Progress Was Made

The Presidents, Trump and Xi, met
Attempting, trade talks, to reset
Some progress was made
Though China downplayed
Reductions in tariffs as yet

Risk is back! At least it is for today, with the news that there has been a truce, if not an end, to the trade war between the US and China seen as a huge positive for risky assets. And rightly so, given that the trade contretemps has been one of the key drivers of recent investor anxiety. In addition, the G20 managed to release a statement endorsed by all parties, albeit one that was a shadow of its former self. There remain significant disagreements on the value of the G20 with the Trump administration still convinced that these gatherings seek to institutionalize rules and regulations that are contra to the US best interests.

At any rate, equity markets around the world have rallied sharply with Shanghai jumping 2.5%, the Nikkei up 1.25% and the South Korean KOSPI rising by 1.75%. In Europe, the FTSE is higher by 1.75%, the DAX by 2.2% and the CAC, despite ongoing riots in Paris and throughout France, higher by 1.0%. Ahead of the opening here, futures are pointing to an opening on the order of 2.0% higher as well. It should be no surprise that Treasury bonds have fallen somewhat, although the 2bp rise in 10-year yields is dwarfed relative to the equity movements. And finally, the dollar is lower, not quite across the board, but against many of its counterparts. Today, EMG currencies are leading the way, with CNY rising 0.9%, MXN rising 1.7% and RUB up 0.75% indicative of the type of price movement we have seen.

However, the trade story is not the only market driver today, with news in the oil market impacting currencies as well. The story that OPEC and Russia have agreed to extend production cuts into 2019, as well as the news that Alberta’s Premier has ordered a reduction of production, and finally, the news that Qatar is leaving OPEC all combining to help oil jump by more than 3% this morning. The FX impact from oil, however, was mixed. While the RUB and MXN both rallied sharply, as did CAD (+0.9%) and BRL (+0.9%), those nations that are major energy importers, notably India (INR -1.1%), have seen their currencies suffer. I would be remiss not to mention the fact that the euro, which is a large energy importer, has actually moved very little as the two main stories, trade war truce and oil price rise, have offsetting impacts in FX terms on the Continent.

But through it all, there is one currency that is universally underperforming, the British pound, which has fallen 0.3% vs. the dollar and much further against most others. Brexit continues to cast a long shadow over the pound with today’s story that the DUP, the small Northern Irish party that has been key for PM May’s ability to run a coalition government, is very unhappy with the Brexit deal and prepared to not only vote against it in Parliament next week, but to agree a vote of no confidence against PM May as well. This news was far too much for the pound, overwhelming even much better than expected Manufacturing PMI data from the UK (53.1 vs. exp 51.5). So the poor pound is likely to remain under pressure until that vote has been recorded next Tuesday. As of now, it continues to appear that the Brexit deal will fail in its current form, and that the UK will be leaving the EU with no framework for the future in place. This has been the market’s collective fear since the beginning of this process, and the pound will almost certainly suffer further in the event Parliament votes down the deal.

While all this has been fun, the week ahead brings us much more news and
information, as it is Payrolls week in the US.

Today ISM Manufacturing 57.6
  ISM Prices Paid 70.0
  Construction Spending 0.4%
Wednesday ADP Employment 197K
  Nonfarm Productivity 2.3%
  Unit Labor Costs 1.2%
  ISM Non-Manufacturing 59.2
  Fed’s Beige Book  
Thursday Initial Claims 220K
  Trade Balance -$54.9B
  Factory Orders -2.0%
Friday Nonfarm Payrolls 200K
  Private Payrolls 200K
  Manufacturing Payrolls 19K
  Unemployment Rate 3.7%
  Average Hourly Earnings 0.3% (3.1% Y/Y)
  Average Weekly Hours 34.5
  Michigan Sentiment 97.0

So a lot of data, and even more Fed speakers, with a total of 11 speeches, including congressional testimony by Chairman Powell on Wednesday, from six different Fed Governors and Presidents. Now we have heard an awful lot from the Fed lately and it has been interpreted as being somewhat less hawkish than the commentary from September and October. In fact, Minneapolis President Kashkari was out on Friday calling for an end to rate hikes, although he is arguably the most dovish member of the FOMC. Interestingly, the trade truce is likely to lead to one less problem the Fed has highlighted as an economic headwind, and may result in some more hawkish commentary, but my guess is that the current mindset at the Eccles Building is one of moderation. I continue to believe that a December hike is a done deal, but I challenge anyone who claims they have a good idea for what 2019 will bring. The arguments on both sides are viable, and the proponents are fierce in their defense. While the Fed continues to be a key driver of FX activity, my sense is that longer term FX views are much less certain these days, and will continue down to be that way as the Fed strives to remove Forward Guidance from the tool kit. Or at least put it away for a while. I still like the dollar, but I will admit my conviction is a bit less robust than before.

Good luck
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There Is No Plan B

Said Europe, “there is no Plan B”
This deal is the best that you’ll see
Opponents keep saying
The deal is dismaying
Because it cedes full sovereignty

It turns out last week was quite a difficult one in markets, with equity prices around the world under significant pressure as concerns continue to grow regarding growth prospects everywhere. In fact, for the first time we heard Fed Chair Jay Powell moderate his description of the US economy’s growth trajectory. It seems that the clear slowing in the housing sector combined with less positive IP and Durable Goods data has been enough to alert the Fed to the possibility that all may not be right with the world. While there is no indication that the Fed will delay its December rate hike, questions about 2019’s rate path have certainly been debated more aggressively with the consensus now believing that we can see a pause before just two more rate hikes next year. With the Powell Fed indicating that they are truly data dependent (as opposed to the Yellen Fed which liked the term, but not the reality), if we continue to see slowing US growth, then it is quite reasonable to expect a shallower trajectory of rate hikes in the US.

But that was last week’s news and as the new week begins, the biggest story is that the EU has agreed the terms of the Brexit negotiations that were just completed two weeks ago. The entire process now moves on to the next stage, where all 28 parliaments need to approve the deal. Given the terms of the deal, which has the opportunity to lock the UK into the EU’s customs union with no say in its evolution, it would be surprising if any of the other 27 members reject the deal. However, it remains unclear that the deal will be accepted by the UK parliament, where PM May does not hold a majority and rules because of a deal with the Northern Irish DUP. Of course the irony here is that Northern Ireland is the area of greatest contention in the deal, given the competing desires of, on the one hand, no hard border between Ireland and Northern Ireland, and on the other hand, the desire to be able to separate the two entities for tariff and immigration purposes.

At this stage, it seems there is at best a fifty-fifty chance that the deal makes it through the UK parliament, as the opposition Labour Party has lambasted the deal (albeit for different reasons) in the same manner as the hard-line Brexiteers. But political outcomes rarely follow sound logic, and so at this point, all we can do is wait until the vote, which is expected to be on December 12. What we do know is that the FX market is not sold on the deal’s prospects as despite the announcement by the EU, the pound has managed to rally just 0.25% today and remains, at 1.2850, much closer to the bottom of its recent trading range than the top. I continue to believe that a no vote will be tantamount to a hard Brexit and that the pound will suffer further from here in that event. However, if parliament accepts the deal, I would expect the pound to rally to around1.35 initially, although its future beyond that move is likely to be lower anyway.

Last week’s risk-off behavior led to broad-based dollar strength, with the greenback rallying on the order of 1.0% against both its G10 and major EMG counterparts. While that movement pales in comparison to the rout in equity markets seen last week, it was a consistent one nonetheless. This morning, though, the dollar is under a modicum of pressure as the fear evident last week has abated.

For example, despite softer than expected German IFO data (102.0 vs. exp 102.3), the euro has rallied 0.25% alongside the pound. A big part of this story seems to be that the Italians have made several comments about a willingness to work with a slightly smaller budget deficit in 2019 than the 2.4% first estimated. While the euro has clearly benefitted from this sentiment, the real winner has been Italian debt (where 10-year BTP’s are 17bps lower) and Italian stocks, where the MIB is higher by 2.7%. In fact, that equity sentiment has spread throughout the continent as virtually every European market is higher by 1% or more. We also saw strength in APAC equity markets (Nikkei +0.75%, Hang Seng +1.75%) although Shanghai didn’t join in the fun, slipping a modest 0.15%. The point is that market sentiment this morning is clearly far better than what was seen last week.

Looking ahead to the data this week, the latest PCE data is due as well as the FOMC Minutes, and we have a number of Fed speakers, including Chairman Powell on Wednesday.

Tuesday Case-Shiller Home Prices 5.3%
  Consumer Confidence 135.5
Wednesday Q3 GDP 3.5%
  New Home Sales 578K
Thursday Initial Claims 219K
  Personal Income 0.4%
  Personal Spending 0.4%
  PCE 0.2% (2.1% Y/Y)
  Core PCE 0.2% (1.9% Y/Y)
Friday Chicago PMI 58.3

In addition to Powell, we hear from NY Fed President Williams as well as Vice-Chairman Richard Clarida, both of whom will be closely watched. Given the recent change in tone to both the US data (slightly softer) and the comments from Fed speakers (slightly less hawkish), I think the key this week will be the Minutes and the speeches. Investors will be extremely focused on how the evolution in the Fed’s thinking is progressing. But it is not just the Fed. Remember, the ECB has promised to end QE come December despite the fact that recent data has shown slowing growth in the Eurozone.

The greatest fear central bankers currently have is that their economy rolls into a recession while interest rates are already at “emergency” levels and monetary policy remains extremely loose. After all, if rates are negative, what can they do to stimulate growth? This has been one of the forces driving central bankers to hew to a more hawkish line lately as they are all keen to get ahead of the curve. The problem they face collectively is that the data is already beginning to show the first indications of slowing down more broadly despite the continuation of ultra easy monetary policy. In the event that the global economy slows more rapidly than currently forecast, there is likely to be a significant increase in market volatility across equities, bonds and currencies. In this case, I am not using the term volatility as a euphemism for declines, rather I mean look for much more intraday movement and much more uncertainty in expectations. It is this scenario that fosters the need for hedgers to maintain their hedge programs at all times. Having been in the markets for quite a long time, I assure you things can get much worse before they get better.

But for today, there is no reason to believe that will be the case, rather the dollar seems likely to drift slightly lower as traders position for the important stuff later this week.

Good luck
Adf

QE He’ll Dismember

The head of the Fed, Chairman Jay
Implied there might be a delay
In how far the Fed
Will push rates ahead
Lest policy does go astray

Meanwhile, his Euro counterpart,
Herr Draghi’s had no change of heart
He claims, come December
QE he’ll dismember
Despite slower growth in Stuttgart

In what can only be seen as quite a twist on the recent storylines, Wednesday’s US CPI data was soft enough to give pause to Chairman Powell as in two consecutive speeches he highlighted the fact that the US economy is facing some headwinds now, and that may well change the rate trajectory of the Fed. While there was no indication of any change coming in December, where a 25bp rate hike is baked in, there is much more discussion about only two rate hikes next year, rather than the at least three that had been penciled in by the Fed itself back in September. Powell mentioned the slowing growth story internationally, as well as the winding down of fiscal stimulus as two potential changes to the narrative. Finally, given that the Fed has already raised rates seven times, he recognized that the lagged effects of the Fed’s own policies may well lead to slower growth. The dollar has had difficulty maintaining its bid from the past several weeks, and this is clearly the primary story driving that change of heart.

At the same time, Signor Draghi, in a speech this morning, reiterated that the risks to growth in the Eurozone were “balanced”, his code word to reassure the market that though recent data was soft, the ECB is going to end QE in December, and as of now, raise rates next September. Now, there is a long time between now and next September, and it is not hard to come up with some scenarios whereby the Eurozone economy slows much more rapidly. For example, the combination of a hard Brexit and increased US tariffs on China could easily have a significant negative impact on the Eurozone economy, undermining the recent growth story as well as the recent (alleged) inflation story. For now, Draghi insists that all is well, but at some point, if the data doesn’t cooperate, then the ECB will be forced to change its tune. His comments have helped support the euro modestly today, but the euro’s value is a scant 0.1% higher than its close yesterday.

Adding to the anxiety in the market overall is the quickening collapse of the Brexit situation, where it seems the math is getting much harder for PM May to get the just agreed deal through Parliament. Yesterday’s sharp decline in the pound, more than 1.5%, has been followed by a modest rebound, but that seems far more likely to be a trading event rather than a change of heart on the fundamentals. In my view, there are many more potential negatives than positives likely to occur in the UK at this point. A hard Brexit, a Tory rebellion ousting May, and even snap elections with the chance for a PM Corbyn all would seem to have negative overtones for the pound. The only thing, at this time, that can support the currency is if May somehow gets her deal agreed in Parliament. It feels like a low probability outcome, and that implies that the pound will be subject to more sharp declines over time.

Pivoting to the Emerging markets, the trade story with China continues to drive equity markets, or at least all the rumors about the trade story do that. While it seems that there are mid-level conversations between the two nations ahead of the scheduled meeting between Trump and Xi later this month, we continue to hear from numerous peanut gallery members about whether tariffs are going to be delayed or increased in size. This morning’s story is no deal is coming and 25% tariffs are on their way come January 1. It is no surprise that equity futures are pointing lower in the US. Look for CNY to soften as well, albeit not significantly so. The movement we saw last week was truly unusual.

Other EMG stories show that Mexico, the Philippines and Indonesia all raised base rates yesterday, although the currency impacts were mixed. Mexico’s was widely anticipated, so the 0.5% decline this morning seems to be a “sell the news” reaction. The Philippines surprised traders, however, and their peso was rewarded with a 0.5% rally. Interestingly, Bank Indonesia was not widely expected to move, but the rupiah has actually suffered a little after the rate hike. Go figure.

Yesterday’s US data arguably leaned to the strong side with only the Philly Fed number disappointing while Empire State and Retail Sales were both quite strong. This morning brings IP (exp 0.2%) and Capacity Utilization (78.2%), although these data points typically don’t impact the FX market.

As the week comes to a close, it appears the dollar is going to remain under some pressure on the back of the newly evolving Fed narrative regarding a less aggressive monetary policy. However, if we see a return of more severe equity market weakness, the dollar remains the haven of choice, and a reversal of the overnight moves can be expected.

Good luck and good weekend
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A Too Bitter Pill

Three stories today are of note
First, Italy’s rocking the boat
Next Brexit is still
A too bitter pill
While OPEC, a cut soon may vote

The outcome in all of these cases
Has been that the market embraces
The dollar once more
(It’s starting to soar)
And quite clearly off to the races

On this Veteran’s Day holiday in the US, where bond markets will be closed although equity markets will not, the dollar has shown consistent strength across the board. Interestingly, there have been several noteworthy stories this morning, but each one of them has served to reinforce the idea that the dollar’s oft-forecast demise remains somewhere well into the future.

Starting with Italy, the current government has shown every indication that they are not going to change their budget structure or forecasts despite the EU’s rejection of these assumptions when the budget was first submitted several weeks ago. This sets up the following situation: the EU can hold firm to its fiscal discipline strategy and begin the procedure to sanction Italy and impose a fine for breaking the rules, or the EU can soften its stance and find some compromise that tries to allow both sides to save face, or at least the EU to do so.

The problem with the first strategy is the EU Commission’s fear that it will increase the attraction of antiestablishment parties in the Parliamentary elections due in May. After all, the Italian coalition was elected by blaming all of Italy’s woes on the EU and its policies. The last thing the Commission wants is a more unruly Parliament, especially as the current leadership may find themselves on the sidelines. The problem with the second strategy is that if they don’t uphold their fiscal probity it will be clear, once and for all, that EU fiscal rules are there in name only and have no teeth. This means that going forward, while certain countries will follow them because they think it is proper to do so, many will decide they represent conditions too difficult with which to adhere. Over time, the second option would almost certainly result in the eventual dissolution of the euro, as the problems from having such dramatically different fiscal policies would eventually become too difficult for the ECB to manage.

With this in mind, it is no surprise that the euro is softer again today, down 0.6% and now trading at its lowest level since June 2017. In less than a week it has fallen by more than 2.0% and it looks as though this trend will continue for a while yet. We need to see the Fed soften its stance or something else to change in order to stop this move.

Turning to the UK, the clock to make a deal seems to be ticking ever faster and there is no indication that PM May is going to get one. Over the weekend, there was no progress made regarding the Irish border issue, but we did hear from several important constituents that the PM’s current deal will fail in Parliament. If Labour won’t support it and the DUP won’t support it and the hard-line Brexiteers won’t support it, there is no deal to be had. With this in mind it is no surprise that the pound has suffered greatly this morning, down 1.4% and back well below 1.30. You may recall that around Halloween, the market started to anticipate a Brexit deal and the pound rallied 3.7% in the course of a week. Well, it has since ceded 2.7% of that gain and based on the distinct lack of progress on the talks, it certainly appears that the pound has further to fall. Do not be surprised if the pound trades below its recent lows of 1.2700 and goes on to test the post-Brexit vote lows of 1.1900.

The third story of note is regarding OPEC and oil prices, which have fallen nearly 20% during the past six weeks as US production and inventories continue to climb while the price impact of sanctions on Iran turned out to be much less then expected. This has encouraged speculation that OPEC may cut its production quotas, although the news from various members is mixed. Adding to oil’s woes (and in truth all commodity prices) has been the fact that global growth has been slowing as well, thus reducing underlying demand. In fact, the biggest concern for the market has been the slow down in China, which continues apace and where stories of further policy ease by the PBOC, including interest rate cuts, are starting to be heard. Two things to note are first, the typical inverse correlation between the dollar and commodity prices such that when the dollar rises, commodity prices tend to fall, and second, in line with the dollar’s broad strength, the Chinese yuan has fallen further today, down 0.3%, and pushing back to the levels that inspired calls for a move beyond 7.00 despite concerns over increased capital outflows.

And frankly, those are the stories of note. The dollar is higher vs. pretty much every other currency today, G10 and EMG alike, with no distinction and few other stories that are newsworthy. Looking at the data this week, there are two key releases, CPI and Retail Sales along with a bit of other stuff.

Tuesday NFIB Biz Confidence 108.0
  Monthly Budget -$98.0B
Wednesday CPI 0.3% (2.5% Y/Y)
  -ex food & energy 0.2% (2.2% Y/Y)
Thursday Initial Claims 215K
  Philly Fed 20.2
  Empire State 20.0
  Retail Sales 0.5%
  -ex Autos 0.5%
Friday IP 0.2%
  Capacity Utilization 78.2%

Overall, the data continues to support the Fed’s thesis that tighter monetary policy remains the proper course of action. In addition to the data we will hear from three Fed speakers including Chairman Powell on Wednesday. It seems hard to believe that he will have cause to change his tune, so I expect that as long as the rest of the world exhibits more short-term problems like we are seeing today, the dollar will remain quite strong.

Good luck
Adf

Brexit Doomsday

In London, Prime Minister May
Has started revealing, some say
Details of the deal
Which optimists feel
Could postpone the Brexit doomsday

With the elections now past, market participants are looking for the next potential catalysts for movement and Brexit regularly leads the list. According to the British government, the deal is 95% complete, although the Irish border issue remains unsolved. The essence of this issue is as follows: ever since the Good Friday Agreement in 1998, Northern Ireland has been part of the UK, but has had no hard border between itself and the Republic of Ireland. As both Ireland and the UK were members of the EU, there were no issues regarding tariffs or trade, and so the process worked effectively. However, now that the UK is leaving the EU, as well as the customs union, suddenly there are likely to be tariffs on goods that cross that border. The problem stems from the fact that neither side wants a ‘hard’ border between the two nations, meaning no customs checking there. Therein lies the problem. How can Northern Ireland remain in the customs union but not England, Wales and Scotland? It would mean a border of some type between Northern Ireland and the rest of the UK. Of course, that doesn’t go over very well either. Hence the stalemate. The EU is willing to allow Northern Ireland to maintain its current stance with Ireland, but not the rest of the UK. The UK doesn’t want Northern Ireland to have a different status than itself with the EU. Those are exactly opposite positions and there is no obvious middle ground.

The risk becomes that PM May negotiates a deal, which will by definition be imperfect, and that said deal gets defeated in a Parliamentary vote, thus leaving nothing completed. Given the shrinking timeline available to come up with a deal, less than five months at this point, it seems pretty clear that this is the last opportunity to get something done. The market, at least based on the recent performance of the pound, has become increasingly optimistic that a solution will be found. While the pound has edged slightly lower overnight, it is up by more than 3% since Halloween with the entire movement based on the idea that a deal will be done. In addition, this morning there have been several comments by investors that a Brexit deal will result in a powerful rally in the pound, up to 1.50 or beyond. While I disagree with that assessment, it is important that everyone understands the different viewpoints in the market. The idea is that a Brexit deal will end uncertainty, spur investment and allow the BOE to become more aggressive raising interest rates. And while some of that is certainly true, for the pound to reach 1.50, the dollar will need to be much lower against all its counterparties, and I just don’t see that outcome.

The other key story today is the FOMC meeting, where no change in policy is anticipated, although there are some analysts looking for a tweak to the policy statement. At this point, it seems abundantly clear that the Fed is unconcerned with the level of the stock market, and that last month’s decline will have no bearing on their policy decision. There is talk of a tweak to IOER, where the Fed may reduce that rate relative to the current Fed Funds corridor of 2.00% – 2.25%, but I agree with the analysts who say that it makes limited sense for the Fed to do something this month, and they will be better off waiting until December when they raise rates again.

Beyond that, the data overnight showed a modest slowdown in Chinese exports with a reduction in their trade surplus, both globally and with the US. We also saw that German exports decline 0.8%, a surprisingly weak outcome attributed to ongoing issues with the German diesel auto sales. While yesterday morning saw the dollar under significant pressure across the board, the reality is that it reversed many of those losses during the session. This morning the dollar is marginally higher across the board, but the movements have not been significant. For example, the euro is lower by 0.15% and the pound by 0.3%. We have seen similar magnitude moves by the commodity bloc, and the yen has softened by 0.2%. As you can see, it has been a dull market.

In the EMG space, the dollar is generally, though not universally, stronger but here, too, the magnitude of movement has been modest, on the order of 0.2%-0.4% overall.

The only piece of data aside from the FOMC meeting is Initial Claims (exp 214K) this morning, and aside from the fact that this data continues to show a robust labor market, it has not been a market catalyst for a long time. After a big equity rally yesterday, futures are pointing slightly softer to open, and Treasury yields, after rallying sharply at the beginning of the month, remain near their multiyear highs with this morning’s level at 3.23%.

In sum, it is hard to get excited about large upcoming movement in the market today, and so a modest further dollar rally seems about right. Removing some more of the recent excesses would make sense in the context of the still uncertain outcomes from key issues like Brexit and the Italian budget quesoins.

Good luck
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Good Times Will Endure

Elections are out of the way
The outcome caused little dismay
Investors seem sure
Good times will endure
With stocks set to rally today

The dollar, however, is weak
Some pundits claim we’ve seen the peak
Still folks at the Fed
See rate hikes ahead
Which could, on those views, havoc wreak

The midterm elections are now past, with expectations largely fulfilled. The Democrats will run the House, while the Senate’s Republican majority has actually grown by four seats to a 53-47 count. At least that’s what appears to be the case at this time, although there are some runoff elections that need yet to be completed in the next weeks. The traditional view of a political split is that gridlock will ensue and very little in the way of new policy will come out of the next Congress. However, in this case, things may not actually work out that way. Consider the fact that President Trump’s populist leanings may well dovetail with Democratic priorities, especially on spending. It wouldn’t be that surprising if the next budget is even more stimulative than the last, especially as by next summer it is highly likely that the US growth impulse will be slowing down somewhat as the effects of the last stimulus fade away. And through it all, there is no indication that the Fed is going to stop raising interest rates, so I might argue that things haven’t changed all that much.

The risks to this view are if the new Democratic majority in the House chooses to use their power to rehash the battles from 2016 or, more disconcertingly for markets, decide that they want to proceed with an Impeachment process against the President. Two things about this issue are that, first, with the Republicans in control of the Senate, there is essentially zero probability that the President would be removed from office, so it would all be for show. But second, as I mentioned yesterday, the last time we saw this movie, in the autumn of 1998, the dollar fell sharply during the proceedings. This is just something to keep in mind as headlines start to flow going forward.

Enough about the elections. The market response overnight showed equity markets feeling a little better, with Europe higher and US futures pointing in the same direction, although APAC markets were largely flat. Meanwhile, the dollar has come under pressure across the board. The latter seems a little counterintuitive, although I guess it is simply a result of the embrasure of risk by investors. There is no need to flock to dollars, or yen for that matter, if expectations turn positive. And that’s what we seem to have seen.

Focusing on the FX market, the dollar is down pretty sharply across the board. Both the euro and the pound are higher by more than 0.5% despite what I would argue was some mildly negative news. In the Eurozone, while German IP was a touch firmer than expected at +0.2%, Retail Sales data throughout the Eurozone was actually quite weak, with both Italian and Austrian data showing contraction while the French managed to just hold on to an unchanged result, and all three coming well short of expectations.

Meanwhile, the pound continues to trade on hopes that a Brexit breakthrough is coming, despite the fact that yesterday’s widely publicized cabinet meeting produced exactly nothing. PM May has two potential problems here; first is the question of actually coming up with a deal that her cabinet can agree to support that also has EU support, a task that has thus far been out of reach. Second, remember that May has a coalition partner, not a majority in Parliament, and the Labor Party is now coming on record that they will vote against any deal. If that is the case, it is entirely possible that it all falls apart and the UK leaves the EU with no deal in place. While the pound has rallied nicely over the past week, up more than 3.5%, I continue to see the downside risks being significantly greater than the upside. Certainly the rally on a deal announcement would be much smaller in magnitude than the decline in the event of a hard Brexit. Hedgers must keep this in mind as they manage their risks.

As to the rest of the G10, the dollar has fallen even further than the euro and pound, with 0.7% pretty common across virtually the entire bloc. The only two exceptions are JPY, with a more modest 0.3% rally and CAD with a similar gain. My sense is the former is all about risk reduction mitigating some of the dollar weakness, while the latter is related to the fact that oil prices continue to fall, having come down nearly 20% from their highs reached in early October.

In the EMG bloc, there is broad dollar weakness as well with IDR leading the way (+1.5%) and ZAR jumping a solid 1.25%. We discussed the IDR story yesterday as investment flows continue to find their way back to the country given its continued strong growth and low inflation. ZAR, on the other hand, has benefitted from the combination of broad dollar weakness and gold’s recent strength, with the “barbarous relic” having rallied more than 4% in the past month. But it is not just those two currencies showing strength this morning; it is a universal dollar down day, with most freely traded currencies rising more than 0.5%.

And that’s really the day overall. There is no US data to be released today, and the Fed is just starting its two-day meeting, although there is no expectation that there will be any policy change regardless of the fact that it has been pushed back a day in deference to Election day yesterday. There is certainly no reason to believe that the dollar will reverse course in the near term, unless we see a significant uptick in US data that might cause the Fed to step up their pace of activity. However, that is not going to happen today, no matter what, and so I would look for the dollar to continue the overnight move and sell off modestly from this morning’s levels. Although I do not believe that the big picture has changed, any dollar strength is likely to be fleeting in the near future.

Good luck
Adf

 

Hardliners Abhorred

According to sources, it seems
That Minister May and her teams
Have neared the accord
Hardliners abhorred
As they’ll need to give up their dreams

While there is much in store for markets this week from the US, between the midterm elections tomorrow and the FOMC meeting on Thursday, today’s biggest headline is really about the UK and Brexit. Allegedly, albeit with no corroboration from either side, the entire UK will remain in the customs union, not just Northern Ireland, in the immediate aftermath of Brexit as the two sides continue to work out the eventual solution. May’s idea is that she will present this to her cabinet with an ultimatum to approve it and send it to Parliament in order to get the process completed before the end of the year. And while the other 27 members of the EU must also ratify the deal, the current belief is that there will be limited problems doing that. However, this all remains speculation at this point, except for the fact that May and her cabinet have a meeting scheduled for tomorrow where more details should become available.

It cannot be surprising that the pound has rallied on the news, jumping 60 pips on the open although since giving back about half that original gain. The broad consensus in the market is that any deal will result in the pound trading sharply higher, although I am skeptical that it can stay much above 1.35 for any meaningful amount of time. Even if the Brexit monkey climbs off the pound’s back, the market will still have to account for the fact that UK growth is slowing more sharply than its peers and that the pressure for the BOE to raise rates will likely ebb accordingly. But for now it remains speculation as to whether a deal is imminent or not. And as long as that uncertainty remains, the pound will be beholden to the latest story or headline on the subject.

Away from the pound though, the dollar is starting to show some life at this stage of the morning. Friday’s employment report, with NFP printing at 250K and AHE at 3.1%, confirmed that growth in the US continues to outperform virtually every other region in the world, and will have done nothing to dissuade the Fed from continuing its rate hiking strategy. While there is no expectation of any activity by the Fed on Thursday, the market probability for a rate hike in December remains above 80%. As long as US data continues to outpace that of the rest of the world, it seems unlikely that the Fed is going to stop.

Regarding the US midterm elections, clearly there is the potential for a market reaction depending on the results and whether the Republican party maintains its hold on the House of Representatives. If not, a split government (it is assumed that they will retain the Senate) will clearly impede the president’s plans for further economic stimulus programs and reintroduce brinksmanship to things like budget discussions. Net, given the current economic situation, I expect that after a kneejerk response, it is unlikely to have a significant impact for a while. However, it does open the possibility of more inflammatory rhetoric, including the threat of impeachment hearings, which may well detract from the dollar’s performance going forward. As we learned following President Trump’s election, markets pay close attention to significant electoral changes. With this in mind, it is important to remember that many pundits have been forecasting the Democrats will retake the House, so if the Republicans hold on, even with a much smaller majority, that may be an outcome not currently priced into the market. My point is that there is still great uncertainty to the outcome, and it is not entirely clear the FX impact that will result.

Away from those stories, the biggest news we saw was the weaker than expected Caixin PMI data from China. The Services print was 50.8 with the Composite number at just 50.5. The latter was at its weakest in more than two years and is an indication that the trade conflict with the US is continuing to take a toll on the Chinese economy. In addition, there were several articles in the press this weekend explaining that despite President Trump’s tweets last week, the meeting between Xi and Trump is really just going to get the trade negotiations restarted. There is no deal imminent. It should be no surprise that the renminbi has weakened during the session, especially after last week’s remarkable rally. So the 0.3% decline this morning needs to be kept in context, and simply represents a move back toward its previous trend.

Broadly speaking, the dollar is performing well against the EMG bloc today with MXN (-0.4%), INR (-0.9%) and KRW (-0.5%) indicative of the type of market activity ongoing.

Looking ahead to the upcoming data, we see that beyond the Fed and election, there is precious little that we will learn.

Today ISM Non-Manufacturing 59.3
Tuesday JOLT’s Jobs Report 7.1M
Thursday Initial Claims 214K
  FOMC Rate Decision 2.25%
Friday PPI 0.3% (2.5% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
  Michigan Sentiment 98.0
  Wholesale Inventories 0.3%

So between the US elections and PM May’s cabinet meeting with its chance to make real Brexit headway, there is much to look for this week. But the data will not be the story. As to today’s session, APAC equity markets have reversed some of last week’s gains after it became clear that trade situation wasn’t going to improve in the very short term. US equity futures are pointing lower, although Europe is modestly higher. It all strikes me as though traders are biding their time awaiting the big news, which makes sense. Look for a dull session today, but with the chance for some fireworks tomorrow, at least in the pound if something happens in the cabinet meeting.

Good luck
Adf