Tag Archives: #dollar

Time’s Crunch

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When Boris and Leo had lunch
No panties were balled in a bunch
The signals showed promise
And no doubting Thomas
Appeared, as both sides felt time’s crunch

Meanwhile, though there’s been no bombshell
The trade talks have gone “very well”
Today Trump meets He
And then we will see
If a deal betwixt sides can now gel

And finally from the Mideast
The story ‘bout risk has increased
A tanker attack
Had market blowback
With crude a buck higher at least

There is no shortage of important stories today so let’s jump right in. Starting with Brexit, yesterday’s lunch meeting between Boris Johnson and Leo Varadkar, the Irish PM, turned into something pretty good. While the comments have been very general, even EU president Donald Tusk as said there were “promising signals.” It is crunch time with the deadline now less than three weeks away. Apparently, the rest of the EU is beginning to believe that Boris will walk with no deal, despite the Benn Act requiring him to ask for an extension if there is no deal in place. At the same time, everybody is tired of this process and the EU has many other problems, notably a declining economy, to address. And so, I remain confident that we will soon hear, probably early next week, about a ‘deal in principle’ which will be ratified by Parliament as well as the EU. Though all the details will not have been completed, there will be enough assurances on both sides to get it through. Remember, Boris has Parliament on his side based on the deal he showed them. I’m pretty sure that his conversation with Leo yesterday used that as the starting point.

When that news hit the tape yesterday morning a little past 10:00, the pound started a significant rally, ultimately gaining 2% yesterday and it is higher by a further 1.0% this morning after more promising comments from both sides of the table. Remember, too, that the market remains extremely short pound Sterling and has been so for quite a while. If I am correct, then we could see the pound well above 1.30 as early as next week. Of course, if it does fall apart, then a quick trip back to 1.20 is on the cards. As I have said, my money is on a deal. One other thing to note here is what happened in the FX options market. For most of the past twelve years, the risk reversal (the price the market pays for 25 delta puts vs. 25 delta calls) has traded with puts at a premium. In fact earlier this year, the 1mo version was trading at a 2.5 vol premium for puts. Well, yesterday, the risk reversal flipped positive (bid for calls) and is now bid more than 1.0 vol for GBP calls. This is a huge move in this segment of the market, and also seen as quite an indicator that expectations for further pound strength abound.

Regarding the trade talks, risk assets have taken a very positive view of the comments that have come from both sides, notably President Trump describing things as going “very well” and agreeing to meet with Chinese Vice-premier Liu He this afternoon before he (He) returns to Beijing. The information that has come out points to the following aspects of a deal; a currency pact to insure the Chinese do not weaken the renminbi for competitive advantage; increased Chinese purchases of grains and pork; a US promise not to increase tariffs going forward as the broader negotiations continue; and the lifting of more sanctions on Chinese companies like Huawei and COSCO, the Chinese shipping behemoth. Clearly, all of that is positive and it is no surprise that equity markets globally have responded with solid gains. It is also no surprise that Treasury and Bund yields are much higher this morning than their respective levels ahead of the talks. In fact, Treasuries, which are just 1bp higher this morning, are up by more than 15bps since Tuesday. For Bunds, today’s price action shows no change in yields, but a 12bp move (less negative rates) since then. The idea is a trade deal helps global economic growth pick back up and quashes talk of deflation.

The last big story of the morning comes from the Persian Gulf, where an Iranian oil tanker, carrying about 1 million barrels of oil, was attacked by missiles near the Saudi port of Jeddah. At first the Iranians blamed the Saudis, but they have since retracted that statement. It should be no surprise that oil prices jumped on the news, with WTI futures quickly rallying more than a dollar and maintaining those gains since then. One of the key depressants of oil prices has been the global economic malaise, which does not yet look like it is over. However, if the trade truce is signed and positive vibes continue to come from that area, I expect that oil prices will benefit greatly as well.

As to the FX market per se, the dollar is overall under pressure. Of course, the pound has been the biggest mover in the G10 space, but AUD has gained 0.55% and the rest of the block is higher by roughly 0.3%. The only exceptions here are the yen (-0.3%) and Swiss franc (-0.1%) as haven assets are unloaded.

Turning to the EMG bloc, ZAR is today’s big winner, rallying more than 1.1% on two features; first the general euphoria on trade discussed above and second on the news that former President Jacob Zuma must face corruption charges. The latter is important because it demonstrates that the rule of law may be coming back into favor there, always a benefit for an emerging market. But most of the space is firmer this morning, with many currencies higher by between 0.5% and 0.6% (RUB, KRW, PLN, HUF, MXN, etc.) In fact, the only loser this morning is TRY (-0.4%), which remains under pressure as President Erdogan presses his military campaign against the Kurds in Syria.

On the data front, the only US news is Michigan Sentiment (exp 92.0) but we also get the Canadian employment picture (exp 7500 new jobs and a 5.7% Unemployment Rate). Three more Fed speakers, Kashkari, Rosengren and Kaplan, are on the slate, but so far, the only clarity of message we have received this week is that everybody is watching the data and will respond as they see fit. Hawks are still hawks and doves are still doves.

I see no reason for the dollar to regain ground today assuming the good news from Trade and Brexit continue. So look for a further decline into the holiday weekend.

Good luck and good weekend
Adf

PS. While typing, the pound jumped another 1.0%.

Much Could Be Gained

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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

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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

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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

 

The Hard Way

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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

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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

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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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A Major Broadside

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The question that needs to be asked
Is, have central bank powers passed?
The ECB tried
A major broadside
But markets ignored Draghi’s blast

There has certainly been no shortage of interesting news in the past twenty-four hours, however from a markets perspective, I think the ECB actions, and the market reactions are the most critical to understand. To recap Signor Draghi’s action, the ECB did the following:

1. cut the deposit rate 10bps to -0.50%;
2. restarted QE in the amount of €20Bio per month for as long as necessary;
3. reduced the rate and extended the tenor of TLTRO III loans; and
4. introduced a two-tier system to allow some excess liquidity to be exempt from the -0.50% deposit rate.

Certainly the market was prepared for the rate cut, which had been widely telegraphed, and the talk of tiering excess liquidity had also been making the rounds. Frankly, TLTRO’s had not been a centerpiece of discussion but I think that is because most market participants don’t see them as a major force in the policy debate, which leaves the start of QE2 as the most controversial thing Draghi introduced. Well, maybe that and the fact that forward guidance is now based on achieving a “robust convergence” toward the inflation target rather than a particular timeframe.

Remember, in the past two weeks we had heard from the Three Hawksketeers (Weidmann, Lautenschlager and Knot) each explicitly saying that more QE was not appropriate. We also heard that from the Latvian central banker, Rimsevics, and perhaps most surprisingly of all, from Franҫois Villeroy de Galhau, the French central bank chief. And yet despite clearly stiff opposition, Draghi got the Council to agree. Perhaps, though, he went too far in describing the “consensus as so broad, there was no need to take a vote.” Now, while I have no doubt that no vote was taken, that statement stretches credulity. This was made clear when Robert Holzmann, the new Austrian central bank president and first time member of the ECB, gave an interview yesterday afternoon explicitly saying that the ECB could well have made a mistake by reintroducing QE.

But let’s take a look at what happened after the ECB statement and during the press conference. The initial move was for the euro to decline sharply, trading down 0.65% in the first 10 minutes after the release. When Draghi took to the stage at 8:30 and reiterated the points in the statement, the euro declined a further 30 pips, touching 1.0927, its lowest level since May 2017. But that was all she wrote for the euro’s decline. As Draghi continued to speak and answer questions, traders began to suspect that the cupboard was bare regarding anything else the ECB can do to address further problems in the Eurozone economies. This was made abundantly clear in his pleas for increased fiscal stimulus, which much to his chagrin, does not appear to be forthcoming.

It was at this point that things started to turn with the euro soaring, at one point as much as 1.5% from the lows, and closed 1.3% higher than those levels. And this morning, the rally continues with the euro up to 1.1100 as I type, a solid 0.3% gain. But the big question that now must be asked is; has the market decided the ECB is out of ammunition? After all, given the relative nature of the FX market and the importance of monetary policy on exchange rates, if the market has concluded the ECB CANNOT do anymore that is effective, then by definition, the Fed is going to promulgate easier policies than the ECB with the outcome being a rising euro. So if the Fed follows through next week and cuts 25bps, and especially if it does not close the door on further cuts, we could easily see the euro rally continue. That will not help the ECB in their task to drive inflation higher, and it will set a difficult tone for Madame Lagarde’s tenure as ECB President going forward.

Turning to the Fed, the market is still fully priced for a 25bp cut next week, but thoughts of anything more have receded. However, a December cut is still priced in as well. The problem for the Fed is that the economic data has not been cooperating with the narrative that inflation is dead. For instance, yesterday’s CPI data showed Y/Y core CPI rose 2.4%, the third consecutive outcome higher than expectations and the highest print since September 2008! Once again, I will point to the anecdotal evidence that I, personally, rarely see the price of anything go down, other than the gyrations in gasoline prices. But food, clothing and services prices have been pretty steady in their ascent. Does this mean that the Fed will stay on hold? While I think it would be the right thing to do, I absolutely do not believe it is what will happen. However, it is quite easy to believe that the accompanying statement is more hawkish than currently expected (hoped for?) and that we could see this as the end of that mid-cycle adjustment. My gut is the equity market would not take that news well. And the dollar? Well, that would halt the euro’s rise pretty quickly as well. But that is next week’s story.

As if all that wasn’t enough, we got more news on the trade front, where President Trump has indicated the possibility of an interim trade deal that could halt, and potentially roll back, tariff increases in exchange for more promises on IP protection and agricultural purchases. That was all the equity market needed to hear to rally yet again, and in fairness, if there is a true thawing in that process, it should be positive for risk assets. So, the dollar declined across the board, except against the yen which fell further as risk appetite increased.

Two currencies that have had notable moves are GBP and CNY. The pound seems to be benefitting from the fact that there was a huge short position built over the past two months and the steady stream of anti-Brexit news seems to have put Boris on his back foot. If he cannot get his way, which is increasingly doubtful, then the market will continue to reprice Brexit risk and the pound has further to rally. At the same time, the renminbi’s rally has continued as well. Yesterday, you may recall, I mentioned the technical position, an island reversal, which is often seen as a top or bottom. When combining the technical with the positive trade story and the idea that the Fed has a chance to be seen as the central bank with the most easing ahead of it, there should be no surprise that USDCNY is falling. This morning’s 0.45% decline takes the two-day total to about 1.0%, a big move in the renminbi.

Turning to this morning’s data, Retail Sales are the highlight (exp 0.2%, 0.1% ex autos) and then Michigan Sentiment (90.8) at 10:00. Equity futures are pointing higher and generally there is a very positive attitude as the week comes to an end. At this point, I think these trends continue and the dollar continues to decline into the weekend. Longer term, though, we will need to consider after the FOMC next week.

Good luck and good weekend
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Though Bond Prices Tumbled

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There once was a time when the buck
Reacted when bonds came unstuck
If fear was seen rising
It wasn’t surprising
If traders would back up the truck

But lately though bond prices tumbled
The dollar just hasn’t been humbled
Instead of declining
Investors are pining
For dollars as other cash crumbled

First, a moment of silence to remember the horrific events of 18 years ago this morning…

As the market awaits tomorrow’s ECB meeting, it is not surprising that FX markets have remained pretty benign. In fact, looking across both G10 and EMG currencies, the largest mover overnight was the Hungarian forint, which has fallen 0.4%, a moderately exaggerated move relative to the shallow rally in the dollar. Arguably, yesterday’s modestly lower than expected CPI print has reduced some of the pressure on the central bank there to keep policy firm, hence the selloff. But otherwise, there are really no stories of direct currency interest today and no data of note overnight.

As such, I thought it would be interesting to take a look at government bond yields and their gyrations lately. It was just eight days ago when 10-year Treasury yields were trading at 1.45% as expectations for further coordinated policy ease by the major central banks became the meme du jour. Economic data appeared to be rolling over (ISM at 49.1, German GDP -0.1%, Eurozone CPI 0.9%, etc.) which inspired thoughts of massive policy ease by the big 3 central banks. The market narrative evolved into the ECB cutting rates by 0.20% and restarting QE to the tune of €35 billion / month while the Fed cut 0.50% and the BOJ cut rates by 0.10% and pumped up QE further. It seemed as though analysts were simply trying to outdo one another’s forecasts so they could be heard above the din. And after all, we had seen central banks all around the world cutting rates during the previous two months (Australia, New Zealand, Philippines, South Korea, India et al.) so it seemed natural to expect the biggest would be acting soon.

During this time, the FX market responded as might be expected during a pretty clear risk-off scenario, the dollar and the yen rallied while other currencies suffered. In fact, we have seen several currencies trade near historic lows lately (CLP, COP, BRL, INR, PHP to name a few). Equity markets were caught between fear and the idea that central bank ease would support stock prices, and while there were certainly wobbles, in the end greed won out.

But then a funny thing happened to the narrative; a combination of data and commentary started to turn the tide (sorry for the mixed metaphor). We heard from a variety of central bank speakers, notably from the ECB, who were clearly pushing back on the narrative. Weidmann, Lautenschlager, Knot and Villeroy were all adamant that there was no reason for the ECB to consider restarting QE. At the same time, just before the quiet period we heard from a number of Fed members (Rosengren, George, Kaplan, Barkin) who were quite clear they didn’t see the need for an aggressive rate cutting stance, and then Chairman Powell, in the last words before the quiet period, basically stuck to the party line of the current stance being a modest mid-cycle adjustment as they closely monitored the data.

It cannot be a surprise that the market has adjusted its views ahead of the first of the three central bank meetings tomorrow. But boy, what an adjustment. 10-year Treasury yields have rallied 27bps, 10-year Bunds are higher by 19bps and 10-year JGB yields are up 8.5bps (there’s a lot less activity there as the BOJ already owns so many bonds there is very little ability to trade.) However, this is not a risk-on move despite the movement in yields. This has been a massive position unwinding. A couple of things highlight the lack of risk appetite. First, the dollar continues to move higher overall. While individual currencies may have good days periodically, nothing has changed the long-term trend of dollar strength. And history shows that when risk is sought, dollars are sold. Equity markets have also been underwhelming lately, with very choppy price action but no direction. Granted, stocks are not falling, but they are certainly not rallying like risk is being ignored. And finally, gold, which had been performing admirably during the fear period, has ceded some of its recent gains as positions there are also unwound.

The point is that in the current market environment, it is very difficult to draw lessons from the price movement. Market moves lately have been all about position adjustments and very little about either market fundamentals (data) or monetary policy. While this is not the first time markets have behaved in this manner, in the past these periods have tended to be pretty short. The ECB meeting tomorrow will allow views to crystalize regarding future monetary policy there, and my sense is that we will go back to the previous market driver of the policy narrative. In fact, it is arguably quite healthy that we have seen this correction as it allows markets a fresh(er) start with new information. However, there is still nothing I see on the horizon which will weaken the dollar overall.

This morning the only thing of note on the calendar is PPI (exp 1.7%, 2.2% core). It is hard to believe that it will change any views. At this point, look for continued position adjustments (arguably modest further declines in bond prices but no direction in the dollar) as we all await Signor Draghi and the ECB tomorrow morning.

Good luck
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Not Making Hay

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In China, despite what they say
The ‘conomy’s not making hay
Their exports are lagging
With industry gagging
On stuff manufactured each day

The upshot’s the PBOC
Released billions of renminbi
Reserve rates are shrinking
And everyone’s thinking
They’ll shrink further ere ought twenty

Long before trading started last evening, Chinese trade data set the tone for the markets as exports there shrank by 1.0% in USD terms, a clear indication that the trade war is starting to bite. Imports fell further (5.6%), but overall, the trade surplus was significantly smaller than expected. In the current market environment, it cannot be a surprise that the response was for a rally in Asian equity markets as the weak data presages further policy ease by the Chinese. In fact, there are numerous articles discussing just what options they have. Friday afternoon they cut the reserve ratio by a full percentage point, and analysts all over are expecting at least one more cut before the end of the year. As to direct interest rate cuts, that is far less clear given the still problematic bubble tendencies in the Chinese real estate market. The PBOC is quite concerned over allowing that bubble to blow up further, so any reductions in the benchmark rate are likely to be modest…at least until the renminbi starts to strengthen again.

Speaking of the currency, while it has remained quite stable overall, -0.2% this morning, +0.65% in the past week, it remains one of the easiest tools for the PBOC to utilize. The government there has also sought to stimulate via fiscal policy, with significant tax cuts proposed and some implemented, but thus far, those have not been effective in supporting economic growth. While I am confident that when the next GDP number prints in mid-October it will be above 6.0%, there are an increasing number of independent reports showing that growth there is much slower than that, with some estimates more in line with the US at 3.0%. At any rate, equity markets continue to believe that a trade deal will happen sooner rather than later, and as long as talks continue, look for a more positive risk attitude across markets.

The other big news this morning is from the UK, where British PM Boris Johnson met with his Irish counterpart, Taoiseach Leo Varadkar, to discuss how to overcome the Irish backstop conundrum. It is interesting to see the two attitudes; Boris quite positive, Leo just the opposite, but in the end, nothing was agreed. In this instance, Ireland is at far more risk than the UK as its much smaller economy is far more dependent on free access to the UK than vice versa. But thus far, Varadkar is holding his ground. Another Tory cabinet member, Amber Rudd, quit Saturday night, but Boris is unmoved. There was an interesting article over the weekend describing a possible way for Boris to get his election; he can call for a no-confidence vote in his government, arguably losing, and paving the way for the election before the Brexit deadline. Certainly it seems this would put parliament in an untenable position, support him to prevent the election, but that would imply they support his program, or defeat him and have the election he wants.

Of course, while all this is ongoing, the currency market is looking at the pound and trying to decide the ultimate outcome. For the past two weeks, it is clear that a belief is growing there will be no Brexit at all as the pound continues to rally. This morning it is higher by 0.6% and back to its highest level in over a month. Part of that, no doubt, was the UK GDP data, which surprised one and all by showing a 0.3% gain in July, which virtually insures there will be no technical recession yet. But the pound is a solid 3.5% from its lows seen earlier this month. I continue to believe that the EU will blink and a deal will be cobbled together with the pound rebounding much further.

Elsewhere, the dollar is softer in most cases. The continuation of last week’s risk rally has reduced the desire to hold dollars and we continue to see yields edge higher as well. Beyond the pound’s rally, which is the largest in the G10 space, AUD and NZD have pushed back up by about 0.3% on the China stimulus story, but the rest of G10 is quite dull. In the EMG bloc, ZAR is today’s big winner, +0.8%, as hopes for more global stimulus increase the relative attractiveness of high yielding ZAR denominated bonds. But otherwise, here too, things are uninteresting.

Looking to the data this week, it is an Inflation and Retail Sales week with no Fed speak as they are now in their quiet period ahead of next week’s meeting.

Today Consumer Credit $16.0B
Tuesday NFIB Small Biz Optimism 103.5
  JOLT’s Job Openings 7.311M
Wednesday PPI 0.0% (1.7% Y/Y)
  -ex food & energy 0.2% (2.2% Y/Y)
Thursday Initial claims 215K
  CPI 0.1% (1.8% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
Friday Retail Sales 0.2%
  -ex autos 0.1%
  Michigan Sentiment 90.5

Aside from this, we hear from both the ECB and BOJ this Thursday with expectations for a rate cut and potentially more QE by Signor Draghi, while there are some thoughts that Kuroda-san will be cutting rates in Japan as well. Ultimately, nothing has changed the broad sweep of central bank policy ease. As long as everybody is easing, the relative impact of monetary policy on the currency market will be diminished. And that means that funds will continue to flow to the best performing economies with the best prospects. Despite everything ongoing, the US remains the choice, and the dollar should remain supported overall.

Good luck
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