slower growth, much higher unemployment and almost no inflationary pulse. Ongoing easy money is critical in keeping any growth momentum alive there. Thus Draghi continues to walk a fine line to keep both sides happy. Many lauded his efforts Thursday, but the biggest concern remains that the ECB is going to find itself with no ammunition to fight the next broad economic downturn if they don’t get policy normalized soon. And Draghi just promised to keep interest rates negative at least until 2020. Even optimists feel that a recession is likely by then.

Finally, Kuroda-san has no choice but to continue QE and keep targeting a 0.0% yield on 10-year JGB yields. While unemployment remains quite low there, Q1’s sharp decline in GDP growth and the continued lack of inflation argue that there is no reason to look for a change in policy here anytime soon.

Keeping all that in mind, here’s what we can expect looking ahead. This week, perhaps the biggest story is the BOE meeting on Thursday, although it seems highly unlikely that they will change policy. Earlier expectations for a rate hike have been all but eliminated, and the probability for an August move continues to fall as well. The Brexit story remains the dominant theme there, and nothing has occurred on that front which implies a solution is any nearer. I continue to believe that the BOE will not adjust rates again before Brexit has occurred, and that the next move will be taken by Governor Carney’s successor.

Trade discussions will continue to be an important part of the market narrative, especially given that we have seen the imposition of the first round of tariffs by both the US and China. Equity markets are clearly unhappy with this, and there is no question that the chance for escalating trade issues has put a cloud over the global economy. We have already seen both MXN and CAD underperform pretty significantly as the NAFTA negotiations drag on, with trade issues the unambiguous driver there. Interestingly, this morning CNY is weaker by 0.3% and is actually back to its weakest level since mid-January. I have maintained all year that I expected a weaker yuan as the currency remains one of the most likely release valves for pressures in the Chinese economy. As the PBOC continues to squeeze over-leverage out of the market while supporting slowing economic growth, a weaker currency is an important tool in the process. Look for this trend to continue.

The data calendar this week is sparse:

Tuesday Housing Starts 1.31M
  Building Permits 1.35M
Wednesday Existing Home Sales 5.50M
Thursday Initial Claims 220K
  Philly Fed 20.0

Quite frankly, none of these seem likely to change opinions much. However, we do hear from six Fed speakers, including Chairman Powell on Wednesday. Now, given that we just heard from them, it seems unlikely that there will be much new news, but it is possible that there will be an attempt to fine-tune some of the thoughts. Thursday, as well as the BOE, is also the ECB’s answer to Jackson Hole with their Sintra, Portugal conference. Last year, Signor Draghi shook up the markets with what was a quite hawkish view, and the euro did rally in the wake of the comments. However, this year, given what we have just heard from all the major central banks, my sense is that there will be much less impact on markets. In fact, I expect the whole week to be pretty dull, with modest movement anywhere.

Good luck
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Not Yet Done For

Continued patience
With the current policy
Sets Japan apart

Meanwhile from the Latvian shore
The ECB told us some more
By year end QE
Will definitely
Be gone, but NIRP’s not yet done for

As promised, this week has been eventful, but my sense is that despite a bit more data this morning, we have seen the bulk of the movement we are going to see. A quick recap may be in order. First, on Tuesday US CPI printed at 2.8% headline, 2.2% core, demonstrating that the inflation story in the US continues to grind higher and keeping pressure on the Fed to do something about it. And they did, increasing rates 25bps on Wednesday and explaining that the median FOMC member forecast has risen to four rate hikes this year from three at previous meetings. Then Wednesday night, Chinese data managed to disappoint across the board, which explains why the PBOC didn’t raise rates in sync with the Fed; too many domestic problems to worry about keeping up with the Joneses. Which brought us to yesterday’s ECB activity where they told us that QE was going to be reduced to €15 billion per month for Q4 of this year, and then end. But they also told us that the current negative rate structure would be in place “at least through [my emphasis] the summer of 2019.” This was taken as a very dovish stance by the ECB and when combined with yesterday’s blowout Retail Sales number in the US (+0.8%, +0.9% ex autos) set the stage for the dollar to rally sharply. In fact, the euro fell 1.9% yesterday, its largest decline since the Brexit vote almost exactly two years ago.

Finally, the overnight session had the BOJ leaving policy on hold, as expected, with no indication that they are going to change things until they start to see inflation. Given that headline inflation in Japan is running at 0.7%, my sense is the BOJ is going to be targeting a 0% interest rate on 10-year JGB’s for quite a while yet. And that means that monetary policy divergence between the BOJ and the rest of the world is going to continue to expand.

But that’s not all! We also now have to deal with the trade situation again, as the US is set to impose tariffs on $50 billion worth of Chinese goods starting as soon as next week, and the Chinese have vowed to respond immediately in kind. While there seemed to be a period where the trade situation may not spiral out of control, unfortunately that no longer seems to be the default option. It is not clear who is going to blink first, but until one side does, I expect that we are going to see increased concern by investors and some pressure on equity markets.

And I didn’t even mention emerging markets here, where ARS fell an impressive 6.5% yesterday, while BRL fell 2.25%. The former was afflicted by the onset of a truckers strike along with changes at the central bank that were seen as unhelpful to the government’s quest to stabilize the economy. Meanwhile, BRL had been the beneficiary of a massive intervention by the BCB, but as is always the case, the impact of something like that wanes over time. USDBRL is still very likely to trade to 4.00 and beyond before long. Meanwhile, after a 1.8% decline of its own yesterday, MXN is actually rebounding a bit this morning, up 0.5%. However, as trade tensions continue to flare, I expect that the peso, along with its LATAM counterparts, has further to fall.

Looking across the rest of the market, after yesterday’s substantial dollar rally (the dollar index rose 1.3%) it is no surprise to see many currencies consolidating those losses and the dollar is slightly softer this morning. So the euro has regained 0.2%, the pound 0.15% and the rest of EEMEA is up by similar amounts. APAC currencies generally fell overnight following yesterday’s US session, but I expect that when those markets open again Sunday evening, we will see a modest retracement there as well.

As to today, the last data of this eventful week brings us IP (exp 0.1%); Capacity Utilization (78.0%); Empire Manufacturing (19.1) and Michigan Sentiment (98.5). In truth, this data should be important as an indicator of how the economy is doing, but given both the remarkable week that we have already had, and the fact that eyes remain focused on the central banks directly, and not so much the underlying data, I expect that it will have only a limited impact at best. Rather, I expect that more consolidation is in order, and that the dollar could drift a touch lower to close the week.

Good luck and good weekend
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Let Me Be Clear

Said Powell, beginning next year
More frequently from me, you’ll hear
But that doesn’t mean
We’re any more keen
To raise rates, please let me be clear

“Growth is strong. Labor markets are strong. Inflation is close to target.” So said Chairman Powell yesterday in the wake of the FOMC raising rates by 25bps such that Fed funds are now 1.75%-2.00%. While the market was virtually certain this would occur, the Fed was still able to surprise with some of its actions.

First, there are now eight members of the Fed who anticipate a total of four rate hikes this year, up from seven at the last meeting, and thus the median forecast is now set at four. Arguably, the changing view of one member shouldn’t make that much difference, but it underscores the fact that the committee recognizes the chance that growth in the US could lead to an overheated situation. Remember, inflation data continues to grind higher and shows no sign of slowing down. In fact, Tuesday’s 2.8% headline CPI print was the highest since 2011.

In addition, they reduced their forecast for unemployment this year to 3.6%, down from the previous estimate of 3.8%, and yet they continue to believe that NAIRU is 4.5%. That means they expect an even larger gap, and given their favored models, expect that wages are going to continue to rise and drive inflation with them.

Finally, Chairman Powell explained that beginning in 2019, there would be a press conference following every meeting, not every other meeting. Given the pattern we have seen since press conferences were instituted in 2011, that policy changes are only made during press conference meetings, arguably this means that every meeting is truly ‘live’. While Powell downplayed this concept, describing it merely as an effort to improve communications, the market clearly sees this as the key ramification.

And they made one other, technical change; they raised the IOER rate by only 20bps, leaving it at 1.95%. Prior to this, IOER had been pegged at the top of the FOMC range for Fed Funds, but recently, actual Fed Funds trading had been pushing the rate to the top, and sometimes beyond the Fed’s target. This may well be the first inkling that the Fed has managed to engineer a liquidity shortage between raising rates and their shrinking balance sheet. This is exactly what emerging market central bankers have been complaining about, and one of the key concerns about Fed policy going forward, namely, just how large is the Fed’s balance sheet going to be when they achieve a neutral status in policy.

While nobody knows the answer to that question, it seems that guidance from banking regulators has been pushing for banks to favor excess reserves over Treasury bill positions as a better liquidity buffer on their books. This will have two effects; first the demand for Treasury bills is likely to decrease at the margin thus driving yields there higher; and second, the Fed balance sheet is likely to remain quite bloated and they are likely to end the balance sheet runoff process sooner than currently expected. Consider the following: prior to the financial crisis, the Fed’s balance sheet was approximately $900 billion. When they completed all their QE purchases, it had grown to be $4.5 trillion. With the implementation of the strategy to normalize policy starting back in October, it has fallen to ~$4.3 trillion and most economists have been expecting that to continue until it reaches somewhere in the $2.5 trillion – $3.0 trillion level. However, if banks continue to demand reserves rather than T-bills, it is possible that when the balance sheet reaches $3.5 trillion, that will be the end of that program. So despite much new information regarding the Fed, there is still a great deal yet to be determined.

One other noteworthy event was the fact that the PBOC did NOT raise its repo rate after the Fed yesterday, something that surprised the market. It seems that the Chinese economy is slowing a bit more rapidly than they would like, and therefore higher rates are not called for. Remember, the PBOC is walking the fine line between reducing leverage in the Chinese economy, and still supporting growth. Last night’s Chinese data showed that Fixed Asset Investment, Retail Sales and IP were all disappointingly lower than expected and seem to indicate that the PBOC may be leaning too heavily on the leverage button. The upshot is that CNY is a bit firmer this morning, rising about 0.3% since this time yesterday.

Of course, this morning brings the ECB, where the big question is whether they will describe their view as to the timing of the end of QE, or whether they will wait until their next meeting in July. My money is on July, as Draghi will fight vigorously to get as much time as possible to see how the Eurozone economy is faring. For example, yesterday’s Eurozone IP data showed yet another decline (-0.9%), the fourth in the past five months, and yet another sign that the slowdown in Q1 was not aberrational, but rather this is the new trajectory. Combining the slowing data with the ongoing concerns over how the new Italian government addresses its finances, I think they will want to wait to the last possible second to make any decisions. The ECB’s problem is that if the growth story in the Eurozone is truly slowing again, and GDP is heading back to 1.5%, it will be that much harder for them to end QE.

With all that said, I would argue the market is expecting the announced end of QE which is one of the reasons that the euro is firmer this morning, up 0.3%. In fact, the dollar, despite what appeared to be a pretty hawkish Fed, is softer across the board. The pound has been the biggest beneficiary (+0.45%), as UK Retail Sales data was much better than expected, rising 1.3% in May. But the dollar is soft everywhere. Stronger Japanese IP data helped the yen rally 0.3%. Inflation data that continues to edge higher around the world has helped underpin many currencies, both G10 and EMG, with the only laggards the ones we would expect, TRY, BRL and INR.

But for now, all eyes are on the ECB. With the Fed out of the way and the BOJ yet to come tonight, traders are continuing to digest the information from this extremely busy week. Given where I believe expectations are, it seems to me the risk is for the euro to retrace its gains as if I am correct about the ECB delaying the decision to end QE, the market will infer that there are other issues under consideration by Draghi and friends.

I would be remiss if I didn’t mention US Retail Sales data is to be released this morning (exp 0.4%, ex autos and gas 0.4%) as well as Initial Claims (224K), but I don’t think anyone will be paying attention unless the number is a blowout. Instead, today is Mario’s day.

Good luck
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Splendid

The summit in Singapore ended
And President Trump called it splendid
More talks will ensue
To seek a breakthrough
On nukes while Korea’s defended

Despite all the headlines it made
Most markets, no movement displayed
For traders instead
What’s crucial’s the Fed
And how policy is portrayed

The major headlines this morning revolve around the historic summit meeting between President Trump and North Korean leader, Kim Jong-un. While the President portrayed the outcome as “fantastic”, it remains to be seen how much progress was actually made. Nonetheless, it is a promising first step on what is likely to be a long road. Market response was muted as there was very little information given, but one would expect that if things really do proceed toward a North Korean denuclearization, it would only be a positive for risk assets. However, this is certainly going to take time, and I expect that the market will largely ignore the process until something concrete occurs.

Turning to more immediate market concerns, this morning’s CPI report will garner all the attention. Expectations are for the headline number to rise 0.2% (2.8% Y/Y) with the core rate also expected at +0.2% (2.2% Y/Y). There is no question that inflation in the US is on an upward trajectory. The key question is how will the Fed respond? Based on the Minutes of the May FOMC meeting, where there was ample discussion on the symmetry of their 2.0% target, it seems clear that the Fed is not likely to panic in the near term. However, arguably the only thing that has changed is the level at which market uncertainty starts to enter the equation. It used to be that markets started tightening policy as inflation rose toward 2.0%. Now that level is arguably going to be something like 2.3% or 2.4%, but if inflation continues to rise, the market will respond eventually.

Pivoting to the Fed, tomorrow’s 25bp rate hike is already baked in. The questions here are will the statement imply one or two more interest rate hikes this year, and how high will estimates of the terminal rate rise. Chairman Powell will almost certainly face pointed questions at the press conference regarding the Fed’s impact on emerging markets as well as what levels of inflation will make the FOMC uncomfortable. However, I imagine he will dismiss EMG issues and give no concrete answers regarding inflation. Based on all that I have read so far, I think the Fed is very comfortable with their current interest rate path, and will need to see significant market upheaval to consider changing things. Remember, February brought some pretty decent market volatility and that did not dissuade the Fed from raising rates in March. Current market conditions are far more benign, so it seems unlikely that things are going to change in Washington any time soon.

Looking at the overnight activity, the dollar is little changed overall. The euro is essentially unchanged despite a much weaker than expected Gernan ZEW report (Economic Sentiment fell to -16.1). At the same time, despite somewhat better than expected employment data from the UK, the pound has barely benefitted. In fact, the only currency that has shown any movement of note in the G10 space is CAD, which continues its recent decline and is down a further 0.3% with the dollar trading back above 1.30 again. This level has proven to be pretty dollar formidable resistance over the past six months, but given the driver this time seems far more Canada specific (trade tensions with the US), I suspect we could see this move continue in the short run.

Meanwhile, in the emerging market space, far more currencies have fallen slightly vs. the dollar than risen, but the magnitude of the movement has been quite small. Notably, the Turkish lira, after a sharp rally late last week on the central bank’s moves, has given back all of those gains. Other problem children include MXN, which has fallen 1.5% since Friday, back to its recent lows and ARS, which has fallen another 2.7% and is making new historic lows. The point is that the underlying questions involving emerging markets have not been addressed, and the opportunities for further movement are manifest. But it doesn’t seem they will be answered today.

Given the proximity of the central bank meetings, once the inflation data is out of the way, it would be surprising if we saw too much movement ahead of the FOMC announcement. As things currently stand, nothing has changed my view regarding the fact that the cyclical factors for the dollar, namely short term interest rates and positive economic signals, continue to outweigh the structural factors, the growing twin deficits and ensuing growth in debt, and so the dollar ought to continue to benefit for a while yet.

Good luck
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