Much Could Be Gained

Today’s jobs report is the theme
About which most traders will scheme
If strong, bulls will buy
Just like last July
If weak, you can bet they’ll all scream

But yesterday there was some news
About a Fed President’s views
Ms. Mester explained
That much could be gained
If price hikes the Fed could perfuse

Yes folks, it’s payrolls day so let’s get that out of the way quickly. Here are the current consensus estimates as per Bloomberg:

Nonfarm Payrolls 145K (whisper 125K)
Private Payrolls 130K
Manufacturing Payrolls 3K
Unemployment Rate 3.7%
Average Hourly Earnings 0.2% (3.2% Y/Y)
Average Weekly Hours 34.4
Participation Rate 63.2%
Trade Balance -$54.5B

Census hiring explains the relatively wide gap between nonfarm and private payrolls, and it is important to understand that these numbers represent a downtick from the trends we have seen during the past several years. But it is also important to remember that a nonfarm number greater than 100K is deemed sufficient to prevent the Unemployment Rate from rising as population growth in the US slows. Given how poor the data has been this week, while official forecasts at most institutions haven’t fallen much, the trading community is definitely looking for a weaker number.

In the event the data is weak, I expect the dollar to decline as the market starts to price in more than a 25bp cut for the end of this month (currently an 85% probability), but I think the initial reaction to equities could be a rally as the reflex of lower rates leading to higher stock prices kicks in. Alas, for stock bulls, I fear the situation is starting to turn to the data is getting weak enough to indicate an imminent recession which will not be good for equity markets. Of course, a strong print should see both the stock market and the dollar rally, while Treasuries sell off. As an aside, 10-year Treasury yields have fallen 37 basis points since September 13! That is a huge move and a very good indicator of just how quickly sentiment has shifted regarding the Fed’s activity later this month.

But there was something else yesterday that I think was not widely noticed, yet I believe is of significant importance. Cleveland Fed President Loretta Mester, one of the two most hawkish members of the FOMC (KC’s Esther George is the other) spoke yesterday and said she thought, “adopting a band for the Fed’s inflation objective makes sense for communications reasons, as it allows some scope to run inflation a bit higher in the band during good times while allowing the target for price gains to be lower during downturns when interest rates are near zero.” This is hugely significant because if a Fed hawk is now comfortable allowing inflation to run above target, something that hawks specifically fight, it means that the FOMC is much more dovish than previously assumed. And that means that we are likely to head toward ZIRP much sooner than many had thought.

This is clearly an impediment to further dollar strength, as one of the pillars of the strong dollar view has been the idea that the FOMC would maintain relatively tighter monetary policy than other central banks. Of course, as we have already seen, other central banks are not sitting around, waiting for Godot, but acting aggressively already. For example, after the RBA cut rates last week, last night the Reserve Bank of India cut rates by 25bps while lowering GDP forecasts. As inflation remains modest in India, you can bet that there will be further cuts to come. The FX impact was on a day when the dollar lost ground against virtually all EMG counterparts, INR actually weakened by 0.15%.

Away from these stories, Brexit is still Brexit with Boris flitting around Europe trying to close the loop. Though not yet able to get a deal agreed in Brussels, he seemingly is having success at home in getting enough of Parliament to back him to get his deal passed. And that is important for the EU, because given the previous failure of Teresa May to get her deal passed, the EU is wary that anything to which they agree will still be voted down. But if Boris can show his deal will get enacted in the UK, it would be a powerful argument for the EU to blink.

And that’s really it folks. The dollar is generally softer this morning against both G10 and EMG currencies with KRW the biggest gainer (+0.8%) on excitement over prospects for the Fed to cut rates which encouraged profit taking after a two-week 2+% decline. But it’s all about payrolls this morning. We do hear from three more Fed speakers today, with Chairman Jay on the hustings in Washington this afternoon. That will give the market plenty of time to have absorbed the data.

For my money, I fear a much worse NFP number, something on the order of 50K. The data has been too weak to expect something much better in my view.

Good luck and good weekend
Adf

QE We’ll Bestow

The data continue to show
That growth is unhealthily slow
The pressure’s on Jay
To cut rates and say
No sweat, more QE we’ll bestow

The market narrative right now is about slowing growth everywhere around the world. Tuesday’s ISM data really spooked equity markets and then that was followed with yesterday’s weaker than expected ADP employment data (135K + a revision of -38K to last month) and pretty awful auto sales in the US which added to the equity gloom. This morning, Eurozone PMI data was putrid, with Germany’s Services and Composite data (51.4 and 48.5 respectively) both missing forecasts by a point, while French data was almost as bad and the Eurozone Composite reading falling to stagnation at 50.1. In other words, the data continues to point to a European recession on the immediate horizon.

The interesting thing about this is that the euro is holding up remarkably well. For example, yesterday in the NY session it actually rallied 0.45% as the market began to evaluate the situation and price in more FOMC rate cutting. Certainly it was not a response to positive news! And this morning, despite gloomy data as well as negative comments from ECB Vice-President Luis de Guindos (“level of economic activity in the euro area remains disappointingly low”), the euro has maintained yesterday’s gains and is unchanged on the session. At this point, the only thing supporting the euro is the threat (hope?) that the Fed will cut rates more aggressively going forward than had recently been priced into the market. Speaking of those probabilities, this morning there is a 75% probability of a Fed cut at the end of this month. That is up from 60% on Tuesday and just 40% on Monday, hence the euro’s modest strength.

Looking elsewhere, the pound has also been holding its own after yesterday’s 0.5% rally in the NY session. While I think the bulk of this movement must be attributed to the rate story, the ongoing Brexit situation seems to be coming to a head. In fact, I am surprised the pound is not higher this morning given the EU’s reasonably positive response to Boris’s proposal. Not only did the EU not dismiss the proposal out of hand, but they see it as a viable starting point for further negotiations. One need only look at the EU growth story to recognize that a hard Brexit will cause a significant downward shock to the EU economy and realize that Michel Barnier and Jean-Claude Juncker have painted themselves into a corner. Nothing has changed my view that the EU will blink, that a fudged deal will be announced and that the pound will rebound sharply, up towards 1.35.

Beyond those stories, the penumbra of economic gloom has cast its shadow on everything else as well. Government bond yields continue to decline with Treasury, Bund and JGB yields all having fallen 3bps overnight. In the equity markets, the Nikkei followed the US lead last night and closed lower by 2.0%. But in Europe, after two weak sessions, markets have taken a breather and are actually higher at the margin. It seems that this is a trade story as follows: the WTO ruled in the US favor regarding a long-standing suit that the EU gave $7.5 billion in illegal subsidies to Airbus and that the US could impose that amount of tariffs on EU goods. But the White House, quite surprisingly, opted to impose less than that so a number of European companies that were expected to be hit (luxury goods and spirits exporters) find themselves in a slightly better position this morning. However, with the ISM Non-Manufacturing data on tap this morning, there has to be concern that the overall global growth story could be even weaker than currently expected.

A quick survey of the rest of the FX market shows the only outlier movement coming from the South African rand, which is higher this morning by 0.9%. The story seems to be that after three consecutive weeks of declines, with the rand falling more than 6% in that run, there is a seed of hope that the government may actually implement some positive economic policies to help shore up growth in the economy. That was all that was needed to get short positions to cover, and here we are. But away from that story, nothing else moved more than 0.3%. One thing that has been consistent lately has been weakness in the Swiss franc as the market continues to price in yet more policy ease after their inflation data was so dismal. I think this story may have further legs and it would not surprise me to see the franc continue to decline vs. both the dollar and the euro for a while yet.

On the data front, this morning we see Initial Claims (exp 215K) and then the ISM Non-Manufacturing data (55.0) followed by Factory Orders (-0.2%) at 10:00. The ISM data will get all the press, and rightly so. Given how weak the European and UK data was, all eyes will be straining to see if the US continues to hold up, or if it, too, is starting to roll over.

From the Fed we hear from five more FOMC members (Evans, Quarles, Mester, Kaplan and Clarida), adding to the cacophony from earlier this week. We already know Mester is a hawk, so if she starts to hedge her hawkishness, look for bonds to rally further and the dollar to suffer. As to the rest of the crew, Evans spoke earlier this week and explained he had an open mind regarding whether or not another rate cut made sense. He also said that he saw the US avoiding a recession. And ultimately, that’s the big issue. If the US looks like a recession is imminent, you can be sure the Fed will become much more aggressive, but until then, I imagine few FOMC members will want to tip their hand. (Bullard and Kashkari already have.)

Until the data prints, I expect limited activity, but once it is released, look for a normal reaction, strong data = strong dollar and vice versa.

Good luck
Adf

It’s Now or Never

Like Elvis said, it’s now or never
For Boris’s Brexit endeavor
The Irish are chuffed
As Coveney huffed
He’s not, but he thinks he’s so clever

Around 7:00 this morning, PM Boris Johnson will be addressing the Tory party at their annual convention and the key focus will be on his plan to ensure a smooth Brexit. The early details call for customs checks several miles away from the border on both sides with a time limit of about four years to allow for technology to do the job more effectively. However, he maintains that the whole of the UK will be out of the EU and that there will be no special deal for Northern Ireland. His supporters in Northern Ireland, the DUP, appear to have his back. In addition, he is reportedly going to demand that an agreement be reached by October 11 so that it can be agreed in Parliament as well as throughout the EU.

Interestingly, the Irish are still playing tough, at least according to Foreign Minister Simon Coveney, who said that the leaked details formed “no basis for an agreement.” Of course, as in everything to do with this process, there are other views in Ireland with Irish PM Varadkar seemingly far more willing to use this as a basis for discussion. His problem is the Fianna Fail party, a key coalition member, is unhappy with the terms. I say this is interesting because in the event of a no-deal Brexit, Ireland’s economy will be the one most severely impacted, with estimates of 4%-5% declines in GDP in 2020.

With respect to the market, it is difficult to untangle the effect of the latest Brexit news from the dreadful economic data that continues to be released. This morning’s UK Construction PMI fell to 43.3, within ticks of the lows seen during the financial crisis in 2009. The pound has suffered, down 0.4% as I type, although it was even softer earlier in the session. The FTSE 100 is also weak, -1.8%, although that is very much in line with the rest of the European equity markets (CAC -1.6%, DAX -1.3%) and is in synch with the sharp declines seen yesterday in the US and overnight in Asia.

Speaking of yesterday’s price action, it was pretty clear what drove activity; the remarkably weak ISM Manufacturing print at 47.8. This was far worse than forecast and the lowest print since June 2009. It seems pretty clear at this point that there is a global manufacturing recession ongoing and the question that remains is, will it be isolated to manufacturing, or will it spill over into the broader economy. Remember, manufacturing in the US represents only about 11.6% of GDP, so if unemployment remains contained and services can hold up, there is no need for the US economy to slip into recession. But it certainly doesn’t help the situation. However, elsewhere in the world, manufacturing represents a much larger piece of the pie (e.g. Germany 21%, China 40%, UK 18%) and so the impact of weak manufacturing is much larger on those economies as a whole.

It is this ongoing uncertainty that keeps weighing on sentiment, if not actually driving investors to sell their holdings. And perhaps of most interest is that despite the sharp equity market declines yesterday, it was not, by any means, a classic risk-off session. I say this because the yen barely budged, the dollar actually fell and Treasuries, while responding to the ISM print at 10:00am by rallying more than half a point (yields -7bps), could find no further support and have not moved overnight. If I had to describe market consensus right now, it would be that everyone is unsure of what is coming next. Will there be positive or negative trade news? Will the impeachment process truly move forward and will it be seen as a threat to the Administration’s plans? Will Brexit be soft, hard or non-existent? As you well know, it is extremely difficult to plan with so many potential pitfalls and so little clarity on how both consumers and markets will react to any of this news. I would contend that in situations like this, owning options make a great deal of sense as a hedge. This is especially so given the relatively low implied volatilities that continue to trade in the market.

Turning to the rest of the session, a big surprise has been the weakness in the Swiss franc, which has fallen 0.6% this morning despite risk concerns. However, the Swiss released CPI data and it was softer than expected at -0.1% (+0.1% Y/Y) which has encouraged traders to look for further policy ease by the SNB, or at least intervention to weaken the currency. But just as the dollar was broadly weaker yesterday, it has largely recouped those losses today vs. its G10 counterparts. Only the yen, which is up a scant 0.15%, has managed to show strength vs. the greenback. In the EMG space, KRW has been the biggest mover, falling 0.55% overnight after North Korea fired another missile into the sea last night, heightening tensions on the peninsula there. Of course, given the negative data (negative CPI and sharply declining exports) there is also a strong case being made for the BOK to ease policy further, thus weakening the won. Beyond that, however, the EMG currency movement has been mixed and modest, with no other currency moving more than 25bps.

This morning after Boris’s speech, all eyes will turn to the ADP employment data (exp 140K) and then we have three more Fed speakers this morning, Barkin, Harker and Williams. Yesterday, we heard from Chicago Fed president Charles Evans, who explained that he felt the economy was still growing nicely and that the two rate cuts so far this year were appropriate. He did not, however, give much of a hint as to whether he thought the Fed needed to do more. Reading what I could of the text, it did not really seem to be the case. My impression is that his ‘dot’ was one of the five looking for one more cut before the September meeting.

And that’s what we have for today. Barring something remarkable from Boris, it appears that if ADP is in line with expectations, the dollar is likely to consolidate this morning’s gains. A strong print will help boost the buck, while a weak print, something on the order of 50K, could well see the dollar cede everything it has gained today and then some.

Good luck
Adf

 

A Lack of Well-Being

Down Under the RBA eased
And Aussie bulls have gotten squeezed
In Europe they’re seeing
A lack of well-being
Which has politicians displeased

The RBA cut rates by 25bps last night, as fully expected by the interest rate markets, and they indicated that despite the fact that their base rate was now at a record low of 0.75%, they were considering further easing in the future. The Aussie dollar suffered on the news and is the worst performer in the G10 today, down 0.80%. In fact, Aussie is now at its lowest level since the financial crisis and, in truth, the trend certainly looks like it has further to fall. Australia continues to suffer from the combination of China’s slowing growth as well as the fall-out from the US-China trade war. Alas for the Australians, there is precious little they can do to insulate themselves from those things given they have literally built their economy over the past twenty-five years on the back of Chinese growth. Given the US dollar’s overall trend higher, I see nothing that would change this in the near term. Receivables hedgers beware.

Adding to the global gloom was the release of the Eurozone Manufacturing PMI data which continues to point to a manufacturing recession there. Germany’s was actually slightly better than forecast, but at 41.7 remains far and away the worst of the bunch. The overall Eurozone reading was at 45.7, essentially unchanged from last month and showing no signs of improvement whatsoever. In fact, the sub-indices showed that both new orders and prices paid are falling even faster. Given this news it can be no surprise that Eurozone CPI was released at a weaker than forecast 0.9% this morning as well. It is easy to see why Signor Draghi has been keen to add stimulus to the Eurozone economy, but it will take some time for the most recent activities to work their way into the data, which implies that things are going to get worse before they get better. Interestingly, after an early dip on the data, the euro has clawed back those losses and is now essentially unchanged on the day. Of course, the euro remains in a very clear downtrend and is lower by 1.9% since the ECB’s last policy meeting where they cut rates and restarted QE. Looking back a bit further into the summer, since last June, the single currency has fallen more than 4.6%. This trend, too, has legs.

As a harbinger of the narrative, the WTO released updated forecasts for growth in global trade this morning and the reading was not pretty. The new forecast is for global trade to grow just 1.2% in 2019 and 2.7% in 2020. This compares to growth of 3.0% in 2018, and its last forecasts of 2.6% and 3.0% for this year and next. At this point, the market is sharpening its focus on the upcoming trade negotiations due to begin in Washington on October 10th. Everybody is hoping for a positive outcome, but from everything that has been reported so far, it appears the two sides remain far apart on a number of issues, and though a deal will be beneficial for both, it remains a distant prospect I fear.

Turning our attention to Japan, last night the government auctioned a new tranche of 10-year JGB’s with pretty disastrous results. A day after explaining they will be reducing the amount of purchases in the back end in order to steepen the yield curve, they were true to their word. Yields there climbed 5bps with the bid-to-cover ratio a very weak 3.42, the lowest since 2016. This price action had a knock-on effect everywhere in the world as Treasury prices fell (yields +6bps) with a similar story in Germany (+4.5bps) and the UK (+7bps). For our purposes, the impact was in USDJPY, which is higher by 0.25% this morning, extending its bounce of the last month. Once again, the current market does not appear to be risk sensitive per se, this is simply dollar outperformance.

A quick look at the rest of the FX world shows SEK a key underperformer this morning, falling 0.55% as the market continues to focus on the change in tone from the Riksbank. They had been working hard to ‘normalize’ interest rates over the past year, but the data there continues to undermine their case with this morning’s PMI release of 46.3 dramatically lower than forecasts and the weakest reading since 2012. Instead, they are far more likely going to need to cut rates again, hence the krone’s weakness.

In the EMG sphere, ZAR is the biggest loser today, falling 1.0% on the back of two related stories; first Fitch cut the credit rating of Eskom, the troubled government-owned utility, to CCC-, essentially dead. This situation has been weighing on economic growth there for quite a while, and the bigger concern is that it forces a countrywide credit downgrade. South Africa is currently under review by Moody’s, and another cut would put them in junk territory forcing a significant amount of ZAR bond sales by international investors (with some estimates as high as $15 billion worth), and correspondingly, driving the rand even lower. But if you look across the board, while ZAR is the worst performer, the dollar is higher against virtually the entire space.

Turning to the upcoming session, we are looking forward to ISM Manufacturing data (exp 50.0) after a very weak Chicago PMI number yesterday (47.1). We also get to hear from three Fed speakers, Evans, Clarida and Bowman, although the last of these, Governor Bowman, rarely speaks of monetary policy with her focus on community banking. Beyond this, the bigger trend remains a higher dollar and there is nothing to indicate that trend is changing.

Good luck
Adf

 

The Hard Way

The quarter has come to an end
And Brexit’s now just round the bend
Meanwhile Chairman Jay
Has learned the hard way
Experience is his best friend

It has been more than a week and the market continues to talk about the liquidity crunch that drove repo rates to 10.0% briefly. The Fed did respond, albeit somewhat slowly, and have seemingly been able to get things under control at this point. But in the WSJ this weekend there was a very interesting article asking, how could this have happened? After all, the Fed’s primary responsibility is to ensure that there is sufficient funding in the system. And I think for all market participants, this is a critical question. Since the Fed is essentially the world’s central bank, if they are losing control of the plumbing of the US money markets, what does that say about their ability to implement monetary policy effectively.

The back story revolves around actions that occurred shortly after John Williams was named NY Fed President, despite a complete lack of markets experience (he is a PhD Economist and Fed lifer, never having held a job in the private sector). In one of his first acts, he dismissed two key lieutenants, the head of the Markets Desk and the head of Financial Services, both of whom had been with the Fed for more than twenty years, and both of whom had intimate familiarity with market crises. After all, they were both in their roles during the Financial crisis, when Williams was one of a hundred economists working for the Fed’s Board of Governors. In other words, he has zero real world or market experience, and he fired the two most experienced market hands in his organization. While there has never been an explanation as to why he made that move, it clearly came back to haunt him, and the Fed at large, last week.

The issue for markets is now one of confidence. It doesn’t matter that things seem to be under control at this point, and all the talk of a standing repo facility being implemented to insure there is always sufficient liquidity are addressing the symptoms, not the cause. In addition, there is almost no question that the Fed is going to start rebuilding its balance sheet, as apparently, watching that paint dry was a bit more exciting than anticipated. But in the end, if market participants lose faith that the Fed can effectively manage its processes, then it will significantly change the overall atmosphere in markets. Remember, we have spent the last ten plus years being taught that central banks, and the Fed in particular, have one job, to protect financial markets. Two weeks ago, we realized that the ECB has basically run out of ammunition in its efforts to continue to address Europe’s problems. If the Fed has lost the knowhow regarding what is needed to manage the US financial system, that is a MUCH larger problem. I’m not saying they have, just that the repo market gyrations are an indication that they will have to work very hard to convince markets they are still in charge.

Turning to the market situation overnight, there has been very little of interest overall. In fact, the best way to describe things would be mixed. For example, the dollar is slightly firmer vs. the euro (+0.15%) but slightly weaker vs the pound (-0.15%). And the truth is, as I look across the board, that is a pretty good description of the entire FX market, modest gains and losses without any trend to note. European equity markets are little changed, US futures are the same and Asian markets were mixed (Nikkei -0.5%, Hang Seng +0.5%). Finally, bond markets have shown almost no movement with 10-year yields in the major bonds within 1 basis point of Friday’s levels.

As today is quarter end, it feels like most market participants have already straightened up their positions and are waiting for tomorrow to start anew. Meanwhile, we have seen a bunch of data, with the most noteworthy so far being the very slightly better than expected Chinese PMI data, with Manufacturing PMI printing at 49.8 vs. expectations at 49.6. So, while that is better than a further decline, it still points to contraction and slowing growth in China.

Looking ahead to today’s session and the week upcoming, though, there is a lot of new information on the way, including the payroll report on Friday.

Today Chicago PMI 50.0
Tuesday ISM Manufacturing 51.0
  ISM Prices Paid 50.5
Wednesday ADP Employment 140K
Thursday Initial Claims 215K
  Factory Orders -0.3%
  ISM Non-Manufacturing 55.1
Friday Nonfarm Payrolls 146K
  Private Payrolls 130K
  Manufacturing Payrolls 3K
  Unemployment Rate 3.7%
  Average Hourly Earnings 0.3% (3.2% Y/Y)
  Average Weekly Hours 34.4
  Participation Rate 63.2%
  Trade Balance -$54.5B

In addition to the payroll report, we have fourteen Fed speakers, essentially the entire FOMC, this week. My conclusion from this excessive schedule is that the Fed is very concerned that their message is not getting across effectively and that they feel compelled to clarify and repeat the message. However, given the wide disparity of opinions on the Board, my sense is this onslaught of speeches will simply add to the confusion. Chairman Powell has a tough road ahead to get his views accepted given what seem to be hardening positions on both sides of the argument. In fact, the only way the doves can win out, in my view, is if the economic data here starts to deteriorate significantly, but of course, that is not an outcome they seek either!

As to the dollar, there is nothing that has occurred anywhere to dissuade me from my ongoing bullish view. Until we see some more significant changes in the data, the dollar will remain top dog.

Good luck
Adf

Hawks Must Beware

The BOE finally sees
That Brexit may not be a breeze
So hawks must beware
As rates they may pare
For doves, though, this act’s sure to please

Two stories from the UK are driving the narrative forward this morning, at least the narrative about the dollar continuing to strengthen. The first, and most impactful, were comments from BOE member, Michael Saunders, who prior to this morning’s speech was seen as one of the more hawkish members of the MPC. However, he explained that regardless of the Brexit outcome, the continuing slowdown in the UK, may require the BOE to cut rates soon. The UK economy has been under considerable pressure for some time and the data shows no signs of reversing. The market has been pricing in a rate cut for a while, although BOE rhetoric, especially from Governor Carney, worked hard to keep the idea of the next move being a rate hike. But no more. If Saunders is in the cutting camp, you can bet that we will see action at the November meeting, even if there is another Brexit postponement.

And speaking of Brexit postponements, Boris won a court victory in Northern Ireland where a lawsuit had been filed claiming a no-deal Brexit was a breach of the Good Friday accords that brought peace to the country. However, the court ruled it was no such thing, rather it was simply a political act. The upshot is this was seen as a further potential step toward a no-deal outcome, adding to the pound’s woes. In the meantime, Johnson’s government is still at odds with Parliament, and is in the midst of another round of talks with the EU to try to get a deal. It seems the odds of that deal are shrinking, although I continue to believe that the EU will blink. The next five weeks will be extremely interesting.

At any rate, once Saunders’ comments hit the tape, the pound quickly fell 0.5%, although it has since regained a bit of that ground. However, it is now trading below 1.23, its weakest level in two weeks, and as more and more investors and traders reintegrate a hard Brexit into their views, you can look for this decline to continue.

Of course, the other big story is the ongoing impeachment exercise in Congress which has caused further uncertainty in markets. As always, it is extremely difficult to trade a political event, especially one without a specific date attached like a vote. As such, it is difficult to even offer an opinion here. Broadly, in the event President Trump was actually removed from office, I expect the initial move would be risk-off but based on the only other impeachment exercise in recent memory, that of President Clinton in 1998, it took an awful long time to get through the process.

Turning to the data, growth in the Eurozone continues to go missing as evidenced by this morning’s confidence data. Economic Confidence fell to its lowest level in four years while the Business Climate and Industrial Confidence both fell more sharply than expected as well. We continue to see a lack of inflationary impulse in France (CPI 1.1%) and weakness remains the predominant theme. While the euro traded lower earlier in the session, it is actually 0.1% higher as I type. However, remember that the single currency has fallen more than 4.4% since the end of June and nearly 2.0% in the past two weeks alone. With the weekend upon us, it is no surprise that short term positions are being pared.

Overall, the dollar is having a mixed session. The yen and pound are vying for worst G10 performers, but the movement remains fairly muted. It seems the yen is benefitting from today’s risk-on feeling, which was just boosted by news that a cease-fire in Yemen is now backed by the Saudis. It is no surprise that oil is lower on the news, with WTI down 1.1%, and equity market have also embraced the news, extending early gains. On the other side of the coin, the mild risk-on flavor has helped the rest of the bunch.

In the EMG space it is also a mixed picture with ZAR suffering the most, -0.35%, as concerns grow over the government’s plans to increase growth. Meanwhile, overnight we saw strength in both PHP and INR (0.45% each) after the Philippine central bank cut rates and followed with a reserve ratio cut to help support the economy. Meanwhile, in India, as the central bank removes restrictions on foreign bond investment, the rupee has benefitted.

But overall, movement has not been large anywhere. US equity futures are pointing higher as we await this morning’s rash of data including: Personal Income (exp 0.4%); Personal Spending (0.3%); Core PCE (1.8%); Durable Goods (-1.0%, 0.2% ex transport); and Michigan Sentiment (92.1). We also hear from two more Fed speakers, Quarles and Harker. Speaking of Fed speakers (sorry), yesterday vice-Chairman Richard Clarida gave a strong indication that the Fed may change their inflation analysis to an average rate over time. This means that they will be comfortable allowing inflation to run hot for a time to offset any period of lower than targeted inflation. Given that inflation has been lower than targeted essentially since they set the target in 2012, if this becomes official policy, you can expect prices to continue to gain more steadily, and you can rule out higher rates anytime soon. In fact, this is quite dovish overall, and something that would work to change my view on the dollar. Essentially, given the history, it means rates may not go up for years! And that is not currently priced into any market, especially not the FX market.

The mixed picture this morning offers no clues for the rest of the day, but my sense is that the dollar is likely to come under further pressure overall, especially if risk is embraced more fully.

Good luck and good weekend
Adf

Quite Frankly Floored

Most pundits were, quite frankly, floored
That leaving the ECB Board
Was one of the hawks
Who tired of talks
‘bout QE the Germans abhorred

The dollar is stronger than where I left it Tuesday evening after a rally in yesterday’s NY session. Determining the catalyst for that rally has been difficult given the only economic data of note was New Home Sales (713K), which while quite strong are generally not seen as market moving, and the limited commentary overheard. However, there are three things that conspired, I believe, to drive the dollar higher.

First was the surprise resignation of Sabine Lautenschlaeger from the ECB Executive Board. Ms. Lautenschlaeger was one of the most ardent hawks on the ECB and was quite vocal that there was no need to resume QE at the current time. In fact, she had been proffering that message since the last meeting when Mario first hinted that QE2 was on the table. In the end, though, she was not able to garner enough support to dissuade Signor Draghi from going ahead with it, and it appears she decided that her voice was no longer taken into consideration. Whomever is chosen as her replacement is almost certain to have less hawkish views, and so the market recognized that the tone of the ECB has turned more dovish. A dovish ECB is likely to result in easier policies and correspondingly a weaker euro.

We also heard from Chicago Fed President Charles Evans, a known dove, who indicated that he saw no reason for further rate cuts this year. It appears that he was one of the dots in the middle, comfortable with last week’s cut but calling it quits then. He highlighted that if the economy deteriorated for some reason, he would not be against further cuts, but at the present time, they were not necessary. So, a Fed dove was mildly hawkish, helping cement the idea that the Fed was less likely to cut rates again this year. This can only be seen as dollar bullish.

Finally, we have the calendar as we approach quarter-end and the financing requirements necessary for banks and other financial firms when they report positions. The stricter regulatory environment that has been in place since the financial crisis means that there is an increased demand for dollars on virtually every institution’s balance sheet. That is one reason we have seen issues within the Fed Funds market with all the discussion about the Fed’s repo facility and recent activities. However, there are many institutions that simply buy dollars in order to put their balance sheet in order.

Add them all up, and you have the makings of a dollar rally, which has seen the euro decline 0.85% since yesterday morning, the pound fall 1.2% and the yen fall 0.5%. Granted, the pound has its own issues relating to Boris’s return to Parliament and the inflamed rhetoric on both sides of the aisle there leading to an increase in belief that a hard Brexit is still possible. But the tell that this is simply a dollar rally and not a risk off event is the fact that the yen fell sharply, alongside a rally in equities and decline in the bond market.

The question at this time is whether the rally continues, or if it was merely a one-day event. At this point, the evidence seems to indicate that a slow continuation of the dollar rally is the most likely outcome. Certainly, there will be nothing hawkish coming from ECB policymakers as the hawks seem more willing to quit than continue to lose their battle. Eurozone data continues to implode and another key German institute, the DIW Institute, announced its expectation that when German GDP for Q3 is released on November 14, it will show growth at -0.2%, the second consecutive decline and put Germany in a technical recession. As an aside, it is interesting to see just how crucial the idea of monetary discipline is to Germans, in general, and German bankers in particular. Despite the fact that Germany probably has the weakest growth in the Eurozone, its ECB members are amongst the most hawkish. If that ever changes, you can be sure the euro will fall far more rapidly!

As to the Fed, it seems to me that there is a clear level of comfort developing on the FOMC that two cuts were sufficient in the current circumstances to stanch any bleeding in the economy, and barring an escalation in the trade war, they seem ready to stand pat. If that is the case, then dollars will retain their relative attractiveness. And of course, the calendar is beyond all our reach, but we will need to see if Friday, when the spot value date turns to October 1, whether or not there is reduced demand for the greenback. My sense is that pressure will dissipate quickly, and possibly reverse as those dollars are seen as short-term needs. But for the rest of the day, I think the dollar has room to run a little further.

Turning to today’s session, we do get the final reading of Q2 GDP (exp 2.0%) as well as the ancillary data that comes with that report. I always look at the Personal Consumption component (4.7%) as the best measure of demand, so keep an eye there. And of course, we get Initial Claims (212K), but that series’ stability has been extraordinary and largely taken it out of the conversation. If we do start to see that rise, however, beware of weakening nonfarm numbers and a lot more dovish rhetoric from the Fed.

As to the Fed, we have six, count ‘em, speakers today with nary a hawk in sight. As such, amongst Kaplan, Bullard, Clarida, Daly, Kashkari and Barkin, I expect rationales as to why another rate cut or two makes sense, or at the very least highlights of weakening global growth and impending problems like Brexit which require easier Fed policy as a response. However, given they are all known on the dovish side, I don’t think it matters that much. For now, I don’t see anything derailing the dollar and look for a modest further increase throughout the session.

Good luck
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