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
Adf

 

Make Boris Bend

As Parliament seeks to extend
The timeline, and make Boris bend
The market’s decided
The deal he provided
Will ultimately pass in the end

Well, Brexit is still the number one topic in markets, although after a quiet Friday on the trade front, we got more discussion there as well. As to Brexit, Boris lost his fight to get a clean vote on the newly renegotiated deal on Saturday. Instead, Parliament voted to force a request for an extension, which at this moment the EU is considering. Interestingly, in the EU there are a number of countries that seem ready to be done with the process and no longer care if the UK exits. However, as sweet as that would be for the Brexiteers, in the end that would require courage by the country(ies) who voted no. And courage is something in short supply at the top of European (and most) governments. At any rate, given the speed with which this story changes, this morning the word is that Johnson has found the votes necessary to get his deal through Parliament, but it means that he has to get another vote. The roadblock there is in the form of John Bercow, the Speaker of the House of Commons, who has proven himself to be a virulent Bremainer, and wants nothing more than to see Boris fail.

With that as background, one might have thought the pound would have suffered, but the market has looked through all the permutations and decided that a deal is forthcoming in the near-term, or perhaps more accurately, that the odds of a no-deal Brexit have been significantly reduced. This is evident in the fact that as I type, the pound is essentially unchanged since Friday’s optimistic close at 1.2980, and has traded above 1.30 earlier in the session for the first time since May (the month, not the former PM).

However, I think the euro’s performance has been far more interesting lately. Consider that despite an ongoing run of generally awful data, showing neither growth nor inflationary impulse, the single currency continues to climb slowly. A part of this is likely a result of what has been mild dollar weakness amid increasing risk appetite. But I think that the market has also begun to recognize that a Brexit deal will remove uncertainty on the continent and the euro will benefit accordingly. From the time of the referendum in 2016 I have made it clear that Brexit was not just a British pound story, but a euro one as well. And this slow appreciation (EUR is higher by 2.7% this month, about 0.7% more than the dollar index) is a belated reaction to the fact that a Brexit deal is a benefit there as well. At any rate, much of this story is yet to be written, and a successful outcome will almost certainly result in further GBP outperformance, but the euro is likely to continue this grind higher as well.

On the trade front, comments from Chinese vice-premier Liu He explaining China would work with the US to address each other’s core concerns and that ending the trade war would be good for everyone were seen as quite positive by equity and other risk markets. In fact, the combination of optimism on the two big issues of the day, trade and Brexit has led to a clear, if modest, risk-on session. Equity markets in Asia performed well (Nikkei +0.25%, CSI 300 +0.3%), and we are seeing modest gains throughout Europe as well (DAX +0.7%, CAC +0.15%). It is certainly a positive that the trade dialog continues, but I fear we remain a very long way from a broad deal.

Another weekend event was the World Bank / IMF meetings in Washington with the commentary exactly what you would expect. Namely, everyone derided the trade war and explained it would be better if it ended. Everyone derided Brexit and said it would be better if it didn’t happen. And everyone explained that it’s time for fiscal policy to step up to the plate to help central banks. What has become very clear is that central banks are truly running out of room to help support their respective economies but it is impolitic to say so. This results in exhortations for fiscal policy pushes by those who can afford it. However, Germany remains resolute in their belief that there is no reason to implement a supplementary budget of any kind and that continuing to run a budget surplus is the best thing for the nation. Look for pressure to continue to build, but unless growth really starts to crater there, I don’t expect them to change their views, or policies.

A look around the rest of the FX market shows that the biggest gainer this weekend was KRW, rising 0.8% on optimism that a trade deal between the US and China was closer. Certainly it was not the terrible data from South Korea that helped the won rally, as exports in October have fallen nearly 20%, making eleven consecutive monthly declines in that statistic. Otherwise, the mild risk-on atmosphere has helped most EMG currencies edge higher. On the G10 front, NOK is the big winner, rising 0.55%, although that simply looks like a reaction to its sharp declines over the past two weeks.

On the data front it is extremely quiet this week as follows:

Tuesday Existing Home Sales 5.45M
Thursday Initial Claims 215K
  Durable Goods -0.7%
  -ex Transport -0.3%
  New Home Sales 701K
Friday Michigan Sentiment 96.0

Source: Bloomberg

Arguably, Durable Goods is the most interesting number of the bunch. And after a two-week deluge of Fed speakers, they have gone into their quiet period ahead of next Wednesday’s meeting. The final comments by Kaplan and Clarida were similar to the previous comments we heard, namely that the economy is in a “good place” and that they are essentially going to play it by ear on the next rate decision. As of this morning, the market is still pricing in an 89.5% probability of a rate cut.

Speaking of low rates, Signor Draghi presides over his last ECB meeting this week and while there are no new policies expected, it is universally anticipated that he will renew his call for fiscal stimulus to help the Eurozone economic outlook. Quite frankly, I think it is abundantly clear that the ECB has completely run out of ammunition to fight any further weakness, and that Madame Lagarde, when she takes the seat on November 1, will feel more like Old Mother Hubbard than anything else.

For the day, I see no reason for the risk-on attitude to change, and if anything, I imagine we can see more positive news from the UK which will only help drive things further in that direction. While in the end, I still see the dollar performing well, for now, it is on its back foot and likely to stay there for a little while longer.

Good luck
Adf

Pledges Bestowed

In China, the pace of growth slowed
Which highlighted how hard the road
Is going to be
For President Xi
To live up to pledges bestowed

With the Brexit situation now up to Boris Johnson’s domestic political machinations, finding the required 326 votes to pass his agreed deal with the EU, the market’s attention has turned elsewhere. It should be no surprise that China is the topic, this time based on the data released last night. While the trajectory of growth in China has been slowing quite consistently for the past ten years, last night’s 6.0% GDP result was weaker than expected and indicates that perhaps, that slowdown is accelerating. Alongside the GDP data, the other three key monthly data points; IP (5.6% YTD), Fixed Asset Investment (5.4% YTD), and Retail Sales (8.2% YTD) showed a mixed bag versus expectations, although generally all point to continuing slower growth. The trend in China is downward. On the one hand, this should not be surprising. After all, the larger the base size of an economy, the harder it is to grow rapidly. On the other hand, despite significant government control over the entire economy, it is becoming clear that the combined fiscal and monetary stimulus measures China is using are, so far, not up to the job of upholding President Xi’s targets.

Regarding the trade talks, this simply adds to pressure on Xi to find a deal. Despite his title as President for Life, there are clearly still many domestic political issues with which he must deal, and failure to bring about promised growth will be quite problematic. As many pundits have already described, the reality is that both sides need a deal given the fact that the eighteen month long trade spat has started to drag down both the US and China in terms of GDP growth. Interestingly, the PBOC fixed the renminbi stronger last night, although both the onshore and offshore yuan are trading weaker by about 0.1% this morning. Overall, though, the trend for the renminbi has been for modest weakening over time. Regardless of promises to manage the currency, the reality remains that China needs their currency to weaken as a relief valve for internal pressures. An interesting aside is that there is some evidence based on the errors and omissions portion of the Chinese accounts, that capital continues to flow out of China pretty aggressively, despite the capital controls imposed in the summer of 2015. Eventually, if that is true, USDCNY is going to go higher. I continue to look for an eventual move toward 7.40, but it may take longer than the end of this year as I previously thought.

However, beyond the Chinese data story, FX has been a pretty uneventful place to be overnight. G10 currencies are generally slightly firmer vs. the dollar, but we are only looking at the biggest mover, SEK, having rallied 0.3% this morning after a more substantive 1.3% rally yesterday. It seems that despite higher than expected unemployment data, there is concern that data may be faulty and the Riksbank may still have room to raise interest rates at their next meeting, or by the end of the year at the very least. But away from that story, there is nothing of real note in the G10 space.

And in truth, that is pretty much the situation in the EMG space as well. TRY is the leading gainer, higher by 0.85% after the cease-fire on the Syrian border went into effect. Elsewhere, both ZAR and KRW are firmer by 0.5% with the won benefitting from comments by Treasury Secretary Mnuchin that he may request an auto tariff exemption for South Korea. Meanwhile, the rand is the beneficiary of profit-taking after recent weakness in the currency, as traders and investors await the latest information on the Eskom situation in a government briefing later today.

For the rest of the day, while we wait to hear any tidbits from the UK, there is only one data point, Leading Indicators (exp 0.0%), and then we hear from three more Fed speakers, the uber-hawk, Esther George, as well as Richard Clarida and Robert Kaplan. So far this week we have heard the consistent message that the FOMC is watching the data closely but has not yet made up their mind if another cut is necessary right away.

In truth, it is shaping up to be an uneventful day to finish the week. The dollar is a bit soft, equity futures are little changed, as are equity markets throughout Europe, and Treasury yields are within 1bp of yesterday’s levels. Unless there is a tape bomb, it is hard to see a reason for a big more from current levels.

Good luck and good weekend
Adf