More Concerned

More pressure has lately been felt
In China, despite Road and Belt
As growth there is slowing
And Xi Jinping’s knowing
He must change the cards he’s been dealt

So last night, the news that we learned
Was both sides have grown more concerned
Thus trade talks would start
While traders took heart
And short-sellers of yuan got burned

While the Turkey situation has not disappeared completely, the central bank there appears to be regaining some control over the lira through surreptitious rate hikes. Cagily, they have stopped offering one-week liquidity, which theoretically could be had for ‘just’ 17.75% and instead are forcing banks to fund at the more expensive overnight window. This amounts to an effective 300bp rate rise and has been a key reason, along with yesterday’s announced moves regarding short positions, as to why the Turkish lira has rebounded so sharply from its worst levels. This hasn’t changed the macroeconomic picture, nor can it address the ongoing political row between the US and Turkey, but it has been effective in cooling the ardor of traders to short the lira. We will continue to monitor the situation, but it appears, that for now, TRY will no longer be the primary topic in FX markets.

Which allows us to turn our attention to China, where last night it was announced that low level trade talks between the US and China would start later this month in Washington. That is clearly the best news we have heard on the trade front in months, and although the process for further tariffs continues apace in the US, and it seems highly likely that next weeks imposition of tariffs on $16 billion of Chinese goods would go ahead, traders took the news very positively. The FX response was to reverse the renminbi’s recent decline, which prior to the news had seen it trade above 6.95 and perilously close to the 7.00 level many analysts have targeted as critical in PBOC deliberations. But this morning, USDCNY has fallen 0.75%, quite a large move for the currency pair, as fears of further escalation in the trade war seem to have abated slightly. There is certainly no guarantee that these talks will amount to anything or bring about further discussions, let alone a solution, but for now, they have been extremely well received by markets. Not only did the yuan rally, but also the Shanghai Composite reversed its early weakness, having fallen 1.8% at the open, and closed lower by only 0.65%. Hong Kong shares, too, rebounded from early weakness to close only marginally lower. It is important to remember that one of the drivers of the Shanghai market had been much weaker than expected earnings from Tencent, the Chinese internet firm that owns WeChat, China’s answer to Facebook. But there is no question that the news about trade talks was a critical factor in the rebound.

With these two stories as the lead, it is not surprising that the dollar has ceded some of its recent gains and is a touch softer overall this morning. Other EMG currencies that had seen significant pressure like ZAR (+0.1%), MXN (+0.5%), and RUB (+0.3%) have at least stabilized, if not reversed course. Fear of contagion remains rampant amongst emerging market investors and I expect that they will only return to markets slowly. And of course, it is entirely possible that the measures taken by the various authorities will turn out to be insufficient to address what in many cases are structural problems, and the currency rout will resume. But for now, it feels like a modicum of calm has been restored.

Meanwhile, G10 currencies are also mildly firmer this morning, although the dollar remains near its recent highs. For example, while the euro is higher by 0.3%, it is still trading with a 1.13 handle. There has been very little Eurozone data to drive markets, but there have been several articles discussing the ongoing trauma in Italy and how concerns over the new government’s fiscal policies may still turn disastrous.

Looking toward the UK, Retail Sales data there was quite strong, rising 0.7% in July, well above expectations for a 0.2% rise. However, the benefit to the pound has been minimal, with it rising just 0.1% on the news. Brexit remains a huge cloud over the currency (and the economy) and every day there is no positive news means that there is that much less time to create a solution. You all know I foresee a hard Brexit, not so much on principle as much as because I fear the May government simply cannot decide how to proceed and is not strong enough to impose a decision.

The last noteworthy piece of news in this space comes from Oslo, where the Norgesbank left rates on hold, as expected, but also essentially cemented the idea that they will be raising rates in September, joining the growing list of countries that are beginning to remove the excess accommodation put in place as a response to the financial crisis. After all, the tenth anniversary of the Lehman bankruptcy, the time many hold as the starting point to the crisis, is coming up in less than a month!

This morning’s US data brings Housing Starts (exp 1.2M), Building Permits (1.28M), Initial Claims (217K) and Philly Fed (22). Yesterday’s data was pretty strong, with the Empire Mfg print higher than expected and productivity growth showing its highest outcome since Q1 2015. In all, there is nothing in the data that suggests the Fed is going to change its tune, and if the trade situation eases, it is even more likely the Fed remains steady. All in all, despite modest softness this morning, the dollar remains the best bet going forward.

Good luck


Myriad Flaws

The Turkish are starting to act
As dollars they try to attract
Restrictions imposed
Effectively closed
The method short-sellers had backed

But problems in Turkey remain
And although we’ve seen lira gain
The myriad flaws
In Turkey still cause
A major league capital drain

Much to my chagrin, I am forced to continue the discussion on the Turkish lira as it remains the driving force in FX conversations. Despite the fact that Turkey is a bit player on the world stage economically, the fear engendered by its recent policy actions and subsequent market gyrations continues to have spillover effects elsewhere around the world. The latest example is that the Indonesian central bank surprised most analysts last night and raised their policy rate by 25bps to 5.50% specifically to help fight further IDR weakness. The rupiah finds itself weaker by 1.2% this week, despite the rate hike, and nearly 5% since late June, which has included two rate hikes. Clearly, the market has evaluated the macroeconomic situation in Indonesia and sees too many similarities to Turkey, notably the significant amount of USD debt outstanding there. As long as the Fed continues to tighten policy, and there is no hint that they will be slowing down anytime soon, every emerging market with significant USD debt outstanding (besides Turkey and Indonesia, Malaysia, South Africa and Argentina come to mind) will continue to see their currency under pressure.

The question of whether the Turkey situation is a harbinger of others remains the hottest topic in FX markets. Last night, the Bank of Turkey took a page from China’s activity book and attacked the forward FX market by reducing the limit on banks’ swap transactions to 25% of shareholder equity, down from the previous level of 50%. This had the effect of driving up short-term lira rates substantially, with the overnight rate touching 34.5%. It should be no surprise that the lira has continued yesterday’s rebound, rising a further 3% this morning, but that is well off the highs for the session, when it traded back below 6.00 briefly. The point is that despite not raising the base rate, the central bank there does have some tools to help address the situation, at least in the short term. However, there is very limited confidence that President Erdogan will allow the central bank the leeway deemed necessary to address the lira’s problems in the long run. This story is nowhere near over, although several days into it, the story is starting to get a little tired.

Turning away from Turkey, the dollar is having quite a good session. Versus its G10 counterparts, we have seen consistent strength to the tune of 0.2%-0.3%. Data has not been the driver as the only notable release has been UK inflation, where the headline came out at 2.5%, 0.1% higher than last month, but right on analysts forecasts. There has been a modest amount of Brexit conversation, but none of it has been positive, and at this point, every day without positive news is likely to weigh further on the pound. Meanwhile the euro is making a run at 1.1300, a level not traded since late June 2017, and unless we see some policy adjustments, it is hard to believe that the data is going to turn things in the near future.

Regarding the rest of the emerging markets, there has been some substantial weakness in ZAR (-3.3%), MXN (-1.2%), KRW (-1.3%) and RUB (-1.4%), none of which have released any economic data of note. This feels much more like contagion as traders seek proxies to short while the Turkish authorities use up their ammunition. But of more interest to me is CNY, which has fallen 0.4% this morning to 6.9250 or so. Many analysts have been confident that the PBOC would not allow the renminbi to weaken past the 6.90 level, as they are concerned over potential capital outflows. However, I have maintained that the renminbi has much further to fall. I believe the PBOC will continue to see the renminbi as the most effective release valve for the pressures that continue to build in the economy there. Remember, too, that the government imposed much stricter capital controls earlier this year and so they are feeling more and more confident that they will not have a repeat of the 2015-6 situation. In fact, the most recent data showed that FX reserves in China actually rose last month, surprising every analyst. The upshot is that there is further room for CNY to decline, and a move past 7.00 is merely a matter of time. In fact, it would not surprise me if it occurred before the end of August.

Turning to today’s data releases, we actually receive a great deal of new information as follows: Empire State Manufacturing (exp 20); Retail Sales (0.1%, 0.3% ex autos); Nonfarm Productivity (2.3%); Unit Labor Costs (0.3%); IP (0.3%); Capacity Utilization (78.2%); and finally Business Inventories (0.1%). While Retail Sales will garner the most attention, I will be watching ULC carefully as wage growth remains the watchword at the Fed. If that number surprises on the high side, that will serve to reinforce the idea that Chairman Powell is going to ignore the screams of the emerging markets for quite a while yet. In the end, nothing has changed with regard to the broad macroeconomic picture and the dollar ought to continue to see support across the board. Don’t say I didn’t warn you.

Good luck


Somewhat Misguided

The story in Turkey remains
One loaded with stresses and strains
While Erdogan dithers
The lira, it withers
And everything points to more pains

It seems, though, most traders decided
Their fears turned out somewhat misguided
So havens they’ve sold
From Swiss francs to gold
As safety’s now soundly derided.

The crisis in Turkey is, literally, yesterday’s news! This morning, while there have been no policy changes announced by the Turkish government, it seems that markets are feeling a bit less stressed. In fact, the Turkish lira has rebounded 5.5% as I type, although it is still lower by 25% in the past week. There has been no indication that President Erdogan is going to allow interest rates to rise nor has there been any hint that the Turkish government is going to heed calls to address its fundamental economic problems. Rather, it appears that in the manner of autocrats everywhere facing economic stress, Erdogan is blaming foreign influences for his domestic problems. It makes no sense to me that this crisis in Turkey has ended, but it is not that surprising that after a market move of the magnitude we have just seen in TRY, it should pause. Remember, too,
a key stressor has been the US-Turkish dustup over the detention of an American pastor and the tariffs imposed by President Trump in an effort to force Erdogan to comply with the US request to release him. And that shows no signs of ending either. The point is that while things today have calmed down, my sense is this is a temporary lull.

Moving on from Turkey, we see that China released a passel of data last night, none of which impressed. Fixed Asset Investment fell to 5.5%, the smallest gain in this series since it began in 1996. Retail Sales fell to 8.8%, below expectations and continuing the downward trend that has been evident for the past two years, while Industrial Production rose 6.0%, also below expectations, and continuing the gradual decline in the pace of this statistic. Taking it all together demonstrates that China’s efforts to reel in excessive debt growth earlier this year is starting to pay dividends. The problem for President Xi is that combining that effort with a trade fight with the US is starting to have a bigger nationwide impact than he would like to see. This is why we will continue to see the PBOC ease policy further this year, and why I continue to expect further pressure on the renminbi going forward. There have been many analysts who claim that the PBOC will prevent the currency from weakening beyond 6.90 or 7.00 as they fear the potential effects on capital flows. I disagree with that assessment and expect we can see a further decline in CNY as long as the dollar continues its broad based rally.

As to other emerging markets that had been severely impacted yesterday, we have seen most of those currencies rebound this morning. For instance, ZAR has rallied 2.5%, RUB is +1.5% and MXN is +0.9%. The point is that with TRY taking a breather, the same has been true elsewhere in this space.

Turning to the G10, we received a significant amount of data this morning with most of it better than expected. For example, UK Unemployment fell to 4.0% while Eurozone GDP grew at a 0.4% rate in Q2, a tick higher than expected. We also saw the German ZEW Sentiment Index rise to -13.7, up significantly from last month and a full 7 points better than expected. There were myriad individual national prints regarding GDP, employment and inflation, most of which showed that Q2 growth in the Eurozone was better than Q1. However, none of that has had much of an impact on the euro, which continues to hover unchanged on the day around 1.1400. While this level is a few pips better than the lows seen yesterday, there is no indication that traders have changed their collective minds regarding the euro’s eventual strength. The pound, meanwhile, has rebounded a touch this morning, +0.15%, but that seems more to do with the fact that Brexit has been off the front page than with any specific data releases. Ultimately, unless the Brits figure out a fudge and can get the Europeans to go along, I fear the pound will test the post Brexit vote lows seen two years ago.

As to today’s session, the only data point in the US is NFIB Small Business confidence (exp 106.9). This could actually be quite important in telling us how the trade saga is playing out amongst small companies. Thus far, corporate America seems to have weathered the storm, although if the President does go through with his threatened 25% tariffs on $200 billion of Chinese goods, I expect that will have a larger negative impact on the economy. But for now, it remains full speed ahead in the US, and that includes for the Fed, which is almost certainly going to raise rates in September and again in December. In fact, I think the real risk is that they hike more than three times in 2019, and they do it sooner than the market is expecting. And that, my friends, will continue to support the dollar.

Good luck

Turning To Fearing

The deadline for Brexit is nearing
And hoping is turning to fearing
No deal’s yet in sight
But both sides delight
In claiming that they’re persevering

This morning, the two stories that have captured the FX market’s attention are Brexit and its impact on the pound and Chinese policy changes and their impact on the yuan.

Starting in the UK, the pound is under pressure this morning, down 0.55%, as comments from International Trade Secretary, Liam Fox, have rattled traders. According to Fox, the odds that there is no Brexit deal have now risen to 60%, certainly enough to qualify as “uncomfortably high”, Governor Carney’s description last week in his comments following the BOE meeting. It appears that both sides remain committed to their positions and there has been very little movement from either London or Brussels of late. Meanwhile, in the UK, the politics of the situation has resulted in the new favorite pastime of guessing who will replace PM May when she finally loses a no-confidence vote. And while March 31 is the technical deadline, the reality is that if there is no agreement in place by October, it is likely to be too late. Remember that once an agreement is reached, it needs to be enacted into law by all the nations in the EU as well as the UK, with any one of them able to derail the process. Last year I posited that the odds of reaching a deal were extremely low. I believe this is exactly what is playing out now.

The consequences for the pound are unlikely to be pretty. I expect that we will see pressure continue to increase as it becomes clear that there is no deal forthcoming. So unlike the market action right after the initial Brexit vote in June 2016, where the pound fell more than 10% overnight, and shed another 10% in the ensuing four months, I expect that this will be steady downward pressure, although the net 20% decline cannot be ruled out. After all, there will be no announcement that talks have ended, merely a lack of progress to be seen. Consider that a further 20% decline from here will put the historic low level of 1.06, set back in 1985, on the radar. And while that may well be too pessimistic, it remains extremely difficult to make a bullish pound case at this time. Unless we see a negotiating breakthrough in the next month or so, hedgers need to be prepared for a much lower pound over time.

Turning to China, late Friday night the PBOC imposed a new restriction on FX trading by reinstituting a 20% reserve requirement against short yuan forward positions. The idea here is that Chinese banks will not be willing to allocate the funds necessary to maintain those positions, and therefore will not allow clients to sell CNY forward. In 2015, during the last CNY devaluation, when capital outflows really gathered pace, this was one of the tools that the PBOC employed to stem the yuan’s weakness. What this tells me is that despite the rhetoric from the government about the trade situation and their willingness to tough it out, there is growing concern that if USDCNY reaches 7.00, citizens will start to become much more aggressive in their efforts to reduce their exposure to the yuan, and flee to other, safer currencies. Ironically, given what has started this process, this includes the dollar as well as the yen and Swiss franc. As is typical of the Chinese, they announced this change late Friday night when markets were closed. And while the initial market reaction to the news in China’s morning was for the yuan to strengthen a bit, that strength has reversed and USDCNY is now higher by 0.25%. If 7.00 is truly the pain point, I fear we are going to see some fireworks before the end of the summer.

Beyond those two stories, the dollar is firmer overall, but there is less specificity than it simply being a strong dollar day. The euro is lower by 0.25% after German Factory Orders fell a much worse than expected -4.0%, taking the Y/Y level negative for the first time in two years. But given the breadth of the dollar’s strength this morning, I would argue the euro would have declined no matter the number. As the trade rhetoric continues apace, I expect the dollar to remain well bid against all comers.

Turning to the data this week, it is far less interesting than last week’s onslaught, but we do end the week with CPI.

Tuesday JOLT’s Job Openings 6.646M
  Consumer Credit $16.0B
Thursday Initial Claims 220K
  PPI 0.2% (3.4% Y/Y)
  -ex food & energy 0.2% (2.8% Y/Y)
Friday CPI 0.2% (3.0% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)

Beyond the inflation data, we have only two Fed Speakers, and given the continued strong run of data, it remains hard to believe that we will hear any new dovishness by anyone. I am hard-pressed to derive a scenario that leads to significant dollar weakness in the short run. Until the US data turns, I believe that the Fed will continue to tighten policy and that the dollar will benefit. And that seems likely to last through at least the end of the year.

Good luck

Uncomfortably High

Said Carney, exhaling a sigh
The odds are “uncomfortably high”
More pain will we feel
If there is no deal
When England waves Europe bye-bye

Yesterday the BOE, in a unanimous decision, raised its base rate by 25bps. This outcome was widely expected by the markets and resulted in a very short-term boost for the pound. However, after the meeting, Governor Carney described the odds of the UK leaving the EU next March with no transition deal in hand as “uncomfortably high.” That was enough to spook markets and the pound sold off pretty aggressively afterwards, closing the day lower by 0.9%. And this morning, it has continued that trend, falling a further 0.2% and is now trading back below 1.30 again.

By this time, you are all well aware that I believe there will be no deal, and that the market response, as that becomes increasingly clear, will be to drive the pound still lower. In the months after the Brexit vote, January 2017 to be precise, the pound touched a low of 1.1986, but had risen fairly steadily since then until it peaked well above 1.40 in April of this year. However, we have been falling back since that time, as the prospects for a deal seem to have receded. The thing is, there is no evidence that points to any willingness to compromise among the Tory faithful and so it appears increasingly likely that no deal will be agreed by next March. Carney put the odds at 20%, personally I see them as at least 50% and probably higher than that. In the meantime, the combination of ongoing tightening by the Fed and Brexit uncertainty impacting the UK economy points to the pound falling further. Do not be surprised if we test those lows below 1.20 seen eighteen months ago.

This morning also brought news about the continuing slowdown in Eurozone growth as PMI data was released slightly softer than expected. French, German and therefore, not surprisingly, Eurozone Services data was all softer than expected, and in each case has continued the trend in evidence all year long. It is very clear that Eurozone growth peaked in Q4 2017 and despite Signor Draghi’s confidence that steady growth will lead inflation to rise to the ECB target of just below 2.0%, the evidence is pointing in the opposite direction. While the ECB may well stop QE by the end of the year, it appears that there will be no ability to raise rates at all in 2019, and if the current growth trajectory continues, perhaps in 2020 as well. Yesterday saw the euro decline 0.7%, amid a broad-based dollar rally. So far this morning, after an early extension of that move, it has rebounded slightly and now sits +0.1% on the day. But in the end, the euro, too, will remain under pressure from the combination of tighter Fed policy and a decreasing probability of the ECB ever matching that activity. We remain in the 1.1500-1.1800 trading range, which has existed since April, but as we push toward the lower end of that range, be prepared for a breakout.

Finally, the other mover of note overnight was CNY, with the renminbi falling to new lows for the move and testing 6.90. The currency has declined more than 8% since the middle of June as it has become increasingly clear that the PBOC is willing to allow it to adjust along with most other emerging market currencies. While the movement has been steady, it has not been disorderly, and as yet, there is no evidence that capital outflows are ramping up quickly, so it is hard to make the case the PBOC will step in anytime soon. And that is really the key; increases in capital outflows will be the issue that triggers any intervention. But while many pundits point to 7.00 as the level where that is expected to occur, given the still restrictive capital controls that exist there, it may take a much bigger decline to drive the process. With the Chinese economy slowing as well (last night’s Caixin Services PMI fell to 52.8, below expectations and continuing the declining trend this year) a weaker yuan remains one of China’s most important and effective policy tools. There is no reason for this trend to end soon and accordingly, I believe 7.50 is reasonable as a target in the medium term.

Turning to this morning’s payroll report, here are the current expectations:

Nonfarm Payrolls 190K
Private Payrolls 189K
Manufacturing Payrolls 22K
Unemployment Rate 3.9%
Average Hourly Earnings (AHE) 0.3% (2.7% Y/Y)
Average Weekly Hours 34.5
Trade Balance -$46.5B
ISM Non-Manufacturing 58.6

Wednesday’s ADP number was much stronger than expected at 213K, and the whisper number is now 205K for this morning. As long as this data set continues to show a strong labor market, and there is every indication it will do so, the only question regarding the Fed is how quickly they will be raising rates. All of this points to continued dollar strength going forward as the divergence between the US economy and the rest of the world continues. While increasing angst over trade may have a modest impact, we will need to see an actual increase in tariffs, like the mooted 25% on $200 billion in Chinese imports, to really affect the economy and perhaps change the Fed’s thinking. Until then, it is still a green light for dollar buyers.

Good luck and good weekend

For How Long?

The US economy’s strong
Denial of this would be wrong
It’s not too surprising
That rates will be rising
The question is just, for how long?

Despite the Trump administration’s recent discussion of imposing 25% tariffs on $200 billion of Chinese imports, rather than the 10% initially mooted, the Fed looked at the economic landscape and concluded that things continue apace. While they didn’t adjust rates yesterday, as was universally expected, the policy statement was quite positive, highlighting the strength in both economic growth and the labor market, while pointing out that inflation is at their objective of 2.0%. Market expectations for a September rate hike increased slightly, with futures traders now pricing in a nearly 90% probability. More interestingly, despite the increased trade rhetoric, those same traders have increased their expectations for a December hike as well, with that number now hovering near 70%. At this point, despite President Trump’s swipe at higher rates last week, it appears that the Fed is continuing to blaze its rate-hiking path undeterred.

The consequences of the Fed’s stance are starting to play out more clearly now, with the dollar once again benefitting from expectations of higher short term rates, and equity markets around the world, but especially in APAC, feeling the heat. The chain of events continues in the following manner. Higher US rates have led to a stronger US dollar, especially vs. many emerging market currencies. The companies in those countries impacted are those that borrowed heavily in USD over the past ten years when US rates were near zero. They now find themselves struggling to repay and refinance that debt. Repayment is impacted because their local revenues buy fewer dollars while refinancing is impacted by the fact that US rates are that much higher. With this cycle in mind, it should not be surprising that equity markets elsewhere in the world are struggling. And those struggles don’t even include the potential knock-on effects of further US tariff increases. Quite frankly, it appears that this trend has further to run.

Meanwhile, the week’s central bank meetings are coming to a close with this morning’s BOE decision, where they are widely touted to raise the Base rate by 25bps, up to 0.75%. It is actually quite amusing to read some of the UK headlines talking about the BOE raising rates to the ‘highest in a decade’, which while strictly true, seems to imply so much more than the reality of still exceptionally low interest rates. However, given the ongoing uncertainty due to the Brexit situation, I continue to believe that Governor Carney is extremely unlikely to raise rates again this year, and if we are headed to a ‘no-deal’ Brexit, which I believe is increasingly likely, UK rates will head back lower again. Early this morning the UK Construction PMI data printed at a better than expected 55.8, its highest since late 2016, but despite the strong data and rate expectations, the pound has fallen 0.35% on the day.

Other currency movement has been similar, with the euro down 0.35%, Aussie and Kiwi both falling more than 0.5% and every other G10 currency, save the yen declining. The yen has rallied slightly, 0.2%, as interest rates in Japan continue to respond to Tuesday’s BOJ policy tweaks. JGB’s seem to have quickly found a new home above the old 0.10% ceiling, and there is now a growing expectation that as the 10-year yield there approaches the new 0.2% cap, the longer end of the JGB curve will rise with it taking the 30-year JGB to 1.00%. While that may not seem like much to the naked eye, when considering the nature of international flows, it is potentially quite important. The reason stems from the fact that Japanese institutional investors tend to hedge the FX exposure that comes from foreign fixed income purchases thus reducing their net yield from the higher rates received overseas to something on the order of 1.0%. And if the Japanese 30-year reaches that 1.0% threshold (it is currently yielding 0.83%), there is a growing expectation that those same investors will sell Treasuries and other bonds and bring the money home. That will have two impacts. First, I would be far less concerned over an inverting yield curve in the US as yields across the back end of the US curve would rise on those sales, and second, the dollar would likely rally overall on higher rates, but decline further against the yen. These are the type of background flows that impact the FX market, but may not be obvious to most hedgers.

Turning to the emerging markets, the dollar is firmer against virtually all of these currencies as well. One of the biggest movers has been CNY, falling 0.5% and now trading at its weakest level since May 2017. The renminbi’s decline has been impressive since mid-April, clocking in at nearly 9%, and clearly offsetting some of the impact of the recent tariffs. But remember, the renminbi’s decline began well before any tariffs were in place, and has as much to do with a slowing Chinese economy forcing monetary policy ease in China as with the recent trade spat. At this point, capital outflows have not yet become a problem there, but if history is any guide, as we get closer to 7.00, we are likely to see more pressure on the system as both individuals and companies seek to get their money out of China and into a stronger currency. I expect that there are more fireworks in store here.

Aside from China, the usual suspects continue to fall, with TRY having blasted through 5.00 overnight and now down 1.5% on the day. But we have also seen significant weakness in ZAR (-1.75%), KRW (-1.15%), and MXN (-0.75%). Even INR is down 0.5% despite the RBI having raised rates 0.25% overnight to try to rein in rising inflation pressures there. So today’ story is clear, the dollar remains in the ascendancy on the back of optimism in the US vs. increasing pessimism elsewhere in the world.

A quick peek at today’s data shows that aside from the weekly Initial Claims (exp 220K) we see only Factory Orders (0.7%). Yesterday’s ADP Employment data was quite strong, rising 219K, while the ISM Manufacturing report fell to a still robust 58.1, albeit a larger fall than expected. However, given the Fed’s upbeat outlook, the market was able to shake off the news. At this point, however, I expect that eyes are turning toward tomorrow’s NFP report, which will be seen as taking a much more accurate reading on the economy. All in all, I see no reason for the dollar to give back its recent gains, and in fact, expect that modest further strength is in the cards.

Good luck