Employment Unstressed

The jobs report Friday impressed
With growth in employment unstressed
As well, Friday’s quotes
From Fed speakers’ throats
Explained how their policy’s best

As is evidenced by the fact that the stock market in the US continues to trade to new all-time highs on a daily basis, the Fed is doing an incredible job…just ask them! Friday we learned that both the economy and monetary policy are “in a good place” according to vice-chairman Richard Clarida. Governor Randall Quarles used the same terms as did NY Fed President John Williams, who added, “…the economy is strong,” as well to the mix. At least they are all singing from the same hymnal. So, following a much better than expected payrolls report Friday morning, with the headline number not only beating expectations handily (128K vs. 85K), but the previous two months’ data were revised higher by a further 95K, the Fed is patting themselves on the back.

Adding to the overall joy in markets is the apparent thaw in the US-China trade talks, where it appears that a small, ‘phase one’ deal is pretty much agreed with both sides simply trying to find a place to sign it now that the APEC conference in Chile has been canceled due to local violent protests. And of course, the other big uncertainty, Brexit, has also, apparently, become less risky as the amended deal agreed by Boris and the EU has put to rest many fears of a hard Brexit. While the UK is currently engaged in a general election campaign cum second Brexit referendum, the smart money says that Boris will win the day, Parliament will sign the deal and the next steps toward Brexit will be taken with no mishaps.

Who knows, maybe all of these views are absolutely correct and global growth is set to rebound substantially driving stocks to ever more new highs and allowing central banks around the world to finally unwind some of their ‘emergency’ measures like ZIRP, NIRP and QE. Or…

It is outside the realm of this morning note to opine on many of these outcomes, but history tells us that everything working out smoothly is an unlikely outcome.

Turning to the market this morning shows us a dollar that is marginally firmer despite a pretty broad risk-on feeling. As mentioned above, equity markets are all strong, with Asia closing higher and almost every European market higher by more than 1.0% as I type. US futures are pointing in the same direction following on Friday’s strong performance. Treasury yields are also higher as there is little need for safety when stock prices are flying, and we are seeing gains in oil and industrial metals as well. All of which begs the question why the dollar is firm. But aside from the South African rand, which has jumped 1.5% this morning after Moody’s retained its investment grade rating on country bonds, although it did cut its outlook to negative, there are more currencies lower vs. the dollar than higher.

One possible explanation is the Fed’s claim that they have ended their mid-cycle adjustment and that US rates are destined to remain higher than those elsewhere in the world going forward. It is also possible that continued weak data elsewhere is simply undermining other currencies. For example, Eurozone final PMI’s were released this morning and continue to show just how weak the manufacturing sector in Europe remains. Given the fact that the ECB is basically out of bullets, and the fact that the Germans and Dutch remain intransigent with respect to the idea of fiscal stimulus, a weak currency is the only feature that is likely to help the ECB achieve its inflation target. However, as we have seen over the past many years, the pass-through of a weak currency to higher inflation is not a straightforward process. While I do think the dollar will continue its slow climb higher, I see no reason for the pace of the move to have any substantive impact on Eurozone CPI.

Meanwhile, the G10 currency under the most pressure today is the pound, which has fallen 0.2%, and while still above 1.29, seems to have lost all its momentum higher as the market tries to assess what will happen at the election six weeks hence. While I continue to believe that Boris will win and that the negotiated deal will be implemented, I have actually taken profits on my personal position given the lack of near-term momentum.

Looking ahead to this week, the data picture is far less exciting than last, although we do have the BOE meeting on Thursday to spice things up, as well as a raft of Fed speakers:

Today Durable Goods -1.1%
  -ex transport -0.3%
  Factory Orders -0.4%
Tuesday Trade Balance -$52.5B
  JOLTS Job Openings 7.088M
  ISM Non-Manufacturing 53.4
Wednesday Nonfarm Productivity 0.9%
  Unit Labor Costs 2.2%
Thursday Initial Claims 215K
  Consumer Credit $15.05B
Friday Michigan Sentiment 95.5

Source: Bloomberg

As all of this data is second tier, it is hard to get too excited over any of it, however, if it demonstrates a pattern, either of weakness or strength, by the end of the week we could see some impact. Meanwhile, there are nine Fed speakers slated this week, but given the consistency of message we heard last week, it seems hard to believe that the message will change at all, whether from the hawks or doves. At this point, I think both sides are happy.

Putting it all together, I would argue that the dollar is more likely to suffer slightly this week rather than strengthen as risk appetite gains. But it is hard to get too excited in either direction for now.

Good luck
Adf

Get Out of My Face!

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

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

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

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

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

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

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

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

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

Good luck
Adf

A Christmas Election

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

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

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

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

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

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

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

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

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

Good luck
Adf

 

New Brexit Day

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

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

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

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

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

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

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

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

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

Source: Bloomberg

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

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

Good luck
Adf

Choler on Display

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

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

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

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

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

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

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

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

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

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

Good luck and good weekend
Adf

 

What Exactly Comes Next?

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

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

Brexit noun
brē·gzit

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

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

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

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

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

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

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

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

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

Good luck
Adf

 

Kind of a Treat

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

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

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

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

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

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

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

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

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

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

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

Good luck
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