Dying To See

Said Trump, it’s not me it’s the Fed
Preventing us moving ahead
While China and Xi
Are dying to see
A deal where all tariffs are dead

It should be no surprise that President Trump was at the center of the action yesterday, that is the place he most covets. In a speech at the Economic Club of New York, he discussed pretty much what we all expected; the economy is doing great (low unemployment, low inflation and solid growth); the Fed is holding the economy back from doing even better (give us negative rates like Europe and Japan, we deserve it) and the Chinese are dying to do a deal but the US is not going to cave in and remove tariffs without ironclad assurances that the Chinese will stop their bad behavior. After all, this has been the essence of his economically focused comments for the past year. Why would they change now? But a funny thing happened yesterday, the market did not embrace all this is good news, and we started to see a little bit of risk aversion seeping into equity prices and filter down to the bond and currency markets.

For example, although the Dow Jones Industrial Average closed yesterday just 0.3% from the all-time high set last Thursday, there has been no follow-through in markets elsewhere in the world, and, in fact, US futures are pointing lower. Now arguably, this is not entirely a result of Trump’s comments, after all there are plenty of problems elsewhere in the world. But global markets have proven to be quite vulnerable to the perception of bad news on the US-China trade negotiations front, and the fact that there is no deal clearly set to be signed is weighing on investors’ collective minds. So last night, we saw Asian markets suffer (Nikkei -0.85%, Hang Seng -1.8%, KOSPI -0.85%, Shanghai -0.35%) and this morning European markets are also under pressure (DAX -0.75%, CAC -0.45%, FTSE -0.55%, Spain’s IBEX -1.65%, Italy’s MIB -1.3%). In other words, things look pretty bad worldwide, at least from a risk perspective.

Now some of this is idiosyncratic, like Hong Kong, where the protests are becoming more violent and more entrenched and have demonstrably had a negative impact on the local economy. Of even more concern is the growing possibility that China decides to intervene directly to quell the situation, something that would likely have significant negative consequences for global markets. Too, Germany is sliding into recession (we will get confirmation with tomorrow’s Q3 GDP release) and so the engine of Europe is slowing growth throughout the EU, and the Eurozone in particular. And we cannot forget Spain, where the fourth election in four years did nothing to bring people together, and where the Socialist Party is desperately trying to cobble together a coalition to get back in power, but cannot find enough partners, even though they have begun to climb down from initial comments about certain other parties, namely Podemos, and consider them. The point is, President Trump is not the only reason that investors have become a bit skeptical about the future.

In global bond markets, we are also seeing risk aversion manifest itself, notably this morning with 10-year Treasury yields falling more than 6bps, and other havens like Bunds (-4bps) and Gilts (-5bps) following suit. There has been a great deal of ink spilled over the recent bond market price action with two factions completely at odds. There continue to be a large number of pundits and investors who see the long-term trend of interest rates still heading lower and see the recent pullback in bond prices as a great opportunity to add to their long bond positions. Similarly, there is a growing contingent who believe that we have seen the lows in yields, that inflation is beginning to percolate higher and that 10-year yields above 3.00% are going to be the reality over the course of the next year. This tension is evident when one looks at the price action where since early September, we have seen a 40bp yield rally followed by a 35bp decline in the span of five weeks. Since then, we have recouped all the losses, and then some, although we continue to see weeks where there are 15bp movements, something that is historically quite unusual. Remember, bonds have historically been a dull trading vehicle, with very limited price activity and interest generated solely for their interest-bearing qualities. These days, they are more volatile than stocks! And today, there is significant demand, indicating risk aversion is high.

Finally, the dollar continues to benefit against most of its counterparts in both the G10 and EMG blocs, at least since I last wrote on Friday. In fact, there are four G10 currencies that have performed well since then, each with a very valid reason. First, given risk aversion, it should be no surprise that both the yen and Swiss franc have strengthened in this period. Looking further, the pound got a major fillip yesterday when Nigel Farage said that his Brexit party would not contest any of the 317 seats the Tories held going into the election, thus seeming to give a boost to Boris Johnson’s electoral plans, and therefore a boost toward the end of the Brexit saga with a deal in hand. Finally, last night the RBNZ surprised almost the entire market by leaving rates on hold at 1.0%, rather than cutting 25bps as had been widely expected. The reaction was immediate with kiwi jumping 1.0% and yields in New Zealand rallying between 10 and 15 bps across the curve.

Turning to the Emerging markets, the big mover has been, of course, the Chilean peso, the erstwhile star of LATAM which has fallen more than 5.0% since Friday in the wake of the government’s decision to change the constitution in an effort to address the ongoing social unrest. But this has dragged the rest of the currencies in the region down as well, with Colombia (-2%) and Mexico (-1.7%) also feeling the effects of this action. The removal of Peruvian president, Evo Morales, has further undermined the concept of democracy in the region, and investors are turning tail pretty quickly. Meanwhile, APAC currencies have also broadly suffered, with India’s rupee the worst performer in the bunch, down 1.1% since Friday, as concerns about slowing growth there are combining with higher than expected inflation to form a terrible mix. But most of the region is under pressure due to the ongoing growth and trade concerns, with KRW (-0.9%) and PHP (-0.7%) also feeling strains on the trade story. The story is no different in EEMEA, with the bulk of the bloc lower by between 0.5% and 0.85% during the timeframe in question.

Turning to this morning, we see our first important data of the week, CPI (exp 0.3%, 0.2% core) for the month and (1.7%, 2.4% core) on an annual basis. But perhaps more importantly Chairman Powell speaks to Congress today, and everybody is trying to figure out what it is he is going to say. Most pundits believe he is going to try to maintain the message from the FOMC meeting, and one that has been reinforced constantly by his minions on the committee, namely that the economy is in a good place, that rates are appropriately set and that they will respond if they deem it necessary. And really, what else can he say?

However, overall, risk remains on the back foot today, and unless Powell is suddenly very dovish, I expect that to remain the case. As such, look for the dollar to continue to edge higher in the short term, as well as the yen, the Swiss franc and Treasuries.

Good luck
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Decidedly On

While risk is decidedly on
Investors have kept being drawn
To dollars, so they
Can still overpay
For stocks, and sometimes, a junk bond

With the trade story still titillating markets, or at least distracting them, a funny thing has happened to the broad picture; the dollar has continued to rally despite the market’s embrasure of risk. Touching on the trade story, we continue to get dueling headlines from both sides as to how things are progressing, but the key is that both sides say things are progressing. The latest is confirmation that any phase one deal will, in fact, include a rollback of some portion of the existing tariffs, and there has been absolutely no discussion regarding the mooted tariffs to be imposed on December 15th. In addition, this morning, EU President Jean-Claude Juncker announced that he was certain there would be no US tariffs on European automobiles going forward, at least no additional ones.

This has been more than sufficient to encourage the equity bulls to continue to drive indices to new highs, at least in the US, but to generally rally around the world. At the same time, this week has seen a massive selloff in haven assets, specifically in US Treasuries and German bunds. For instance, last Friday, the 10-year closed at a yield of 1.712%. This morning it is trading at 1.924%. We have seen a similar, albeit not quite as large, move in the bund market, where the yield has risen from -0.386% to -0.247%. Still a 14bp move, given the low absolute level of yields, is nothing to dismiss.

Other favorite havens are the Japanese yen and the Swiss franc, both having fallen -1.1% this week. Gold? It too is lower by 3.45%, with Silver (-7.3%) and Platinum (-5.8%) faring even worse. And yet, despite this strong risk-on market sentiment, the dollar continues to perform well against all comers. In fact it is firmer against every G10 currency (SEK and NZD have been the worst performers, each down 1.4% this week), and it is firmer vs. most of its EMG brethren, with the South African rand (+1.6%) the major outlier based on the news earlier this week that it would not lose its last investment grade rating and so bond investors would not be forced to liquidate their positions.

But it begs the question, why is the dollar remaining so strong? Typically when risk is acquired, investors are seeking the highest yielding assets they can find, which includes EMG government bonds, junk bonds and equities. Usually, the carry trade makes a big comeback, where those who view FX as an asset class simply sell dollars and earn the points. But this time around, that doesn’t seem to be the case. In fact, one might point to the fact that US yields are the highest G10 yields, and higher than many EMG yields (e.g. South Korea, Singapore, Thailand, Hong Kong, Bulgaria, Slovenia, Croatia, Greece and the Czech Republic) and so on a risk adjusted basis, it appears that investors are far more willing to buy Treasuries and clip that coupon. At any rate, the dollar remains well bid across the board, and barring a sudden negative trade headline, I see no reason for this trend to change in the near term. This is especially true if US data continues to surprise to the high side, like we saw last week with the payroll numbers.

The upshot is hedgers need to beware of the current situation. While the dollar hasn’t had any days where it exploded higher, it continues to grind higher literally every day. Hedgers, at least receivables hedgers, need to be actively managing their risks.

One other thing supporting the dollar has been the change in market tone regarding the Fed’s future activities. It wasn’t that long ago, September, when the futures market was pricing in one more 25bp rate cut for December and one in March of next year. But now, looking out a full year shows there is not even one more rate full cut priced into the market. So the Fed’s dovishness has been effectively dissipated as made evident yesterday by Atlanta Fed President Rafael Bostic’s comments that if he were a voter, he would have dissented from cutting rates last week.

Looking ahead to this morning’s session, the only data we see is Michigan Sentiment (exp 95.5) at 10:00, although at 8:30 Canada releases their employment report. Yesterday’s Initial Claims data was mildly better than expected, just 211K, which indicates that the US jobs situation is not deteriorating in any real way. Perhaps a bit more surprising was the sharp decline in Consumer Credit yesterday, falling to just $9.5 billion, its lowest increase in more than a year, and a data point you can be sure will be highlighted by those pining for a recession. We also hear from three more Fed speakers, Daly, Williams and Governor Lael Brainerd, although both Daly and Brainerd are speaking at a climate change conference, which seems a less likely venue to discuss monetary policy.

Overall, the dollar remains bid and while it may stall as it runs into some profit-taking this afternoon, there is no reason to believe it is going to reverse course anytime soon.

Good luck and good weekend
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Removal of Tariffs

According to some in Beijing
Removal of tariffs’ the thing
That ought to diminish
And fin’lly help finish
The problems the trade war did bring

Another day, another story about progress in the trade talks. Given the complete lack of movement actually seen, a cynic might conclude that both sides have realized just talking about progress is probably as effective as making progress, maybe more so. After all, making progress requires both sides to make actual decisions. Talking about progress just hints that those decisions are being made. And let’s face it; the one thing at which politicians have proven especially inept is making decisions. At any rate, the news early this morning was that part of the elusive phase one deal would be simultaneous rollbacks of the current tariff schedules. If true, that is a great leap forward from simply delaying the imposition of new tariffs. But the key is, if true. At this point, it has become difficult to recognize the difference between actual progress and trial balloons. The one thing going for this story is it was put out by the Chinese, not President Trump. Of course, that could simply be a negotiating tactic trying to force Trump’s hand.

It should be no surprise that the market reacted quite positively to the story, with equity markets in Asia turning around from early losses to close higher on the day. While the Nikkei just clawed back to +0.1%, the Hang Seng finished higher by 0.6% and Australia’s ASX 200 gained 1.0% on the day. Europe has followed the trend with the DAX leading the way, +0.75%, and the rest of the Continent showing gains of between 0.2% (CAC) and 0.6% (IBEX). And of course, US futures turned higher on the news, now showing gains of approximately 0.5% across all three.

So risk is in vogue once again. Treasuries and Bunds have both sold off sharply, with yields in the 10-year space higher by roughly 6bps in both markets. And the dollar, as would be expected, is under further pressure this morning.

A trade truce cannot come soon enough for Germany, which once again released worse than expected data. This morning’s miss was IP, which fell 0.6% in September, and is down 4.3% Y/Y. So while yesterday’s Factory Orders seemed positive, they also seem like the outlier, not the trend. However, given the dollar’s overall performance this morning, it should be no surprise that the euro has edged higher, rising 0.1% as I type. But a step back for some perspective shows that the euro has actually done essentially nothing for the past month, trading within a range barely exceeding 1.0%. It will take more than just the occasional positive or negative economic print to change this story.

And perhaps there is a story brewing that will do just that. Several weeks ago there was a Bloomberg article about inflation in the Eurozone, specifically in Spain, that highlighted the dichotomy between the low rate of measured inflation, which in Spain is running at 1.0%, and the fact that the cost of home ownership and rent is rising at a double digit pace. It turns out that the European CPI measurements have rent as just 6.5% of the index and don’t even include the costs of home ownership. In contrast, those represent more than 30% of the US CPI measurement! And housing costs throughout Europe are rising at a much faster rate, something on the order of 3.0%+ over the past five years. In other words, a CPI basket constructed to include what Europeans actually spend their money on, rather than on some theoretical construct, would almost certainly have resulted in higher CPI readings and potentially would have prevented the poisonous negative interest rate conundrum.

With this in mind, and considering Madame Lagarde’s review of ECB policy, there is a chance, albeit a small one, that the ECB will consider changing the metric, and with a change in the metric, the need for further QE and NIRP will diminish greatly. That would be hugely euro positive! This is something to watch for going forward.

The other big news that just hit the tape was from the Bank of England, where while rates were left unchanged, two members of the MPC voted to cut rates by 25bps in a complete surprise. Apparently, there is growing concern inside the Old Lady that the recent weakening data portends further problems regardless of the election outcome. Of course, regarding the election, the fact that both the Tories and Labour are promising huge new spending plans, the need for low rates is clear. After all, it is much easier to borrow if interest rates are 0.5% than 5.0%! The pound, which had been trading modestly higher before the news quickly fell 0.4% and is now back toward the lower end of its recent trading range. Sometimes I think central banks do things simply to prove that they matter to the markets, but in this case, given the ongoing economic malaise in the UK, it does seem likely that a rate cut is in the offing.

As to the rest of the market, some of the biggest gainers this morning are directly related to the US-China trade story, with the offshore renminbi trading higher by 0.6% and back to its strongest level in three months’ time. In addition we have seen NOK rally 0.85%, which seems to be on the back of stronger oil and the fact that easing trade tensions are likely to further support the price of crude. Combining this with the fact that the krone has been mysteriously weak given its fundamentals, relatively strong economic growth and positive interest rates, it looks like a lot of short positions are getting squeezed out.

Finally, I would be remiss if I didn’t mention the Brazilian real, which yesterday tumbled 2.0% after a widely anticipated auction of off-shore oil drilling rights turned into a flop, raising just $17 billion, far less than the $26 billion expected. In fact, two of the three parcels had no bids, and no oil majors were involved. While they will certainly put them up for auction again, the market’s disappointment was clear. It should also be no surprise that the real is rebounding a bit on the open, currently higher by 0.5%.

On the data front this morning the only thing of note is Initial Claims (exp 215K) and there are two more Fed speakers on the agenda, Kaplan and Bostic. However, the plethora of speakers we have heard this week have all remained on message, things are good and policy is appropriate, but if needed we will do more.

And that’s really it. I expect we will continue to hear more about the trade talks and perhaps get a bit more clarity on the proposed tariff rollbacks. But it will take a lot to turn the risk story around, and as such, I expect the dollar will continue to be under pressure as the session progresses.

Good luck
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Not Been Sated

As markets, a trade deal, awaited
Risk appetite has not been sated
The headlines insist
That barring a twist
Phase one will soon be activated

Hooray!! Phase One of the trade deal is almost complete and apparently President’s Trump and Xi are planning a meeting to sign this historic document. At least that’s today’s story to pump up global equity markets. Actually, I assume that will be tomorrow’s as well, just as it has been the story for the past two weeks. But whether or not this comes to pass, the current view is quite positive and risk assets are back in demand. Equity markets are generally higher worldwide, with Asia showing significant strength (Nikkei +1.75%, Shanghai +0.55%, KOSPI +0.6%), although Europe is having a more muted session (DAX 0.0%, CAC +0.15%, FTSE +0.25%). Meanwhile, US futures are currently pointing to a 0.25% rise at the open.

Other evidence of increased risk appetite has been the decline in both Treasury and Bund prices, with the former seeing yields rise a further 4bps this morning and the latter 2bps. A quick look at the recent price history of the 10-year shows that one week ago they were trading at 1.84% and in the interim they fell to 1.69% before rebounding to this morning’s 1.82% level. A slightly longer term view shows a picture of a market that looks like it bottomed in early September, when the 10-year traded to 1.457% amidst escalating fears of everything, and is now slowly trying to head a bit higher. If the Fed has truly stopped cutting rates, and if they maintain their current ‘not-QE’ version of QE, purchasing $60 billion/month of T-bills, I expect we are looking at a much steeper yield curve and the chance for the dollar to resume its rally. (Historically, the dollar performs better in a steepening yield curve environment.)

However, that dollar movement is much more of a long-term trend than a day to day prescription, and in fact, this morning’s risk-on movement has seen the dollar soften further, except against the other two haven currencies, the Swiss franc (-0.35%) and the Japanese yen (-0.25%). The most notable mover has arguably been the Chinese reniminbi, which has rallied 0.5% and is back below 7.00 for the first time since early August. You may recall that time as a severe escalation of the trade conflict and fears were rampant that the PBOC was going to allow the renminbi to weaken substantially to offset tariffs. Of course, that never happened, and ostensibly, part of the trade deal is a Chinese promise to prevent significant currency weakness. (You know, manipulation of a currency is fine when it works in your favor, just not when it works against you.) At any rate, CNY has been strengthening steadily for the past month and has recouped 2.3% in that time. Quite frankly, despite the fact that the slowdown in the Chinese economy would argue for a weaker currency, I expect that we will continue to see modest strength in the renminbi; at least until the trade deal is signed.

In the G10 space, today’s big winner is the Aussie dollar, which is higher by 0.45% this morning and has rallied 3.65% since its recent trough in the beginning of October. Given the country’s close ties to China, it should be no surprise that positive news regarding China helps the AUD. In addition, last night the RBA met and left rates on hold, which while widely expected was a bit of a relief given they cut rates in the past three meetings. While they maintained their easing bias, the market is gaining optimism that the global trade situation will improve shortly and that Aussie will benefit. While the move in Aussie did help drag kiwi higher (+0.25%), the rest of the space is entirely uninteresting.

In the EMG bloc, South Africa’s rand is the leader, gaining 0.65% as the market continues to absorb the fact that Moody’s left them with an investment grade rating. While things are still precarious there, perhaps a relaxation of trade tensions globally will allow the country to stabilize their finances and the currency to stabilize as well. On the flip side, Chile’s peso has opened under pressure, falling 0.65% after Retail Sales there were released at a much worse than expected -0.9% (expected +1.8%). Clearly the ongoing protests are having an impact and as in most places around the world, there doesn’t appear to be any end in sight.

On the calendar this morning we see the Trade balance (exp -$52.4B) as well as the JOLTS Jobs report (7.063M) and finally, at 10:00 ISM Non-Manufacturing (51.0). You may recall the ISM data on Friday was soft at 48.3, and this morning we saw UK Services PMI print at a better than expected 50.0. The best explanation I can give is that we are at an inflection point in the global economy, where what has clearly been a slowing trend may finally be responding to the massive stimulus efforts by the world’s central banks. (FYI, the PBOC reduced its 1-year lending rate by 5bps last night, the first cut since 2016). But inflection points are probably more accurately referred to as inflection curves, since things are not going to turn around quickly. I anticipate we are going to see mixed data for some time into the future. This will allow both bulls and bears to use data to make their respective cases.

In the end, unless today’s data is horrendous, I expect that the risk-on scenario will continue to drive markets and the dollar will likely soften a bit further before it is all over.

Good luck
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Get Out of My Face!

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

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

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

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

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

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

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

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

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

Good luck
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Choler on Display

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

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

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

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

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

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

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

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

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

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

Good luck and good weekend
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Make Boris Bend

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

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

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

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

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

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

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

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

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

Source: Bloomberg

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

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

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

Good luck
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