Tag Archives: #southkorea

Truly Displeasing

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Down Under the story’s that rates
May soon fall, which just demonstrates
That growth there is easing
Thus truly displeasing
The central bank head and his mates

The RBA Minutes were released last evening and the central bank in the lucky country is not feeling very good. Governor Lowe and his team painted two, arguably similar, scenarios under which the RBA would need to cut rates; a worsening of the employment situation or a continued lack of inflation (driven by a worsening of the employment situation). We have been hearing this tune from Lowe for the past several months and the market is already pricing in more than one full 25bp cut before the end of 2019. However, as is often the case, when these theories are confirmed the market adjusts further. And so, it should be no surprise that AUD is lower again this morning, falling 0.35% and now trading back to the lows last seen in January 2016. For a bit more perspective, the last time Aussie was trading below these levels was during the financial crisis in Q1 2009 amidst a full-on risk blowout. But the combination of slowing Chinese growth, and generic dollar strength is taking a toll on the Aussie dollar. The trend here is lower and appears to have further room to run. Hedgers take note!

In England, meanwhile, it appears
The outcome that everyone fears
A no-deal decision
Might soon be the vision
And Sterling might weaken for years

Turning to the UK, the odds of a hard Brexit seem to be increasing by the day. As the EU elections, scheduled for later this week, approach, the hardline Tories are in the ascendancy. Nigel Farage, one of the most vocal anti-EU voices, is leading his new Brexit party into the elections and they are set to do quite well. At the same time, Boris Johnson, the former Foreign Minister in PM May’s government, as well as former Mayor of London, and also a strong anti-EU voice, is now the leading candidate to replace May in the ongoing leadership struggle. The PM is still trying to push water uphill find support for her thrice defeated bill, but it should be no surprise that, so far, that support has yet to materialize. After all, it was hated three times already and not a single word in the bill has changed. At this point, her only hope is that the increasingly real threat of a PM Johnson, who has stated he will simply exit the EU quickly, may be enough to get those wavering to come to her side. Based on the FX market price action over the past three weeks, however, it is becoming clearer that her bill is going to fail yet again.

Since the beginning of the month, the pound has fallen 3.6% (-0.25% today) and is trading at levels last seen in early January. As this trend progresses, it looks increasingly likely that the market will test the post-Brexit lows of 1.1906. And, of course, if Johnson is the next PM and he does pull out of the EU without a deal, an initial move to 1.10 seems quite viable. Once again, hedgers beware. As an aside, do not think for a moment that the euro will go unscathed in a hard Brexit. It would be quite easy to see a 2%-3% decline immediately, although I suspect that would moderate far more quickly than the damage to the pound.

Turning our eyes eastward, we see that the ongoing trade war (it has clearly escalated past a spat) between the US and China continues to have ramifications in the FX markets. Not only is the yuan continuing to weaken (-0.2% today) but other currencies are starting to feel the brunt. The most obvious loser has been the Korean won (-0.15% overnight) which has fallen 5.4% in the past month. While the central bank there is clearly concerned, given the cause of the movement and the strong trend, there is very little they can do to halt the slide other than raising interest rates aggressively. However, that would be devastating for the South Korean economy, so it appears that there is further room for this to decline as well. All eyes are on the 1200 level, which last traded in the major dollar rally in the beginning of 2017.

Do you see the trend yet? The dollar is continuing its strengthening tendencies across the board this morning. Other news adding fuel to the fire was the latest revision of OECD growth forecasts, where the US data was upgraded to 2.6% for 2019 while virtually every other area (UK, China, Eurozone, Japan, etc.) was downgraded by 0.1%-0.2%. It should be no surprise that the dollar remains well-bid in this environment.

Turning to the data this week, it is quite sparse as follows:

Today Existing Home Sales 5.35M
Wednesday FOMC Minutes  
Thursday Initial Claims 215K
  New Home Sales 675K
Friday Durable Goods -2.0%
  -ex transport 0.2%

Obviously, all eyes will be on the Minutes tomorrow, but the data set is not very enticing. That said, we do hear from eight more Fed speakers across a total of ten speeches (Atlanta’s Rafael Bostic is up three times this week). Yesterday, Chairman Powell explained that while corporate debt levels are high, this is no repeat of the mortgage crisis from 2008. Of course, Chairman Bernanke was quite clear, at the time, that the mortgage situation was “contained” just before the bottom fell out. I’m not implying the end is nigh, simply that the track record of Fed Chairs regarding forecasting market and economic dislocations is pretty dismal. At this time, there is no evidence that the Fed is going to do anything on the interest rate front although the futures market continues to price for nearly 50bps of rate cuts this year. And when it comes to forecasting, the futures market has a much better track record. Just sayin’.

All told, at this point there is no reason to think the dollar is going to reverse any of its recent strength, and in fact, seems likely to add to it going forward.

Good luck
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Spring Next Year

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Interest rates shan’t
Rise ere spring next year. But might
They possibly fall?

This morning’s market theme is that things look bad everywhere, except perhaps in the US. Starting in Tokyo, the BOJ met last night and, to no one’s surprise, left their policy rate unchanged at -0.10%. They maintained their yield curve control target of 0.00% +/- 0.20% for 10-year JGB’s and they indicated they would continue to purchase JGB’s at a clip of ¥80 trillion per year. But there were two things they did change, one surprising and one confusing.

First the surprise; instead of claiming rates would remain low for an “extended period”, the new language gave a specific date, “at least through around spring 2020”. Of course, this gives them the flexibility to extend that date specifically, implying an even more dovish stance going forward. Market participants were not expecting any change to the language, but interestingly, the yen actually rallied after the report. Part of that could be because there was significant weakness in Asian equity markets and a bit of a risk-off scenario, but I also read that some analysts see this as a prelude to tighter policy. I don’t buy the latter idea, but it does have adherents. The second thing they did, the confusing one, was they indicated they would create a lending facility for their ETF portfolio. The unusual thing here is that generally, lending securities is a way to encourage short-selling, although they did couch the idea in terms of added liquidity to the market. Given they own more than 70% of the ETF market, it is clear that liquidity must be suffering, but I wouldn’t have thought bringing short-sellers to the party would be their goal.

In South Korea, Q1 GDP shrank -0.3%, a much worse outcome than the expected 0.3% growth, and largely caused by a sharp decline in exports and IP. This is an ominous sign for the global economy, and also calls into question the accuracy of the Chinese data last week. Given the tight relationship between Korean exports and Chinese growth, something seems out of place here. The market impact was a decline in the KOSPI (-0.5%), falling Korean yields and a decline in the KRW, which fell a further 0.6% and is now at its weakest point in two years. Look for the Bank of Korea to ease policy going forward.

Turning to Europe, the Swedish Riksbank left policy rates unchanged at -0.25%, as expected, but their statement indicated that there would be no rate hike later this year, as previously expected, given the slowing growth and lack of inflation in Sweden. While I foreshadowed this earlier this week, the market response was severe, with SEK falling 1.4%, although the Swedish OMX (stock market) rallied 1% on the news. You know, bad news is good because rates remain low.

One last central bank note, the Bank of Canada has thrown in the towel on normalizing policy, dropping any reference to higher rates in the future from their statement yesterday. Upon the release of the statement, the Loonie fell a quick 1%. Although it has since recovered a bit of that, it is still lower by 0.6% from before the meeting. It seems concerns over slowing growth now outweigh concerns over excess leverage in the private sector.

The other market note was the sharp decline in Chinese stocks with the Shanghai Composite falling 2.4% as traders and investors there lose faith that the PBOC is going to continue to support the economy, especially after the better than expected GDP data last week. Even the renminbi fell, -0.3%, although it has been especially stable for the past two months as the US-China trade talks continue. Speaking of which, the next round of face-to-face talks are set to get under way shortly, but there has been little in the way of news, either positive or negative, for the past two weeks.

One other thing about which we have not heard much lately is Brexit, where the internal political machinations continue in Parliament, but as yet, there has been no willingness to compromise on either side of the aisle. Of note is that the pound continues to fall, down a further 0.2% this morning and now firmly below 1.29. While there is no doubt that the dollar is strong across the board, it also strikes that some market participants are beginning to price in a chance of a no-deal Brexit again, despite Parliament’s stated aim of preventing that. As yet, there is no better alternative.

Finally, the euro is still under pressure this morning as well, down a further 0.2% this morning, which makes 1.5% in the past week. This morning’s only data point showed Unemployment in Spain rose unexpectedly to 14.7%, another sign of slowing growth throughout the Eurozone. At this point, the ECB is unwilling to commit to easing policy much further, but with the data misses piling up, at some point they are going to concede the point. Easier money is coming to the Eurozone as well.

This morning brings Initial Claims data (exp 200K) and Durable Goods (0.8%, 0.2% ex Transport). It doesn’t seem that either of these will change any views, and as we have seen all week, I expect that Q1 earnings will be the market’s overall focus. A bullish spin will continue to highlight the different trajectories of the US and the rest of the world, and ultimately, continue to support the dollar.

Good luck
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