Jumping at Shadows

Did the BOJ
Change policy? Or are we
Jumping at shadows?

While the dollar continues to perform well overall, rallying against nine of its G10 counterparts, the story overnight was about the tenth, the Japanese yen. The BOJ announced that they were reducing the amount of long-dated JGB’s they were purchasing by ¥10 billion (~$90B) leading to a rise in yields and correspondingly a rise in the yen. When the news hit the tape, USDJPY fell 0.5% within minutes, and despite an attempt to recoup those losses early in the European session, remains lower by 0.4% as I type. The sharp response is due to the idea that this is a significant policy signal although most analysts in Tokyo don’t believe that to be the case. Rather, it appears to be a reaction by the BOJ markets group to the reality on the ground, namely they don’t need to purchase as many bonds to achieve their targets. And actually, that is a key part of the discussion. The likelihood that the financial markets department would announce a change in policy rather than the full board is extremely remote. But it does feel like a harbinger of the future with regard to the yen. At some point the BOJ is going to start to remove policy accommodation and when they do so, it seems reasonable to expect the yen could rally pretty sharply. Of course, Japanese inflation levels remain well below their targets and so actual policy change from the top seems likely to still be far in the future. Meanwhile, the yen is likely to come under further scrutiny by both speculators and investors, which implies to me that underlying volatility in the currency could rise. Hedgers beware!

But away from the yen, the dollar continues its recent rally, rising another 0.35% against the euro and 0.55% against the Swiss franc. Once again, this movement takes place against a backdrop of solid Eurozone data although the Swiss story is a bit less positive. From the latter, we saw Swiss Unemployment rise to a more than expected 3.2% in December, while Real Retail Sales continued their recent decline, falling 0.2%. I guess neither of those things would be considered a Swiss positive. On the other hand, from Europe we continue to see solid data, with German IP rising a more than expected 3.4% and its Trade Balance expanding more rapidly than forecast as well, up €23.7 billion in November. Meanwhile, the Eurozone Unemployment rate fell to its lowest level, 8.7%, since January 2009. And yet, the euro continues its recent decline. Cumulatively, the euro is now lower on the year by about 1.4%, and while market technicians are not yet likely to jump on this bandwagon, and the prevailing narrative remains that the dollar will fall all year long, it still feels to me like the dollar has further room to run in this rally. After all, 10-year yields on US Treasuries have traded back to 2.50% for the first time since last March, and I remain confident that they will continue higher. Interestingly, yesterday’s only US data print, Consumer Credit, blew away estimates and grew by $28B, far more than the $18B expected, as consumers attacked their holiday spending with credit cards and revolving debt. Confidence certainly remains high in the US, yet another reason I find it difficult to accept the narrative of a lower USD this year.

Pivoting to the Emerging markets, the big story was out of China, where the PBOC removed the fudge counter cyclical factor from the calculation of the daily fixing leading to a 0.4% rally. Last year, if you recall, the PBOC introduced this feature as they were fighting ongoing weakness in the yuan amid significant capital outflows. To their credit, the combination of cracking down on capital outflows and adding in a non-market factor to the fixing equation was successful in stemming the decline. In fact, the yuan rallied a solid 6.6% last year. And I guess that was enough because going forward, they claim that the market will be the driving force again. And while I am sure that will be true for the short term, it remains abundantly clear that they will do whatever they deem necessary to achieve the FX level they want. So if CNY starts to move more aggressively in either direction, you can be sure the PBOC will add some new policy to prevent ‘excessive’ movement. Once again, I would question how the IMF could consider the CNY a market driven currency and eligible to be part of the SDR. Talk about politics!

As to the rest of the EMG space, the dollar is today’s big winner virtually across the board, with only ZAR showing any strength. The story here was a market rumor that President Jacob Zuma had resigned, although there is no substantiation of that fact. However, there is no doubt in my mind that if he did do so, the rand would see significant gains.

The only data point this morning is the JOLTS Job Openings number (exp 6.025M), which seems unlikely to drive the FX market. We also hear from uber-dove Neel Kashkari, so look for more discussion on why interest rates should never be raised again. He will certainly be happy to have heard one of the newer members, Atlanta’s Raphael Bostic, say yesterday, “…I would caution that that [removal of policy accommodation] doesn’t necessarily mean as many as three or four moves per year.” So there is another dove on the board. The thing is, if inflation does continue to tick higher, and we will learn more on Friday, even the doves will come around. So far nothing we have seen this year has changed my view that higher inflation and higher interest rates in the US are on their way, and a higher dollar alongside. As to today, I see no reason for this modest dollar rally to end, so would look for the euro to test 1.1900 by the end of the day as a proxy for a tad more dollar strength.

Good luck


On Friday, I have to confess
The Jobs report didn’t impress
The dollar reacted
By getting compacted
But later, dispelled the distress

This morning the dollar is still
Increasing in value but will
Undoubtedly find
The rally will grind
To a halt, as it battles uphill

It has been a distinctly uninteresting session overnight despite somewhat better than expected Eurozone data being released. In fact, the dollar has continued its Friday afternoon price action and rallied vs. almost every currency. A recap of Friday’s US data showed a decent miss by the headline payroll number, just 148K rather than the 190K expected, and even with revisions the data was weak. But as I had suggested, there was more concern about the AHE data, which printed right on the number, continuing to point to earnings growth of 2.5% over the past year. While that is slower than the Fed clearly wants to see, at least it is not decelerating. The market’s initial reaction was for the dollar to sell off sharply, with the euro jumping 0.3% in the first minute of trading, but it spent the rest of the day ceding those gains and actually closed lower. The euro’s decline has continued here this morning and as I type, it is down by a further 0.35%. What makes this so surprising is the data showing Eurozone Economic Confidence is at its highest level in more than a decade, while the harder data, Retail Sales being today’s example, continues to improve as well. I would argue the consensus view on the dollar this year is distinctly negative, with the rationale being the ECB will be more aggressive than currently priced, while the Fed will simultaneously slow down their tightening policies in the absence of inflationary pressures. You also know that I disagree with that outlook and expect virtually the opposite central bank outcomes along with a dollar rally. One week into the year it is way too early to tell who will be correct, but I have not changed my view at all.

As to the rest of the G10, the dollar is firmer here as well. Alongside the euro, SEK has also fallen 0.35% as concerns increase over house prices there. After what had been non-stop rally in prices for ten years, they have fallen 7% in the past three months and are forecast to decline further. Of course, like all other assets, their prices have been a direct response to the extraordinary monetary policy from the world’s central banks. Is this the canary in the coalmine? It is not uncommon for secondary markets to exhibit the first signs of change when trends are under pressure. Keep a close eye here.

The other thing that is somewhat unusual is that commodity prices are continuing their rally despite the dollar’s strength. Generally the two move in opposite directions, but not today. Let me say that if we continue to see commodity prices rally as they have been, inflation expectations are going to need to rise. You are also aware that I am quite certain that we will see higher inflation readings this year, which will drive policy around the globe. So it seems that we have some anomalous price action this morning. But remember, one day is an anomaly, and perhaps even two days, but if it continues, it starts to become a trend.

A brief tour of the emerging markets shows that the dollar is king there as well this morning, with only one currency of the twenty-four I watch, THB, showing a gain vs. the dollar while the rest of the bloc is lower. And the baht is only higher by 0.1% after news showing foreign investors buying more Thai bonds for a ninth consecutive session. Otherwise, the key decliners have been ZAR, down 0.90% after a major analyst indicated he thought the rand’s 16% rally over the past two months was excessive. It seems some profits were taken this morning. But then the rest of this bloc, across all three geographic regions, is lower by varying amounts as well. Today is simply a day to buy dollars!

After last week’s data deluge, we have much less to digest this week, but Friday is important:


Today Consumer Credit $18.0B
Tuesday NFIB Small Biz Optimism 108.0
  JOLTS Job Openings 6.025M
Thursday Initial Claims 245K
  PPI 0.2%
  -ex food & energy 0.2%
  Monthly Budget Statement -$46.0B
Friday CPI 0.1% (2.1% Y/Y)
  -ex food & energy 0.2% (1.7% Y/Y)
  Retail Sales 0.5%
  -ex autos 0.3%
  -Control Group 0.4%

While the Fed doesn’t use CPI in its calculations, it is still the most widely followed inflation indicator and the market will immediately factor in any surprise. While these are December figures, and so I don’t expect much variance, anecdotally I have seen a number of places raise their prices in the new year already, so I expect that next month’s data is ripe for a higher print. In addition to the data, we hear from eight Fed speakers this week, although they mostly hew from the dovish side of the spectrum. As such, I expect to hear a lot about why the Fed needn’t be in a hurry to continue tightening policy. But in the end, even the doves will need to respond if the data shows prices rising. And that is this year’s big unknown; just how fast will prices rise in 2018.

As to the market today, it is hard to get excited about much further movement. My sense is that the dollar’s rally is likely to stall for now, although unless we hear something new and surprising from one of today’s Fed speakers, I see no reason for the dollar to give back its gains.

Good luck

In a Hurry

Inflation in Europe remains
The data that never shows gains
For hawks it’s a worry
As they’re in a hurry
To raise rates ere Europe’s growth wanes

It should be no surprise that inflation remains the topic du jour in markets as it has risen to the top of every central bank’s agenda now that global growth appears in good shape on a synchronized basis. The problem, however, is that despite this uptick in growth, inflation continues to run well below targets. The latest data came from the Eurozone this morning, where headline CPI was released at 1.4%, 0.1% lower than last month but right on expectations, while the core reading, excluding food, energy & tobacco prices, remained stable at 0.9%. The ongoing absence of visible price pressures continues to split the ECB with a slowly growing hawkish wing arguing for a swift end to QE, while the more moderate and dovish members, including Signor Draghi, are perfectly happy to watch from the sidelines. After all, in the doves’ collective mindset, they have already acted by virtue of the reduction in QE purchases to be made starting this month and going forward at least until September. The upshot in the market has been modest weakness in the euro as traders become slightly less certain about the timing of the end of QE. After all, if, come September, Eurozone CPI is still running near current levels with core still around 1.0%, it will be extremely difficult for the ECB to make the case that it is time to end QE. And remember, the key driver in the euro’s ascent over the past nine months has been the idea that the ECB is going to become more aggressive than the Fed in its removal of policy accommodation.

As to the dollar’s overall performance this morning, it has shown broad based, if shallow, strength. In fact, it has rallied against all its G10 brethren, and against most of the emerging market bloc. However, movement overall has been quite limited and I believe that is due to the anticipation of today’s big data release, the payroll report.

Here are updated forecasts:


Nonfarm Payrolls 190K
Private Payrolls 193K
Manufacturing Payrolls 18K
Unemployment Rate 4.1%
Average Hourly Earnings (AHE) 0.3% (2.5% Y/Y)
Average Weekly Hours 34.5
Trade Balance -$49.9B
ISM Non-manufacturing 57.6
Factory Orders 1.1%

At this stage in a recovery cycle, one has to be impressed by the steady growth in employment. The impact from the hurricanes in September seems to have completely washed through the data, and there is no reason to think this report is going to underperform, especially since yesterday’s ADP number was a blowout on the high side at 250K. The point is that the employment situation in the US remains quite solid. Of more importance in my eyes, and likely in that of the FOMC, is how the AHE number evolves. Remember, the Fed remains ‘all-in’ on their Phillips curve models, and so will see an increase in this number as a critical input into their framework. Finally, keep an eye on the ISM data at 10:00, where further strength will add more pressure to the FOMC to potentially accelerate their policy tightening. Let me say that based on the start to the year in equity markets, there is a strong belief that the data will continue to be quite robust.

Aside from the data, we hear from two more Fed speakers, Philly’s Harker (centrist) and Cleveland’s Mester (hawk) later. Yesterday we heard from St Louis Fed President Bullard (dove) who made an interesting, if unproven point. He said that in countries that have established an explicit inflation target, the private sector has become more confident in central banks’ ability to deliver that target, and thus long-term inflation expectations have gravitated to the target. The impact is that it seems unlikely that inflation will run out of control in those countries. But it has also resulted in extremely sluggish movement in those indicators, meaning that the time line for inflation to regain its target has been extended. Of course, as he is a confirmed dove, he is simply talking his book. He remains keen to come up with a rationale for the Fed to slow down its policy trajectory. However, he is not a voter, and I don’t believe that this theory will gain widespread acceptance any time soon. In fact, I would argue that we have seen inflation run higher, and that the data is simply catching up. My gut tells me that the reaction function in the Fed, as currently constructed, is that strong data today, especially AHE, will lead to thoughts of even faster tightening, while any softness will be overlooked. Too much evidence is pointing to further economic strength, and higher prices by default. I still like the dollar overall on this basis, as I continue to believe the Fed will be more aggressive this year than the market expects.

Good luck

Price Rises Ahead

So what did we learn from the Fed?
They’re thinking that tax cuts instead
Of low unemployment
Could give them enjoyment
By driving price rises ahead

“We’ll have to be guided by the data as they come in, that’s what will dictate the path of our policy.” These words from Jerome Powell at his Senate confirmation hearing back on November 28th will be tested as we go forward. Yesterday’s FOMC Minutes showed that
the committee remains quite comfortable with the current economic growth prospects, highlighting strength in numerous sectors domestically as well as global growth. Recall that the December meeting occurred before the tax reform legislation became law. However, several committee members did discuss the prospects for said legislation and the impact it might have on the economy, and by extension the rate of inflation. It is clear that the Fed has completely turned its focus to the inflation story, and rightly so, given the current robust employment situation. So the question going forward, and one of the key drivers of markets and the dollar this year, is how will inflation behave in 2018?

The first data of the year have shown that economic growth continues apace, with PMI data from around the world beating expectations for both manufacturing and services. This morning’s readings from Europe and the UK are the latest, with the Service and Composite readings both pushing to the highest levels seen since the financial crisis. As well, from the US we saw ISM Manufacturing yesterday with a robust outcome of 59.7, also pushing back near its highest levels since the crisis. Of more importance, however, was the ISM Prices Paid index, printing at a much firmer than expected 69.0, and indicating further that inflation pressures are growing in the US.

The mystery of low inflation continues to be the theme on which the Fed hangs its hat. It is why two members dissented on raising rates in December, and what every dove will cite as they make the case for retaining extraordinary monetary policy. But inflation is real, it is quickening, and it is coming to a screen near you. Not only are we seeing price pressures at the factory gate as products are shipped, but we are seeing commodity prices staging a strong rally. In addition, the dollar’s weakness speaks directly to a rise in import prices, and after all, we run a very substantial trade deficit every month. The final hiding place has been in wages, but there remains a disconnect between the growth in wages (which according to the Atlanta Fed Wage Growth Tracker has been running at >3.2% for the past two years) and Average Hourly Earnings (AHE) which continues to run at a surprisingly low 2.5%. The thing is, there is no reason that Core PCE, the Fed’s designated measure of inflation, cannot rise despite the lagging of AHE. In fact, I expect that is exactly what we will see as 2018 progresses. Add to this the prospect for a further boost to US economic growth from the initial impacts of the tax changes and you have a recipe for higher inflation. This will force the Fed’s hand going forward. After all, if Chairman Powell is true to his word, higher inflation will guide the Fed toward higher rates. And that is not something the current market valuations have priced in. Rather I would argue what current valuations have prices in is permanent low interest rates and inflation, a highly unlikely outcome!

On to the dollar, which continues its recent performance and has fallen somewhat further this morning. Versus its G10 brethren, the dollar is down against all but the yen, which is basically flat on the session. Despite a strong performance by the US economy, it appears that traders continue to bet on an even stronger performance by other nations’ economies. Even the UK has shown resilience in the face of Brexit related uncertainty and has rallied further this morning. Last year the dollar remained under pressure all year as the narrative evolved toward the Fed slowing its pace of tightening while other nations started to increase theirs. I have seen nothing to indicate the Fed is going to slow down, and in fact, expect it is far more likely that they raise rates at least four times this year, more than they themselves penciled in back in December, and far more than futures markets currently have assessed. It is that change which will drive a change in dollar sentiment during 2018.

The story in emerging markets overnight was the same, with the dollar falling against virtually all its counterparts, led by TRY’s 0.7% gain followed closely by ZAR’s 0.6%. The latter is easy to understand as commodities, notably precious metals, have been rallying, while the former saw a response to a report by the central bank that the inflation story there was improving slightly. Remember, Turkish interest rates remain amongst the highest in the world. Elsewhere in this space, the story was similar if less dramatic, with currency strength a function of the dollar’s overall weakness rather than any specific stories per se.

This morning’s data brings the following: ADP Employment (exp 190K) and Initial Claims (242K), with the former having potential for instigating a move. Any reading that could imply further labor market tightening should impact US yields and by extension the dollar. However, I would argue that a weak number would not likely have a large negative impact given the market’s underlying premise is already that inflation will remain low forever! At any rate, the reality is that tomorrow’s data is far more important, so it is hard to get overlay excited this morning. The St Louis Fed’s Bullard speaks this afternoon, but I would be surprised if he starts to change the message, especially with the imminent arrival of a new Fed chair so soon. Adding it all up leads me to believe that the dollar is unlikely to fall much further instead staying quite near current levels. Tomorrow, however, could be a different story.

Good luck


The Narrative Speaks

For two weeks the dollar’s been hammered
As traders, for Krona have clamored
The narrative speaks
Of a dollar quite weak
A view with which I’m not enamored

But now that the New Year has started
With tax laws for earnings recharted
A new attitude
Ought soon be pursued
But this won’t be for the fainthearted

In the two plus weeks since I last wrote, the dollar has been sold off consistently, with the Swedish and Norwegian Krona(e) the biggest gainers in the G10 space, rallying between 3.5% and 4.0%. Pretty impressive movement in a short period of time! But across the entire G10, the dollar was the weakest currency as the narrative continues to focus on the idea that the Fed will be forced to slow down their current trajectory of interest rate increases while we will see a much quicker pace of tightening elsewhere in the world. For those of you who looked through my forecasts yesterday, it is clear I disagree with that story. However, as long as enough players in the market continue to believe the story, the dollar will remain under pressure.

So what can change that view? We will need to see the inflation story become much clearer for the US, meaning rising wages and prices, as well as ongoing dovishness from certain central bankers, notably Mario Draghi, in the face of an improving economic situation in Europe. And the improving economic situation in Europe continues apace. Yesterday saw the PMI data in Europe confirmed at its highest level since well before the financial crisis and this morning added record low German Unemployment to the mix. Certainly the story in Europe’s largest economy has been a success, but as yet, like elsewhere in the developed world, faster growth has not led to higher prices. And all of the commentary we have heard from Mario Draghi and his ECB brethren continues to focus on the lack of inflationary pressures as the root cause for the ECB’s need to continue to support the economy. In other words, while QE in Europe will be cut in half from last year’s levels starting this month, they are still adding assets to their balance sheet and continuing to cap Eurozone interest rates.

On the other side of that trade is the US, where the Fed has already embarked on its tightening campaign, both raising rates and allowing the balance sheet to start to shrink. In many ways I think the latter issue will be much greater, especially with the government’s growing need to issue significantly more debt to cover a growing budget deficit. The upshot is just as we are slated to get a big increase in supply this year, the biggest bid for Treasuries is going to shrink. To my knowledge, the laws of supply and demand have yet to be repealed, and that situation means that Treasury prices seem certain to decline as the year progresses. In my view, higher Treasury yields will be the key to underpinning the dollar’s surprising (to the market) strength this year.

It is important to remember that it was not just the G10 currencies that benefitted during the second half of December, but almost all emerging market currencies rallied as well. In fact the only two laggards there were the Argentine and Mexican pesos. As to the former, the story revolved around a relaxation in inflation targets for the next two years allowing easier monetary policy there to support growth. Of course, easier monetary policy (read lower interest rates) is anathema for an emerging market currency, hence the decline. Meanwhile, just south of our border it seems that the basic story driving the Mexican peso’s decline was concern over a growing campaign-finance corruption scandal, which was seen as a boost to AMLO and a more radical presidential outcome this summer. While both these currencies have rebounded somewhat from their worst levels of the period, it is important to remember that both have issues that can lead to further weakness. But elsewhere in EMG, it has been dollar bashing as well.

With the first week of the month upon us, we are due to be saturated with data as follows:


Today Construction Spending 0.5%
  ISM Manufacturing 58.2
  ISM Prices Paid 64.5
  FOMC Minutes  
Thursday ADP Employment 190K
  Initial Claims 242K
Friday Nonfarm Payrolls 190K
  Private Payrolls 185K
  Manufacturing Payrolls 20K
  Unemployment Rate 4.1%
  Avg Hourly Earnings 0.3% (2.5% Y/Y)
  Avg Weekly Hours 34.5
  Trade Balance -$50.0B
  ISM Non-Manufacturing 57.5
  Factory Orders 1.1%

All eyes will be on today’s FOMC Minutes as traders and investors want to see more about the inflation discussion at the Fed. And then, of course, Friday’s payroll data will be key. Any hint that wages are rising more rapidly than forecast should be seen as an immediate dollar positive. Also, watch the Unemployment rate as if it were to decline further, it would also ratchet up pressure on the Fed.

As to today’s trading, the dollar seems to have stabilized after its recent declines. My sense is it will be responsive to the impressions from the Minutes, but that traders are really looking ahead to Friday.

Good luck

The Tale of Goldilocks

(With apologies to Ernest Lawrence Thayer)

The outlook isn’t brilliant for investors or their stocks
As all their hopes are pinned upon the tale of Goldilocks
While growth has been quite solid and in line to further soar
Inflation’s playing possum, sitting right outside the door

And as this year progresses what I sense we will observe
Is prices rising faster and a steepening yield curve
The impact on the dollar will be gradual but clear
With buyers more than sellers driving values for this year.

So let us take a look into my handy crystal ball
And see how things unfold throughout the winter, summer, fall.
The most important data point is now Core PCE
Which as of late December stood at one point five, you see

Way back in Twenty Twelve the Fed explained that in their view
The best inflation rate would be a simple rate of Two
The thing is since that time, and actually from well before,
That rate of two percent has been a ceiling, not a floor

But ask yourself this question, does, to you, it really feel
Like prices aren’t rising? If you ask me, that’s surreal.
The thing is Janet Yellen has been adamant it’s true
Inflation that she’s watching isn’t anywhere near two.

My forecast is that sometime ere the summer does arrive
Those readings will be rising up quite near to two point five
And if I’m right the new Fed Chair, Jay Powell, will be forced
To increase rates much faster than he’s currently endorsed

But this, my friends, is not something for which stocks are prepared
Which helps explain my vision of investors running scared
Consider, if you will, that if the ten-year reaches four
Most traders will have never seen a rate like that before

The impact on the markets will be sharp and likely swift
As traders view portfolios, and stocks given short shrift
Meanwhile those higher interest rates, investors will attract
Thus dollar buying will increase, with very real impact.

And there is one more benefit the dollar will receive
The tax treatment of earnings will for companies relieve
The problem of retaining foreign earnings far offshore
Instead expect that money to come rushing through the door

And while much of this cash has been converted in the past
There’s still a tidy sum in local currencies amassed
Thus when that gets converted many dollars will be bought
For dollar bears, I’m confident this ought be food for thought.

Now let’s take a world tour so we can get a better sense
Of what some FX rates will be, come Christmas twelve months hence.
In Europe we’ve been promised that at least until September
The ECB will buy more bonds ere QE they dismember

But lo, the current narrative has Draghi soon compelled
To stop the buying earlier, a view he has dispelled
While growth across the Continent has recently improved
His history as President implies that he’s unmoved

So I expect the ECB will buy and buy and buy
More bonds, insuring interest rates don’t ever get too high
And so the idea that the euro ought to really thrive
Is errant, but instead will trade year-end at one oh five.

In England as they grapple with the impact Brexit caused
Sir Carney, in his rate hiking, has evidently paused
And though inflation there already threatens to explode
Uncertainty from Brexit will cause growth there to be slowed

And so while Chairman Powell will, more rate hikes, oversee
Mark Carney will do nothing about rates, I guaranty
And thus the pound will suffer all year long and slowly slide
Toward one point one as time goes by and next comes yuletide.

We detour next to Asia where Mt Fuji overlooks
The nation that for years has had deflation on its books
The question is, has twenty years of QE done the trick?
And fin’lly helped Kuroda-san to cause a price uptick?

The good news, I believe, is prices there are no more sinking
But two percent, their target, is still naught but wishful thinking
And so as prices round the world accelerate this year
The yen will find it has become particularly dear

The combination of inflation and increasing risk
Will drive the yen toward par, though movement won’t be very brisk.
The other Asian nation that we care so much about
Is China, where the President, his foes, has now thinned out

Thus Xi has turned his focus to the leverage that exists
In housing and in Wealth Products where danger still persists
Inflation there is edging up alongside interest rates
But most of China’s banks will suffer lest this risk abates

These problems call for answers that are opposite in nature
And well beyond the skill set of the Chinese legislature
The upshot is the yuan is where the pressure will be felt
Come Christmas next expect that seven fifty will be dealt.

Closer to home its time to talk ‘bout things north of the border
Where housing prices bubbled up and may cause more disorder
The BOC has raised rates twice though recently they’ve stopped
But soon some tighter policies they will need to adopt

However, they will trail the Fed as housing there is shaken
And so the Loonie, as its wont, will find itself forsaken
When winter’s clutches have embraced us all twelve months from now
On screens near you expect a rate of one forty, oh wow!

South of the border I expect the story is akin
To Canada, thus pesos ought to take it on the chin
While Carstens has done yeoman’s work and helped his nation grow
His rate path vs. the Fed is likely to be somewhat slow

The other thing we can’t forget is NAFTA’s likely doomed
So growth in trade there, like the past, just cannot be assumed
Comparing notes in Mexico when all is said and done
Look for the peso this year to end up at Twenty-One

There is one other thing that I will forecast, though insane
That’s Bitcoin, which has lately shown it’s anything but plain
The thing is classic markets have both buyers and their sort
While sellers naturally rise up and some even sell short

But Bitcoin’s truly different because half this group’s deficient
Since Miners hoard all that they mine, thus buyers are sufficient
To drive the price much higher than where value seems to be
Especially since value is where both sides disagree

It may be true the future of this ‘asset’ will be grand
But then again it may be that it won’t work out as planned
Last year it multiplied some fifteen times, who would have thought?
But this year I’d be wary if you have already bought

I fear that governments around the world will soon decide
That competition for their money they cannot abide
Look for restrictions to increase, exchanges to be closed
And many obstacles emplaced than currently supposed

All this will weigh quite heavily on Bitcoin’s market price
So I suggest a rout will come and happen in a trice
Experience explains to me this bubble will be shunned
If Bitcoin’s still a thousand bucks next winter I’d be stunned.

And so a recap now is due, the year ahead ought see
Most interest rates increasing, also volatility
While looking back I want to thank my readers one and all
And please remember that these thoughts are just one pundit’s call.

Good luck and have a happy, healthy and prosperous new year

Mario’s Turn

Inflation was kind of a flop

As core prices didn’t much pop

Then Janet regaled

Investors but failed

To sell the idea stocks could drop


The Old Lady’s next to report

Excitement, though’s, sure to fall short

She’s clearly on hold

Til Brexit unfolds

While Carney just holds down the fort


Then lastly it’s Mario’s turn

Where euro bulls, to a man, yearn

For hints that QE

Will end more quickly

Else they’ll all wind up with heartburn!


Starting with the Fed yesterday afternoon, markets have been convulsed by central bank activities in both G10 and emerging markets. And the fun will continue until Signor Draghi finishes his press conference later this morning. So let’s recap what we have learned so far:

FOMC – raised rates 25bps, as expected, and continued to describe economic growth as moderate and risks as roughly balanced. The dot plot indicated median expectations for Fed Funds in 2020 rose to 3.25%, up from the previous reading of 2.875%, but there were two dissents on the vote compared to a unanimous decision in September. Net, it appears that when Jay Powell takes over, he will be following the same course for now, although certainly if the data starts to change, specifically the inflation data, we are likely to see an altered path.

PBOC – raised several rates by 0.05% overnight in an attempt to maintain the balance between their efforts to deleverage the economy further while still encouraging growth. They also added substantial liquidity to the market to prevent any squeeze in short term funding. It seems clear that the Chinese are going to continue to take their lead from the Fed as they navigate their own internal issues. There was virtually no impact on the currency.

SNB – the Swiss left rates unchanged as they continue to call the franc overvalued despite its 7% decline vs. the euro thus far this year. Inflation remains below target, although it is finally climbing slightly. There was no indication that they will be changing the policy rate until well after the ECB starts to raise rates, which, as of now, seems unlikely before 2019. The Swiss franc weakened slightly after the announcement as any hope of a rate change from the current -0.75% was dashed for a longer than expected period.

Norgesbank – while the Norwegians left rates on hold, as expected, they raised their forecast rates starting in Q4 2018 and beyond as they now foresee global growth continuing and driving up the global rate structure. This adjustment surprised the market and NOK has rallied by 1% this morning on the news, by far the biggest mover in the G10 bloc. This is especially in contrast to the Riksbank, who gave no indication that policy rates in Sweden would be moving any time soon.

Central Bank of Turkey – the Turks raised the Lending rate by just 50bps, half the 100bps expected by the market heading into the meeting. It seems that the Central bank is feeling the pressure from President Erdogan who has been calling for lower rates to tame rising Turkish inflation. The lira took the news poorly, tumbling 1.6% within minutes of the announcement and has remained at this new, lower level since then.

ECB – This is the last major central bank meeting of the year. Expectations are for no policy changes, with rates remaining on hold while QE continues, but there are high hopes by euro bulls that Signor Draghi will hint at QE ending completely next September, or that there might be a change in the timing of when rates start to rise. While the Eurozone economy has clearly improved significantly during the past year, the inflation conundrum there is even stronger than here in the US, with core inflation still below 1.0%, far lower than its target of ‘close to, but below 2.0%.’ As I wrote yesterday, inflation has become the key metric for virtually all central banks at this point, and until those readings start to pick up, I find it extremely difficult to believe that the ECB is going to change its stance.

Yesterday, the US core inflation data disappointed, printing at 0.1%, which served to keep alive the debate about why inflation doesn’t seem to respond to the robust employment data. Yellen had no answers at her press conference other than to say that they expect it will eventually occur. However, the soft inflation data yesterday did undermine the dollar, which was consistently weaker all session.

Interestingly, in the time I have been writing my note this morning, early further weakness in the dollar has largely abated, and except for the above mentioned central bank impacts on CHF, NOK and TRY, the dollar is virtually unchanged. This morning also brings some US data to add to the mix with Initial Claims (exp 236K) unlikely to move markets, although Retail Sales (exp 0.3%, 0.6% -ex autos) could have a bigger impact. My sense here is that stronger than expected data will be taken in stride by the markets with little impact, however weakness might be reflected in the dollar losing some additional ground. Of course, it all depends on what the ECB does. They release their policy statement at 7:45 EST and then Draghi faces the press at 8:30. I expect that until we hear from Draghi, markets will remain little changed, but then all bets are off. After all, he has been known to surprise us all.

With the last of the central bank decisions out of the way by day’s end, this will be the last poetry until January 3rd. In that spirit, and in the spirit of the season, may you all have a wonderful holiday and a happy and healthy New Year.


Until 2018…