Author Archives: fxpoet

Gone Astray

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There once was a banker named Jay
Who, for a few weeks, had his way
Stock markets rose nicely
But that led precisely
To things that have now gone astray

Protagonists now can’t discern
What’s safe or what assets to spurn
Their hunt for more yield
Has finally revealed
That risk is attached to return

Apparently, when the Fed cuts rates, it is not a guarantee that stock prices will rally. That seems to be yesterday morning’s lesson in the wake of the Fed’s “surprise” 50bp rate cut. After a brief rally, which lasted about 15 minutes, the bottom fell out again as investors and traders decided that things were actually much worse than they feared. In addition, Chairman Jay did himself no favors by opening the kimono a bit and admitting that there was nothing the Fed could do to directly address the current issues.

This is a real problem for the global central bank community because the Fed was the player with the most ammunition left, and they just used one-third of their bullets with a disastrous outcome. Ask yourself what more the ECB can do, with rates already negative and QE ongoing. They have no more bullets left, just the whispering of sweet nothings from Madame Lagarde to Eurozone FinMins to spend more money. If the data turns further south in Europe, which seems almost guaranteed, I would look for a suspension of the Eurozone rules on financing and deficits. After all, Covid-19 was not part of the bargain, and this is clearly an emergency…just ask Jay. Japan? They are already printing yen as fast as they can to buy more assets, and will not stop, but are unable to achieve their goals.

Arguably, the only central bank left that matters, and that has room to move is the PBOC, which has already been active adding liquidity and trying to steer it to SME’s. But if the pressure continues on both the Chinese economy and its markets, they will do more regardless of the long-term debt problems they may exacerbate. We have clearly reached a point where every central bank is all-in to try to stop the current stock market declines. And you thought all they cared about was money supply!

So, what about a fiscal response by the major economies? After all, to a man, every central bank has explained that monetary policy is not the appropriate tool to address the current economic and market concerns. As Chairman Jay explained in his press conference, “A rate cut will not reduce the rate of infection. It won’t fix a broken supply chain. We get that, but we do believe that our action will provide a meaningful boost to the economy.” A cynic might conclude that central banks were trying to force the fiscal authorities’ collective hands, but in reality, I think the issue is simply that, at least in the G7, fiscal issues are political questions that by their very nature take longer to answer. Getting agreement on spending money, especially in the current fractious political environment, is extremely difficult short of a major crisis like the financial market meltdown in 2008. And for now, despite all the press, and some really bad data releases, Covid-19 has not achieved that level of concern.

Is that likely to change soon? My impression based on what we have seen and heard so far is that unless there is another significant uptick in the number of infections, and especially in the mortality rate, we are likely to see relatively small sums of money allocated to this issue. Of course, if economic activity is impeded by travel restrictions and supply chains cannot get back in business by the end of March, we are likely to have a change of heart by these governments, but for now, its central banks or bust.

So, this morning, after yesterday’s rout in US markets, things seem to have stabilized somewhat with most Asian equity markets flat to slightly higher, European markets ahead by about 1% and US futures currently sitting ~2% stronger. Part of the US showing is undoubtedly due to yesterday’s Super Tuesday primaries which showed former VP Joe Biden build on his recently recovered momentum to actually take a slight delegate lead. There is certainly some truth to the idea that part of the US markets’ recent malaise was due to a concern that Senator Sanders was poised to become the Democratic nominee, and that his policy platforms have been extremely antagonistic to private capital.

But despite the equity market activity, which on the whole looks good, there is no shortage of demand for Treasuries, which implies that there is still a great deal of haven demand. Yesterday, the 10-year yield breached 1.00% for the first time in its 150-year history, trading as low as 0.90% before rebounding ahead of the close. But here we are this morning with the yield down a further 5bps, back to 0.95%, and quite frankly there is nothing to indicate this move is over. In fact, futures markets are pricing in another Fed rate cut at their meeting 2 weeks from today, and another three cuts in total by the end of 2020! While German bunds have not seen the same demand, the rest of the European government bond market has rallied with yields everywhere falling between 1bp and 8bps. And don’t forget JGB’s, which have also seen yields decline 2bps, heading further into negative territory despite the BOJ’s efforts to steepen their yield curve. Certainly, a look at the bond market does not inspire confidence that the all clear has been sounded.

And finally, in the FX markets, the dollar remains under general pressure as the market continues to price in further Fed activity which is much greater than anywhere else. Yesterday’s cut took US rates to their narrowest spread vs. Eurozone rates since 2016, when the Fed was in the process of raising rates. It is no coincidence that the euro has recovered to levels seen back then as well. The thing about the dollar’s current weakness, though, is that it seems to be running its course. After all, if the interest rate market is pricing for US rates to fall back to the zero-bound, and there is no indication that the US will ever go negative, how much more room does the euro have to rally? While yesterday’s peak at just above 1.12 may not be the absolute top, I think we are much nearer than further from that point.

A quick look at the EMG bloc shows that today’s winners have largely centered in Asia as those currencies respond belatedly to yesterday’s Fed actions, although we have also seen commodity focused currencies like ZAR (+0.8%), MXN (+0.7%) and RUB (+0.5%) perform well on the rebound in oil and metals prices. I expect that CLP, BRL and COP will also open well on the same thesis.

While yesterday was barren in the US on the data front, this morning we see ADP Employment (exp 170K) and ISM Non-Manufacturing (54.9) as well as the Fed’s Beige Book at 2:00pm. Monday’s ISM Manufacturing data was a touch weak, but it is getting very difficult to read with the Covid-19 situation around. Was this weakness evident prior to the outbreak? I think that’s what most investors want to understand. Also, I would be remiss if I didn’t mention that Chinese auto sales plunged 80% in February and the Caixin PMI data was also disastrous, printing at 27.5.

For now, uncertainty continues to reign and with that comes increased volatility. We have seen that with a substantial rebound in the equity market VIX, and we have seen that with solid rebounds in FX option volatility, which had been trading at historically low levels but are now, in G7 currencies, back to levels not seen since December 2018, when equity markets were correcting and fear was rampant. My take there is that implied vols have further to rally as there is little chance we have seen the end of the current crisis-like situation. Hedgers beware!

Good luck
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Manna From Heaven

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On Friday, the world nearly ended
On Monday, investors felt splendid
Today the G7
Brings manna from heaven
But will rate cuts work as intended?

Of course, everyone is aware of yesterday’s remarkable equity market rally as investors quickly grasped the idea that the world’s central banks are not going to go down without a fight. While there were separate statements yesterday, this morning the G7 FinMins and Central bankers are having a conference call, led by Treasury Secretary Mnuchin, to discuss next steps in support of the global markets economy.

It is pretty clear that they are going to announce coordinated actions, with the real question simply what each bank is going to offer up. The argument in the US is will the cut be 25bps or 50bps? In the UK it is clearly 25bps. The ECB and BOJ have their own problems, although I wouldn’t be shocked to see 10bps from them as well as a pledge to increase asset purchases. And, of course, Canada remains largely irrelevant, but will almost certainly cut 25bps alongside the Fed.

But equity markets rebounded massively yesterday, so is there another move in store on this new news? That seems less probable. And remember, Covid-19 has not been cured and continues to spread pretty rapidly. The issue remains the government response, as we continue to see large events canceled (the Geneva Auto Show was the latest) which result in lost, not deferred, economic activity. The one thing that is very clear is that Q1 economic data is going to be putrid everywhere in the world, regardless of what the G7 decides. But perhaps they can save Q2 and the rest of the year.

The interesting thing is that bond markets don’t seem to be singing from the same hymnal as the stock markets. We continue to see a massive rally in bonds, with 2-year yields down to 0.87% while the 10-year is at 1.15%. That is hardly a description of a rip-roaring economy. Rather, that sounds like fears over an imminent recession. The only thing that is certain is that there are as many different views as there are traders and investors, and that has been instrumental in the significant increase in volatility we have observed.

As to the dollar, it has been under significant pressure since yesterday morning, with the euro climbing to its highest level since mid-January. I maintain the dollar’s weakness can be ascribed to the fact that the Fed is the only major central bank with room to really cut rates, and the market is in the process of pricing in 4 cuts for 2020, with more beyond. So further USD weakness ought not be too surprising, but I expect it is nearer its bottom than not, as in the end, the US remains the best place to invest in the current global economy. My point is that receivables hedgers need to be active and take advantage of the dollar’s recent decline. I don’t foresee it lasting for a long period of time.

The first actions were seen in Asia, as both Australia and Malaysia cut their base rates by 25bps while explaining that their close relationships with China require action. And that is certainly true as the extent of how far the Chinese economy will shrink in Q1 is still a huge unknown. Interestingly, AUD managed to rally 0.35% after the rate cut as investors seemed to approve of the action. The thing is, now rates Down Under are at 0.50%, so there is precious little room left to maneuver there. MYR, on the other hand, slipped slightly, -0.1%, although stocks there managed to rally 0.8% on the news.

Meanwhile, the market continues to punish certain nations that have their own domestic problems which are merely being exacerbated by Covid-19. A good example is South Africa, where the rand tumbled 1.45% this morning after Q4 GDP was released at a much worse than expected -0.5% Y/Y, which takes the nation to the edge of recession. And remember, this was before there was any concern over the virus, so things are likely to get worse before they get better. This doesn’t bode well for the rand in the near and medium term.

But overall, today has been, and will continue to be driven by expectations for, and then the response to the G7 meeting. While it is certain that whatever statement is made will be designed to offer support, given yesterday’s huge rebound in markets, there is ample chance for the G7 to disappoint. Arguably, the risks for the G7 are asymmetric as even an enormous support package of rate cuts and added fiscal spending seem mostly priced into the market. On the other hand, any disappointment could easily see the next leg down in both equity markets and bond yields as investors realize that sometimes, the only way to deal with a virus is to let it run its course.

Good luck
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A Fig Leaf?

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This morning, the market’s motif
Is central banks’ promised relief
The all-clear has sounded
And stocks have rebounded
But is this more than a fig leaf?

In case you were curious what central bank relief looked or sounded like, I have included the statements from each of the four major central banks addressing Covid-19, starting with the Fed’s statement Friday afternoon that was able to turn the equity market around (all are my emphases). Since then, we have heard from the other three major banks, as per below, and we have also been informed that G7 FinMins would be having a conference call this week to discuss a coordinated response.

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

“Global financial and capital markets have been unstable recently with growing uncertainties about the outlook for economic activity due to the spread of the novel coronavirus. The Bank of Japan will closely monitor future developments and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”

The Bank of England is working with the UK Treasury as well as international partners to ensure all necessary steps are taken to protect financial and monetary stability amid the global outbreak of the coronavirus. The bank continues to monitor developments and is assessing its potential impacts on the global and UK economies and financial systems.

The European Central Bank is vigilant and mobilized when it comes to the fallout from the outbreak of the coronavirus. Any response needs to be calm and proportionate. ECB policy is already very accommodative.

And this has essentially been this morning’s market story, a major relief rally. Friday night, late, China released its PMI data and it was dreadful, with Manufacturing PMI at 35.7 while the Non-manufacturing figure was even worse, at 29.6! This should dispel was any doubts that growth in China has nearly ground to a halt. However, despite the promised support by central banks around the world, and you can be sure pretty much all of them, not just the big four, will be jumping in, if quarantines remain in place as the infection continues to spread, supply lines will remain broken and growth will be feeble. The OECD just released a report regarding the coronavirus with updated GDP forecasts and it is not pretty. Naturally, China is the hardest hit, with Q1 GDP now forecast to turn negative, and 2020 GDP growth to fall to 4.9% before rebounding next year. Meanwhile, global GDP growth is now forecast to fall to 2.4%, its slowest pace since the financial crisis in 2009. And the working assumption is that the virus is contained before the end of Q1. If we continue to see the virus spread, these numbers will be revised still lower.

So, with this as our backdrop, let’s turn our attention to actual market activity. Despite all the promises of support, equity investors remain uncertain as to how to proceed at this time. Support may be helpful, but if companies earnings plummet because of the disruption, then current market valuations are likely still a bit rich. Looking at Asian markets, China was the best performer, with Shanghai rising more than 3.1% as promises of support by the PBOC encouraged investors there. But we also saw the Nikkei (+0.95%) and the Hang Seng (+0.6%) rise although Australia’s ASX 200 (-0.8%) didn’t share in the enthusiasm. Europe has been far less positive with the DAX (-0.45%) and CAC (-0.25%) in the red along with Italy’s FTSE MIB (-2.25%) which is really feeling the brunt of the problems on the continent. The lone equity bright spot is the UK, where the FTSE 100 is higher by 0.5%, largely due to the fact that the pound is today’s worst performing currency, having fallen 0.5% vs. the dollar, and more than 1% vs. the euro.

The British pound story is entirely Brexit related as trade negotiations started today with concerns raised that the red lines both sides have defined may end the chance of any agreement as early as next month. Given the international nature of the FTSE 100 members, a weaker pound is usually a benefit for the stock market. But clearly, if the trade talks collapse, the impact on UK companies would be significant.

But other than the pound, the FX market is the only one that has responded in the manner the central banks were hoping, as the dollar has fallen sharply vs. pretty much every other currency. In the G10 space, SEK (+0.7%) and EUR (+0.65%) are leading the way although even AUD and NZD have managed to gain 0.3% this morning.

In the EMG space, KRW was the BIG winner, rallying 1.7% overnight, but almost every APAC currency jumped on the concerted central bank message. The two exceptions here this morning are INR and MXN, both currently lower by 0.7%, with both suffering from the same disease, new Covid-19 infections where there hadn’t been any before.

Meanwhile, bond markets continue to price in much slower growth as 10-year Treasury yields have tumbled to 1.05%, another new historic low, while German bunds fall to -0.66%, near its historic lows. There is discernment in the market though, as Italian yields have risen 7.5bps as concerns over the safety of those bonds, given Italy’s dubious distinction of being the European country worst hit by the virus, has called into question its financing capabilities.

Adding to all this enjoyment is a very busy data week culminating in the payroll report on Friday.

Today ISM Manufacturing 50.5
  ISM Prices Paid 50.5
  Construction Spending 0.6%
Wednesday ADP Employment 170K
  ISM Non-Manufacturing 55.0
  Fed’s Beige Book  
Thursday Initial Claims 216K
  Nonfarm Productivity 1.4%
  Unit Labor Costs 1.4%
  Factory Orders -0.2%
Friday Trade Balance -$47.0B
  Nonfarm Payrolls 175K
  Private Payrolls 160K
  Manufacturing Payrolls -4K
  Unemployment Rate 3.6%
  Average Hourly Earnings 0.3% (3.0% Y/Y)
  Average Weekly Hours 34.3
  Participation Rate 63.4%
  Consumer Credit $17.0B

Source: Bloomberg

At this point, Covid-19 stories are going to be the primary driver of market activity as investors across all markets try to figure out how to react. Havens remain in demand, although the dollar has clearly suffered. Arguably the dollar’s weakness is predicated on the fact that, of all the nations around, the US is the one with the ability to cut rates the furthest. In fact, futures markets are now pricing in 100bps of rate cuts this year, with between 25bps and 50bps for the March meeting in two weeks’ time. Nobody else has that much room, and so the dollar is definitely feeling the pressure. Of course, I continue to believe that if things get much worse, the dollar will rally regardless of the Fed funds rate, as Treasury bonds remain the single safest and most liquid asset available anywhere in the world. For today however, unless there is additional new information, the dollar is likely to remain under pressure, and in truth, that seems likely all week.

Good luck
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Many a Penny

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The stock market had been for many
A place to make many a penny
But lately they’ve seen
Bright red on their screen
It’s best if they practice their zen (ny)

Meanwhile though the Fed seems quite clear
A rate cut will not soon appear
The market is stressing
And Jay will be pressing
For twenty-five quite soon this year

It’s not clear to me whether the top story is the dramatic decline in global stock markets or the increasing spread of Covid-19. Obviously, they are directly related to each other, and one would have to assume that the causality runs from Covid to stocks, but if you read the paper, stocks get top billing. Coming a close second is the bond market, where 10-year Treasury yields (1.20%) have hit new historic lows every day since Tuesday while discussion of other markets takes a back seat. And, oh yeah, it looks like Turkey and Russia might go to war in Syria!

As is often written, the two great drivers of financial markets are fear and greed. Greed leads to FOMO, which is a pretty solid description of what we have seen, at least in the US equity markets, since 2009. Fear, however, is what happens when excessive greed, also known as complacency, meets the notorious black swan, in this case, Covid-19. And historically, the longer the period of greed, the sharper is fear’s retaliation. With equity markets around the world having fallen by 10% or more this week, there is no question that we could have a session or two where things steady. And given what the futures market is now pricing with respect to central bank activity, it seems reasonable that the market will respond positively to those imminent actions. But I fear that there is a lot of excess in this market, and that stock prices everywhere can fall much further before this is all done.

Let’s look at futures market pricing for central banks this morning vs. last week and last month. This is the number of 25bp rate cuts priced by the end of 2020:

Country Feb 28 Feb 21 Jan 31
US 3.5 1.8 2.0
Canada 2.5 1.6 1.4
Eurozone (10 bps) 1.3 0.7 0.6
UK 1.5 0.8 1.1
Australia 2.1 1.5 1.5
Japan (10 bps) 1.3 0.8 0.8

Source: Bloomberg

Part of the difference is the fact that only the US and Canada have room for more than 2 cuts before reaching the zero-bound, but the market is screaming out for central banks to come to the rescue. This should be no surprise as central banks have been doing this since 1987 when Chairman Greenspan, the maestro himself, stepped in after Black Monday and said he would support markets. It is a little bit late for central bankers to complain that they cannot help things given their actions, around the world, for the past thirty years, which has really stepped up since the financial crisis in 2008. At this point, if equity markets crater this morning in the US (and futures are pointing that way with all three indices currently lower by 1.3%), I expect an “emergency rate cut” by the Fed before stock markets open on Monday. One man’s view.

So how about the dollar? What is happening there? Well, the dollar is having a mixed session this morning, stronger vs. a number of emerging market currencies, as well as Aussie and Kiwi, but weaker vs. the yen and Swiss franc, and a bit more surprisingly, vs. the euro. The euro is an interesting case, and a situation we have seen before.

Consider, if you were a hedge fund investor and looking to fund positions. Where would you seek to fund things? Clearly, the currency with the lowest interest rates is the place to start. Now, knowing the history of the Swiss franc, and the fact that it is not that large a market, CHF is likely not a place to be. But euros, on the other hand, were a perfect funding vehicle, hugely liquid and negative interest rates. And that is what we saw for months and months, hedge funds shorting euro and buying MXN, INR, ZAR and any other currency with real yield. Well, now in the panic situation currently engulfing markets, these positions are being closed rapidly, and that means that hedge funds are aggressively buying euros while selling those other currencies. Hence, the euro’s performance this week has been relatively stellar, +1.35%, although it has recently backed off its highs this morning and is now unchanged on the day.

And where did we see this before? Prior to the financial crisis in 2008, JPY was the only currency that had zero interest rates and was the funding currency of choice for the hedge fund community. Extremely large yen shorts existed vs. the same high yielding currencies of today. And when the crisis struck, hedge funds were forced to buy yen as well as dollars driving it much higher. This was the genesis of the yen as a haven asset, although its consistent current account surplus has done a lot to help the story since then.

As to the rest of the FX market today, yen is the top performer, +0.75%, and CHF is also ahead of the game, +0.2%, but the rest of the G10 is under pressure. The laggard is NZD (-1.1%) as the first Covid-19 case was identified there and markets anticipate the RBNZ to cut rates soon. In the EMG space, with oil crashing again (WTI -2.6%), it is no surprise to see RUB (-1.5%) and MXN (-1.0%) lower. But today’s worst performing EMG currency is IDR (-2.05%) after the first Covid cases were identified and talk of rate cuts there circulated. Interestingly, CNY has been a solid performer today, rising 0.3%, although remember, it is under tight control by the PBOC.

On the data front today we see Personal Income (exp 0.4%), Personal Spending (0.3%), Core PCE (1.7%), Chicago PMI (46.0) and Michigan Sentiment (100.7). While PCE had been the most important data in the past, I think all eyes will be on the Chicago and Michigan numbers, as they are forward looking. Also, of tremendous interest to the market will be tonight’s China PMI data, with estimates ranging from 30.0 to 50.0. My money is on the low side here.

Two things argue for a bounce in equities in the US today, first, simply the fact that they have fallen so much in such a short period of time and a trading bounce is due. But second, given their significant decline, portfolio rebalancing is likely to see buyers today, which can be quite substantial in the short run. But a bounce is just that, and unless we see dramatic central bank activity by Monday, I anticipate we are not nearly done with this move.

Good luck and good weekend
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Tough Sledding

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The Minister, Prime, has declared
Come June, the UK is prepared
To tell the EU
If no deal’s in view
He’ll walk. Sterling bulls should be scared!

Meanwhile as the virus keeps spreading
Investors have found it’s tough sledding
There’s no end in sight
For this terrible blight
Thus, risk assets, most holders keep shedding

While Covid-19 remains the top story across all markets, this morning we did get to hear about something else that mattered, the UK position paper on their upcoming negotiations with the EU regarding trade terms going forward. The EU insists that if a nation wants to trade with them, that nation must respect (read adhere) to the EU’s rules on various issues, notably competition and state aid, but also things like labor conditions. (Funnily enough, China doesn’t seem to need to adhere to these rules). However, Boris has declared, “At the end of this year we will regain, in full, our political and economic independence.” Those are two pretty different sentiments, and while I believe that this is just tough talk designed to level set the negotiations, which begin next week, there is every chance that the UK does walk without a deal. Certainly, that is a non-zero probability. And the FX markets have taken it to heart as the pound has suffered this morning with the worst G10 performance vs. the dollar, falling -0.3%.

In fact, it is the only currency falling vs. the dollar today, which some have ascribed to the dollar’s waning status as a haven asset. However, I would argue that given the dollar’s remarkable strength this year, as outlined yesterday, the fact that some currencies are rebounding a bit should hardly be surprising. Undoubtedly there are those who believe that as Covid-19 starts to be seen in the US, it will have a deleterious impact on the US economy, and so selling dollars makes sense. But remember, the US economy is the world’s largest consumer, by a long shot, so every other country will see their own economies suffer further in that event.

A more salient argument is that the US is the only G10 country (except Canada which really is too small to matter) that has any monetary policy room of note, and in an environment where further monetary policy ease seems a given, the US will be able to be more aggressive than anyone else, hence, lower rates leading to a softer dollar. While that is a viable argument, in the end, as the ongoing demand for Treasuries continues to show, people need dollars, and will buy them, even if they’re expensive. Speaking of Treasuries, the 10-year yield has now fallen another 4bps to 1.29%, a new all-time low yield. And you can’t buy Treasuries using euros or yen!

So as things shape up this morning, it is another risk-off session with most equity markets around the world in the red (Nikkei -2.3%, Kospi -1.1%, DAX -2.5%, CAC -2.4% FTSE 100 -2.2%) and most haven assets (CHF +0.55%, JPY, +0.3%, Gold + 0.4%) performing well. The Covid-19 virus and national responses to the infection continues to be the lead story pretty much everywhere. In fact, last night’s US Presidential press conference was seen to be quite the fiasco as President Trump was unable to convince anyone that the US is on top of the situation. And while I’ve no doubt that things here will not run smoothly, it is not clear to me that things are going to run smoothly anywhere in the world. Fast moving viral epidemics are not something that large governments are very good at addressing. As such, I would look for things to get worse everywhere before they get better.

Looking at some specific FX related stories, perhaps the biggest surprise this morning is the euro’s solid rally, +0.5%, which was underpinned by surprisingly strong Economic Sentiment data for the month of February. This is in spite of the fact that growth figures throughout the major economies on the continent have been turning lower and the unknown consequences of Covid-19. And the euro’s strength has been sufficient to underpin the CE4 currencies, all of which are up by even greater amounts, between 0.6% and 0.85%. Again, these are currencies that have been under pressure for the best part of 2020, so a rebound is not that surprising.

Elsewhere in the EMG bloc, we continue to see weakness in the commodity producers, with oil falling more than 2% this morning and base metals also in the red. MXN (-0.7%), CLP (-0.45%), RUB (-0.3%) and ZAR (-0.3%) remain victims of the coming economic slowdown and reduced demand for their key exports.

This morning’s US session brings us a lot of data including; Initial Claims (exp 212K), Q4 GDP (2.1%) and Durable Goods (-1.5%, +0.2% ex transport). Yesterday’s New Home Sales data was much better than forecast (764K), which given the historically low mortgage rates in the US cannot be that surprising. We also continue to hear from Fed speakers, with each one explaining they are watching the virus situation closely and are prepared to act (read cut rates) if necessary, but thus far, the economic situation has not changed enough to justify a move. It is comments like these that highlight just how much of a follower the Fed has become, unwilling to lead a situation.

Speaking of the foibles of the Fed, I must mention one other thing that serves to demonstrate how out of touch they are with reality. Economists from the SF Fed released a paper explaining that, as currently constructed, the Fed will not be able to achieve their inflation goals because in the next downturn, with rates so low, the public worries that the Fed will not be able to add more support to the economy (my emphasis). Now, I think about the Fed constantly as part of my job, but I am willing to wager that a vanishingly small number of people in this country, far less than 1%, think about the Fed at all…ever! To think that the Fed’s inability to hit their target has anything to do with public sentiment about their power is extraordinary, and laughable!

At any rate, today’s session looks set to continue the risk-off stance, with equity futures down 0.75% or so, and while the dollar has been under pressure overnight, I expect that will be short-lived.

Good luck
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Those Doves

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The dollar continues as king
Of currencies and that’s the thing
The Fed really loves
Especially those doves
Who want to cut rates before spring

It’s not really clear to me what else to discuss these days as everything runs through the following chain of thought: how long before the Covid-19 pandemic epidemic passes its peak; what will be the ultimate economic impact; and when will we see more aggressive monetary intervention by central banks, notably the Fed.

Since the Lunar New Year holiday (and coronavirus scare) began, back on January 24, the dollar has rallied vs. every other currency on the planet. I think it is worthwhile to consider just how big this move has been:

Swiss franc -0.70%
Japanese yen -0.95%
Canadian dollar -1.28%
British pound -1.40%
Danish krone -1.62%
Euro -1.63%
Swedish krona -2.10%
Australian dollar -4.03%
Norwegian krone -4.12%
New Zealand dollar -4.84%

Source: Bloomberg

A look at this list of currencies reveals pretty much what you would expect; those with the highest beta to China’s economy, Australia and New Zealand, have fallen the furthest, along with the currency most closely linked to the price of oil, Norway. Of course, since that day, the price of WTI has tumbled nearly 15%, on significantly reduced demand, so it is no surprise NOK has suffered. Perhaps more interestingly is that both the Swiss franc and Japanese yen, considered the two safest currencies, have both given up solid ground vs. the greenback as well. Any idea that the dollar has lost its haven status is simply incorrect. Granted, one of the key reasons the dollar is a haven is due to US Treasuries, which nobody denies as the safest of havens, and which have seen yields tumble in this same time period amidst substantial demand. In fact, 10-year Treasury yields are down by 37bps in the past month.

The emerging market picture is no different, with even HKD, the pegged currency, lower by 0.25% since the Lunar New year began. While a chart here would be too long, the highlights are as follows: commodity producing countries have seen the worst performance with ZAR (-5.6%, RUB (-5.6%), BRL (-5.0%) and CLP (-4.7%) leading the way. After those come the currencies from those nations most closely linked to China’s economy; notably THB (-4.4%), KRW (-4.0%), MYR (-3.7%) and SGD (-3.3%). The renminbi itself is down 1.1%, which all things considered is a pretty good performance, but also one that is being strictly controlled by the PBOC. As to the rest of the EMG bloc, every one of them has weakened in this time frame, many despite local central bank intervention, and quite frankly, all of their prospects are directly dependent on how the Covid-19 epidemic plays out.

Yesterday’s halting efforts at a rebound were quashed when the CDC revealed the truth that Covid-19 was coming to a city near you at some point and would likely result in significant disruptions in daily life. And of course, the market reactions to comments like these are the reason that officials, especially central bank and FinMin types, routinely lie about conditions. The truth often results in unfavorable outcomes, especially for elected officials.

So a quick recap of the overnight news is that there were more cases highlighted in Italy, South Korea, and Iran, with Brazil finally getting its first confirmed infection. The death toll continues to climb, currently at 2,715 as the official count of infections is well over 80K. As well, in the past twenty-four hours we have heard from central bank officials around the world explaining that it is too soon to react, but they are carefully monitoring the situation and primed and ready to adjust policy if it is deemed necessary. FWIW my view is that if we see US equities fall another 5% this week, we are going to see an emergency rate cut, even before the March 18 meeting. Too, futures markets are now pricing in the first Fed cut in June with two cuts by September. When all this started back at the Lunar New Year, the probability of a June cut was just 19% and a full cut wasn’t priced in until December. One important thing to remember is that the Fed has never disappointed the market on a policy move when it was fully priced by the futures market. It will take a great deal of both positive news and serious discussion by Fed speakers to avoid a real mess come the middle of March if they really don’t want to cut rates.

There was virtually no economic news overnight and this morning brings only New Home Sales (exp 718K), which is the one part of the economy that should continue to benefit from the remarkably low interest rate structure. Currently we are seeing European equity markets continuing their sell-off although US futures have stopped hemorrhaging for the time being and are essentially flat as I type. But until we see some positive news, like a cure has been found, it is difficult to expect the current momentum will change. With that in mind, I expect that equities will remain under pressure, Treasuries will remain well bid and the dollar will continue to find adherents.

Good luck
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At Loggerheads

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While yesterday there was no hope
The global economy’d cope
With Covid-19
Today what we’ve seen
Is those fears were just a mere trope

Meanwhile as the virus still spreads
Investors are at loggerheads
Should bulls buy the dip?
Can bears get a grip?
I guess it’s all up to the Fed(s)

This morning there is a tentative truce in markets between those terrified of a global pandemic and those who have been trained to BTFD (Buy the f***ing dip). Of course, the dip buyers have been the big winners over the past decade, which drives the real question, is this time different? The difficulty in answering this question is due to the fact that the last time there was truly a global pandemic, the Spanish flu of 1918; central banks did not control the economy. In fact, the Fed was just 5 years old at the time, and still coming to terms with its role in the US economy. Ultimately, the problem is that despite the extraordinary information dissemination capabilities that exist in the modern world, where every type of news is available in multiple formats almost instantly, nobody really has any idea what is actually happening in China. Do the infection and fatality numbers they release each day have any resemblance to reality? Can’t really tell. What we do know is that large portions of China remain essentially under lockdown, with Hubei province at a virtual standstill. The tension between preventing the spread of the disease and preventing a collapsing economy is extreme in Beijing. Alas, it is not hard to believe that in the end, President Xi will choose growth over health.

Nonetheless, yesterday’s proximate cause of the market rout seemed to be the sudden uptick in cases in Italy, which was a clear demonstration that the situation was not nearly under control. Although all markets remain tentative this morning, there have been no major dislocations…yet. Even so, for the time being, Covid-19 is going to be the primary story driving daily market activity.

One thing we learned yesterday was that there is growing dissention at the Fed as the hawks, led by Loretta Mester, are nowhere near convinced that cutting interest rates will do anything to solve a medical problem, while the doves, led by Neel Kashkari, think a 25bp cut, at least, is appropriate right now. With the next FOMC meeting slated for March 18, we still have nearly 3 weeks for this conversation to play out. And of course, so much will depend on just what happens with Covid-19. Wider disruption of economic activity due to further quarantines and lock-downs will almost certainly see further monetary policy easing, whether it is useful or not, as central bankers will not want to be seen doing ‘nothing’.

Another interesting thing to watch for is this week’s February Chinese PMI data, due to be released on Thursday night. It is quite interesting that Manufacturing PMI is currently forecast to fall only to 45.1 given the near total shutdown of Chinese activity since the Lunar New Year. Consider that the PMI questions ask if activity levels were “higher, the same or lower than in the prior month.”1 Can anyone asked those questions in China claim that activity was higher than the previous month? It beggars belief that the index can be anywhere near 45. Rather one would expect it to approach zero! My point is that depending on what gets released, it will help us further understand the reliability of the Chinese economic data.

Keeping this in mind, it is extremely difficult to have a strong view on anything right now. Generally speaking, haven assets remain better bid, although this morning’s price action is nowhere near as impressive as yesterday’s. For example, Treasury yields are little changed, still just below 1.37% (and just above the record low of 1.34% set in 2016), although German bund yields have fallen a further 3bps this morning and are sitting at -0.51%. We have also seen a bit of discrimination in the European government bond markets as the PIGS see their bond yields rise this morning, clearly not feeling the haven love of bunds or Treasuries. Also on the haven front, gold prices, which rallied sharply yesterday, trading up nearly 3% at one point, have given back about 0.75% this morning.

In equity land, the Nikkei, which had been closed Monday, fell 3.3% in a catchup move, but the rest of APAC markets had a more mixed performance. Australia’s ASX 200 fell 1.6%, but the Kospi in Korea rallied 1.2%. Even China had mixed results with Shanghai falling 0.6% while Shenzhen rose 0.5%. All told, fear was not quite as rampant overnight. But this morning, European shares, which had started the session in the green, have since turned lower led by Spain’s IBEX (-1.15%), but closely followed by the FTSE 100 (-0.85%), CAC (-0.7% and DAX (-0.6%). In other words, fear is once again creeping into investor’s minds. At this point in the session, US futures are pointing slightly higher, but only about 0.2%. Obviously we will be watching US markets closely when they open.

In the FX world, it has also been a bit of a mixed picture, with the pound actually today’s big winner, +0.3%, as it appears cable options traders are driving the move higher after getting paid out of substantial amounts of short-dated volatility by the leveraged community. The yen has also gained today after a very impressive move yesterday. When I wrote, the yen had just edged higher by 0.25%, but it was in great demand during the NY session and closed nearly a full percent stronger. On the down side, NZD and SEK are the leading decliners, down 0.3% and 0.2% respectively with the former reacting to a story about the RBNZ easing policy further while the latter suffers as a cross play SEKJPY with punters viewing the krone as the most vulnerable currency to the virus.

In the EMG space, KRW (+0.85%) is today’s big winner, following the Kospi higher on hopes that the worst aspects of the virus have passed. On the flipside, RUB is down by 2.0% in a catch up move after being closed yesterday for a bank holiday. Otherwise, the rest of the bloc is +/- 0.2%.

On the data front this morning we see Case-Shiller Home prices (exp 2.8%) and Consumer Confidence (132.1), neither of which seems likely to impact FX. Arguably, this is still a virus and equity driven market, and that is where to look to get the fear barometer and consider where the dollar may move for the rest of the day.

Good luck
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1. https://cdn.ihs.com/www/pdf/1218/IHS-Markit-PMI-Introduction.pdf

 

All Stressed

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It started in China’s Great Plains
Where factories for supply chains
Were built wall to wall
But now they have all
Been shuttered to stop Covid’s gains

However, the sitch has regressed
While China, their data’s, repressed
Thus Covid’s now spreading
And everywhere heading
No shock, stocks worldwide are all stressed

I know each and every one of you will be incredulous that the G20 meeting of FinMins and central bankers this weekend in Saudi Arabia was not enough to stop Covid-19 in its tracks. I certainly was given the number of statements that we have heard in recent weeks by central bankers explaining that if the virus spreads, they will save the day!

But clearly, whatever power monetary or fiscal power has, it is not well placed to solve a healthcare crisis that is rapidly spreading around the world. This weekend may well have been the tipping point that shakes equity investors out of their dream-induced state. While the steady growth in numbers of infections and fatalities in China remains constant, something which seems to have been accepted by investors everywhere, the sudden jump in Covid cases in South Korea and, even more surprisingly, in Italy looks to have been just the ticket to sow doubt amongst the bullish investment set. And just like that, as markets are wont to do, fear is the primary sentiment this morning.

A quick market recap shows that equity markets worldwide have been decimated, although Europe (DAX -3.5%, CAC -3.5%, FTSE 100 -3.2%, FTSE MIB (Italy) -4.6%) has felt the brunt more than Asia (Nikkei -0.4%, Hang Seng -1.8%, Kospi -3.9%, Shanghai -0.3%). And US futures? Not a pretty picture at this point, with all three down more than 2.5% as I type.

Benefitting from the risk-off sentiment are Treasury bonds (yields -8bps to 1.39%) and bunds (-6bps to -0.50%), while the barbarous relic itself is up 2.4% to $1682/oz. And you thought gold was no longer important!

Finally, in the currency markets, the dollar is king once again, gaining against all comers but one, quite sharply in some cases. The yen has regained some of its haven status, rallying 0.25% this morning, although it remains far lower than just last Thursday. But the rest of the G10 is under pressure with NOK (-1.0%) falling the most as oil prices (WTI -4.0%) are getting crushed today. By contrast, CAD (-0.45%) seems almost strong in the face of the weakness in oil. But aside from the yen, the rest of the bloc is lower by at least 0.25%, and there is nothing ongoing in any of these nations that is driving the story, this is pure risk aversion.

In the EMG space, the story is more of the same, with the entire space lower vs. the dollar today although the biggest losers may be a bit of a surprise. Pesos are feeling the heat with both Mexico (-1.2%) and Chile (-1.1%) the worst performers in the space. The latter is a direct response to the weakness in copper prices, while the former has multiple problems, with oil’s decline just the latest. In fact, since last Thursday morning, the peso has fallen nearly 3.0% as we are beginning to see the very large long MXN carry position start to be unwound. It seems that long MXN had the same perception amongst currency investors as long the S&P had for equity investors. The thing is, at least according to the CFTC figures from last week, there is still a long way to go to reach neutrality. We are still more than 12% from the peso’s all-time lows of 22.03 set in early 2017, but if Covid continues to evade control, look for that level to be tested in the coming months (weeks?).

And that’s today’s story really. There are some political issues in Germany, as the ruling CDU finds itself in the middle of a leadership contest with no clear direction, while Italy’s League leader, Matteo Salvini, is hurling potshots at the weakened Giuseppe Conti government. But even under rock solid leadership, the euro would be lower this morning as would each nation’s stock market. Perhaps of more concern is the news that China, despite the ongoing spread of Covid-19, was relaxing some of its quarantine restrictions as it has become clearer by the day that the economic impact on the mainland is going to be quite substantial. President Xi cannot afford to have GDP growth slow substantially as that would break his tacit(?) deal with the people of more government control for continued material improvement. It has been a full month since virtually anything has been happening with respect to manufacturing throughout China and we are seeing more and more factories elsewhere (South Korea, Eastern Europe) shut down as supply chains have broken. Shipping rates have collapsed with more than 25% of pre-Covid activity having disappeared. This will not be repaired quickly I fear.

Turning to the data, which is arguably still too early to really reflect the impact of the virus, this week brings mostly secondary numbers, although we do see core PCE, which is forecast to have increased by a tick.

Tuesday Case-Shiller Home Prices 2.85%
  Consumer Confidence 132.1
Wednesday New Home Sales 715K
Thursday Q4 GDP 2.1%
  Durable Goods -1.5%
  -ex transport 0.2%
  Initial Claims 211K
Friday Personal Income 0.4%
  Personal Spending 0.3%
  Core PCE 0.2% (1.7% Y/Y)
  Chicago PMI 46.0
  Michigan Sentiment 100.7

Source: Bloomberg

Of course, the Fed has made it quite clear that they have an entirely new view on inflation, namely that 2.0% is the new 0.0%, and that they are going to try to force things higher for much longer to make up for their internally perceived failures of reaching this mythical target. We all know that the cost of living has risen far more rapidly than the measured inflation statistics, but that does not fit into their models, nor does it given them an excuse to continue to pump more liquidity into markets. In fact, it would not be that surprising to see them double down if today’s declines continue for several days. After all, that would imply tightening financial conditions.

But for now today is the quintessential risk-off day. Look for the dollar to remain king while equities fall alongside Treasury yields.

Good luck
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Virus Malaise

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It seemed, for a couple of days
That the stock market’s virus malaise
Had finally broken
But now, not unspoken,
Concerns grow in multiple ways

The upshot is risk’s in retreat
And currencies cannot compete
With strength in the greenback
Which this week’s been on track
For, every prediction, to beat

As we head into another weekend, investors and traders have once again demonstrated concern over a shock change in the Covid-19 story and correspondingly have reduced their risk holdings in most markets. While the Chinese government continues to try to pump massive amounts of stimulus into their economy, the actual results may not be as impressive as the numbers suggest. For example, last night the PBOC released their Money supply data, granted a number that has lost much of its luster over the years, but one which still helps explain what is happening in the monetary system there. After all, without a robust monetary system, real economic growth is virtually impossible. And M1, the narrow measure, registered “growth” of 0.0% in January, which means it was at the same level as January 2019. That was a shockingly low outcome (forecasts were for 4.5% growth) and likely indicative of just how little economic activity is occurring in China right now. The other nasty data point was auto sales, which fell, wait for it, 92% in the first half of February. Remember, China is the world’s largest auto market, with annual sales having approached 25 million in 2017, although that number slipped to 21.5 million last year. But a 92% decline, if it persists for another month only, implies that sales will fall below 20 million, and if things don’t get better soon, that number can be much lower. The point is regardless of how much stimulus the Chinese government pumps into the economy, if people remain quarantined and cannot go out and spend it, the economy is going to suffer for a long time.

On top of the Chinese data, the other growing fear is that Covid-19 is starting to spread more widely outside of China. To date, the bulk of the infections have been in Hubei province, although the entire nation is on alert. But last night we heard of more infections in both South Korea and Japan, while the death toll continues to climb alongside the overall infection count. And for the 3rd time this month, the Chinese changed the way they count infections, which pretty much guarantees that whatever numbers they release are hogwash. I fear the virus is much more widespread than publicized, and that it will take far longer than another month for things to return to any semblance of normal in China. There is no ‘V’ shaped recovery coming in Q2, I don’t even think there is a ‘U’ shaped one on the horizon. I fear the Chinese recovery, at least for 2020, may well be ‘L’ shaped.

So, with those cheerful thoughts in mind, let’s look at markets and what they have done both overnight, and all week. Starting with equity markets, last night saw weakness in Asia (Nikkei -0.4%, Hang Seng -1.1%, KOSPI -1.5%) which took their weekly losses to -1.3%, -1.8% and -3.6% respectively. Shanghai, on the other hand, was slightly positive overnight (+0.3%) taking its weekly advance to 4.2%. Of course, Shanghai is the epicenter of a massive inflow of liquidity, so while the real economy may be cratering, new monetary stimulus can easily find its way into the stock market as people trade from home.

European markets have fared somewhat better, with the DAX (0.0%, -0.6% this week), CAC (-0.1%, -0.3%) and FTSE 100 (-0.2%, +0.2%) all biding their time as none of these countries have yet been severely impacted by the virus directly, although obviously, exports to China will have suffered greatly. Meanwhile, in the US, leading up to today’s session, the DJIA has fallen 1.1% this week and the S&P 500 is -0.2%, although the NASDAQ is actually higher by 0.25%. That said, futures markets in all three are pointing lower this morning.

Other key risk indicators are also showing significant gains this week, notably gold (+0.9% today, +3.2% this week) and Treasury bonds, where the 10-year yield is at 1.49% (-2.5bps this morning and 9bps this week).

Finally there is the dollar, which has outperformed virtually every currency this week, with only the Swiss franc even breaking even. In the rest of the G10 space, the yen is the week’s big loser, having fallen 2.0%, a true blow to its status as a safe haven. As I wrote yesterday, it appears that Japanese exporters have stepped away from the market, while leading up to fiscal year end in Japan, there has been an increase in outward investment on an unhedged basis, meaning Japanese lifers and pension funds are buying dollars to buy USD assets and unconcerned about the dollar falling. But both AUD (-1.6%) and NZD (-1.9%) also had a rough week, as the fact that China seems to have come to a virtual standstill will have an immediate negative impact on both those economies.

In the EMG bloc, LATAM currencies have been under the most pressure this week, with BRL (-2.5%), CLP (-2.35%) and MXN (-2.3%) all feeling the impacts of slowing growth in China as the first two are reliant on exports to China for a significant amount of economic activity, while Mexico, which has been holding up extremely well until this week, seems to be feeling the pain of overly extended carry positions amid a risk reduction period. MXN futures are the largest outstanding long positions on the IMM, as many investors seek to earn the 500bps of positive carry. However, as can be seen from the movement just yesterday and today, all that carry can be offset in the blink of an eye when things turn. Given how large the long MXN positions still are, do not be surprised to see the peso weaken much further going forward.

Away from LATAM, it can be no surprise that KRW (-2.1% this week) and THB (-1.6% this week) are also under pressure as the direct Covid-19 impact is greatest in those nations that do the most business with China. And not to be outdone, CNY (-0.65% this week) is trading well back through the 7.00 level and seems unlikely to reverse course until we get unequivocally better news regarding Covid-19.

On the data front, yesterday’s Philly Fed number was spectacular, 36.7 vs. 11.0 forecast, indicating that the US growth story has not yet felt any real effects of the virus. Overnight saw weakness in Australian and Japanese PMI data, again no real surprise, but better than expected results out of Europe and the UK. It seems that the signing of the phase one trade deal was seen as quite a positive, and while Eurozone (and German and French) Manufacturing all remain in contraction with PMI’s below 50.0, the levels have rebounded significantly from their low prints several months ago. This morning brings the US PMI (exp 51.5 for Manufacturing, 53.4 for Services) although this market is far more focused on next week’s ISM data. We also see Existing Home Sales (5.44M) which continue to perform well given the combination of incredibly low Unemployment and incredibly low mortgage rates.

On the day, the dollar is more mixed, having ceded some of its weekly gains vs. the euro and pound, but sentiment appears to continue to point to further risk reduction and further dollar strength as the week comes to a close.

Good luck
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Set For Stagnation

Posted on by

When thinking of every great nation
Regarding its growth expectation
The US alone
Is like to have grown
While others seem set for stagnation

The upshot of these circumstances
Is regular dollar advances
Within the G10
It’s euros and yen
That suffer on policy stances

Another day, another dollar rally. This simple sentiment pretty well sums up what we have been seeing for the past several weeks. And while there may be a multitude of catalysts driving individual currency movements, the reality is they all point in the same direction, a stronger dollar. Broadly speaking, data from around the world, excluding the US, has been consistently weaker than expected while the US continues to hum along nicely. Now, if China’s economy remains in its current catatonic state for another month, one has to believe that US numbers are going to suffer, if only for supply chain reasons. But right now, it is difficult for anyone to make the case that another currency is better placed than the dollar.

For example, last night we saw Australian Unemployment unexpectedly rise to 5.3% as the first measured impacts of Covid-19 make themselves felt Down Under. Traders wasted no time in selling Aussie and here we are this morning with the currency lower by 0.75%, trading to new lows for the move and touching its lowest level since March 2009. Perhaps the Lucky Country has run out of luck.

The yen keeps falling
Like ash from Fujiyama
Is an end in sight?

At this point in the session, the yen has seen its largest two-day decline since November 2016, in the immediate wake of President Trump’s election, and has now fallen more than 2.0% since Tuesday morning. It has broken through a key technical level at 111.02, which represented a very long-term downtrend line. This has encouraged short-term traders to add to what is believed to be significant outflows from Japanese investors, notably insurance companies. One of the other interesting things is that Japanese exporters, who are typically sellers of USDJPY, seem to be sitting this move out, having filled orders at the 110 level, and are now apparently waiting for 115. While it is unlikely that we will see the yen continue to decline 1% each day, I have to admit that 115 seems quite realistic by the end of the Japanese fiscal year next month.

And those are just two of the many stories that seem to be coming together simultaneously to encourage dollar buying. Other candidates are ongoing weak Eurozone economic data (Eurozone Construction output falling and reduced forecasts for tomorrow’s flash PMI data), rate cuts by EMG central banks (Indonesia cut by 25bps last night), and more confusion from China regarding Covid-19 and its spread. Last night, they changed the way they count infections for the second time in a week, and shockingly the result was a lower number indicating the spread of the disease is slowing. However, at this point, the virus count seems to be having less of a market impact than little things like the announcement that Hubei province is keeping all factories shuttered until at least March 10. Now I don’t know about you, but that hardly seems like the type of thing that indicates things are getting better there.

There is a new tacit contest in the market as well, trying to determine just how big a hit the Chinese economy is going to take in Q1. If you recall two weeks ago, the initial estimates were that GDP would grow at a 4%-5% rate in Q1. At this point 0.0% seems a given with a number of analysts penciling in negative growth for the quarter. And folks, I don’t know why anyone would think there is going to be a V-shaped recovery there. It is going to take a long time to get things anywhere near normal, and there has already been a lot of permanent demand destruction. On top of that, one of the things I had discussed last week, the idea that even if companies aren’t generating revenue, they still need to pay interest on their debt, is starting to be seen more publicly. The news overnight that HNA Group, a massively indebted conglomerate that had acquired trophy assets all around the world (stakes in Hilton Hotels and Deutsche Bank amongst others) is unable to pay interest on its debt and seems to be moving under state control. While the PBOC cut rates slightly overnight, the one-year loan prime rate is down to 4.05% from 4.15% previously, it appears that the Chinese government is going to be fighting the Covid-19 fight with more fiscal measures than monetary ones. That said, the renminbi has been falling along with all other currencies and has traded back through 7.00 to the dollar after a further 0.35% decline overnight.

The point is that you can essentially look at any currency right now and it is weaker vs. the dollar. Each may have its own story to tell, but they all point in the same direction.

I would be remiss to ignore other markets, which show that other than Chinese equity markets (Shanghai +1.85%), which rallied last night after news of further stimulus measures, risk is mostly on its back foot today. European equity markets are generally lower (DAX -0.1%, CAC -0.1%) although not by much. US futures are pointing lower by 0.2% across the board, again, not significant, but directionally the same message. Treasury yields continue to fall, down another 2bps this morning to 1.54%, and gold continues to rally, up another 0.3% this morning.

Yesterday’s FOMC Minutes explained that the Fed was pretty happy with current policy settings, something we already knew, and that they are still unsure how to change their ways to try to be more effective with respect to achieving their inflation target as well as insuring that there are no more funding crises. On the data front, yesterday’s PPI data was much firmer than expected, although most people pretty much ignore those numbers. Today we see Philly Fed (exp 11.0), Initial Claims (210K) and Leading Indicators (0.4%). Monday’s Empire Mfg data was stronger than expected and the forecasts for Philly Fed are for a solid increase. Yet again, the data picture points to a better outcome in the US than elsewhere, which in the current environment will only encourage further USD buying. For now, don’t get in front of this train, but if you need to hedge receivables, sooner is better than later as I think we could see this run for a while.

Good luck
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