Tag Archives: #yen

Crab Bisque

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Though troubles worldwide haven’t ceased
Investors continue to feast
On assets with risk
As if they’re crab bisque
And appetites all have increased
 
Perhaps they believe peace is near
Or maybe they’re just cavalier
‘Cause Bitcoin has rallied
And profits they’ve tallied
Convinced them they’ll have a great year

 

This poet is a bit confused this morning as I watch ongoing record high equity markets in the US and elsewhere indicate a bright future, but I continue to read about the problems around the world, specifically in Ukraine and Gaza, but also throughout Africa, as well as the apparent end of democracy in the US.  Though it is showing my age, I recall during the Reagan presidency, equity markets performed well amid a sense that the world was going in the right direction.  The Cold War ended and Fed Chair Volcker had shown he had what it took to fight inflation effectively.  This combination was very effective at brightening one’s outlook on the future.

Then, leading up to the dotcom bubble, attitudes were also remarkably positive as the future held so many possibilities while peace had largely broken out around the world.  Again, the rally albeit overdone, at least had a basis that combined financial hopes with a positive geopolitical background.  Of course, the events of 9/11 put the kibosh on that for quite a while.

Leading up to the GFC, though, I would contend that the zeitgeist was a bit different, and while housing markets were on fire, the geopolitical picture was far less rosy with Russia reasserting itself and taking its first piece of Ukraine, the Middle East situation much dicier with the ongoing military action in Iraq and Afghanistan, and China beginning to flex its muscles in the South China Sea.

Of course, the similarity to these times is they all ended with significant equity market declines and resets of attitudes, at least for a while as per the below chart of the S&P 500.  Of course, given the exponential move over time, the early dips don’t seem so large today, although I assure you, on October 19, 1987, when the DJIA fell 22.6%, it seemed pretty consequential on the trading desk.

Source: finance.yahoo.com

But today, I find the disconnect between market behavior and global happenings far harder to understand. Yes, there is a prospect that Presidents Trump and Putin will agree a ceasefire tomorrow when they meet in Alaska, although I’m not holding my breath for that.  At the same time, President Trump is doing his best to reorder the global economic framework, and doing a pretty good job of it, but causing significant dislocations around the world with respect to trade and finance.  Too, through all the other bubbles, consumer price inflation was not a concern of note, with CPI remaining quiescent throughout until the Covid response as per the below and, as Tuesday’s core CPI reminded us, inflation remains a specter behind all our activities.

And yet, all-time highs are the norm in markets these days, whether US equities, Japanese equities, European equities, Bitcoin or gold, prices for financial assets remain in the uppermost percentiles of their historic ranges.  Perhaps this is the YOLO view of life, or perhaps markets are telling us the technology futurists are correct, and AI will bring so much benefit to mankind that everything will be better.  Or…maybe this is simply the latest bubble in financial markets, and that permanently high plateau for asset values, as Irving Fisher explained in October 1929, is once more a mirage.  Is the value of Nvidia, at $4.466 trillion, really greater than the economic output of every nation on earth other than the US, China and Germany?  It is a comparison of this nature that has me concerned over the short- and medium-term prospects, I must admit.

However, the valuations are what they are regardless of any logic or financial comparisons.  If the Fed cuts 50bps in September, which as of now would be a huge surprise to markets based on pricing, would that really increase the value of these companies by that much?  Perhaps, as frequently has been the case, Shakespeare was correct and “something is rotten in the state of Denmark.”  Care must be taken with regard to owning risk assets I believe, as a correction of some magnitude seems a viable outcome by the end of the year.  At least to my eyes.  Just not today.

Today, this is what we’ve seen in the wake of yesterday’s ongoing US equity rally.  Tokyo (-1.45%) slipped on what certainly looked like profit-taking after reaching new highs.  China was little changed but Hong Kong (-0.4%) fell ahead of concerns over Chinese data due this evening and the idea it may not be as strong as forecast.  As to the rest of the region, the larger exchanges, Korea and India, were little changed and the smaller ones were mixed, all +/- 0.5%.  In Europe, gains are the order of the day, at least on the continent (DAX +0.5%, CAC +0.35%, IBEX +0.8%) although the FTSE 100 (0.0%) is struggling after mixed data showing stronger than expected GDP but much weaker than expected Business Investment boding ill for the future.  As to US futures, they are little changed at this hour (7:30).

In the bond markets, Treasury yields (-3bps) continue to grind lower as comments from Treasury Secretary Bessent have encouraged investors that interest rates will be declining across the curve.  Teffifyingly, there is a story that President Trump is considering Janet Yellen as the next Fed Chair, something I sincerely hope is a hoax.  European sovereign yields are lower by -1bp across the board but JGB yields (+3bps) are rising after Bessent basically said in an interview that the Japanese needed to raise rates to support the yen!

In commodities, oil (+0.4%) is stabilizing after several days of modest declines, but the trend of late remains lower.  If peace breaks out in Ukraine, I suspect the price will have further to fall as the next step will be the reduction or ending of sanctions on Russian oil.  Meanwhile, the metals markets are little changed to slightly softer this morning after a modest rally yesterday as a stronger dollar and a general lack of interest are evident.

As to that dollar, only the yen (+0.4%) is bucking the trend of a stronger dollar today although the pound is unchanged after the data dump there.  But the rest of the G10 is weaker by between -0.2% and -0.4% which is also a pretty good description of the EMG bloc, softer by those amounts.  It’s funny, once again this morning I read some comments about how the dollar’s decline in the first half of this year, where it has fallen about -10%, is the largest since the 1970’s, as though the timing within the calendar is an important part of the dollar’s value.  While I would guess that Bessent is conflicted to some extent, I believe the administration is perfectly happy with a decline in the dollar if it helps US export competitiveness as long as inflation remains under control.  Of course, that is the $64 thousand (trillion?) dollar question.

On the data front, this morning brings the weekly Initial (exp 228K) and Continuing (1960K) Claims as well as PPI (Headline 0.2%, 2.5% Y/Y and Core 0.2%, 2.9% Y/Y).  I always find that there is less interest in PPI when it is released after CPI, but a surprise, especially a hot surprise, could well impact some views.  Once again, we hear from Richmond Fed president Barkin, although so far all he has told us is he is the quintessential two-handed economist, so I’m not expecting anything new here.

Personally, I am getting uncomfortable with equity market valuations and levels based on the rest of the things ongoing and sense a correction in the offing.  As to the dollar, I suspect if I am correct, the dollar will benefit alongside bonds.  Otherwise, the summer doldrums seem likely to describe the day.

Good luck

Adf

Truly Mind-Blowing

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Officials see no
Urgency to rock the boat
YCC ‘s still law

As reported in numerous places overnight, the BOJ has let slip that they are not considering any changes to the current policy mix at their meeting next week.  You may recall that there has been an uptick in discussion about the ongoing review that began just last month and the idea that Ueda-san was preparing to tweak YCC or to end YCC or something else.  That has been a key driving force in the recent rise in JGB yields, which had climbed 10bps, to as high as 0.47%, during July.  Short JPY positions in the currency market were getting covered in waves and we saw the yen strengthen more than 5% in the first two weeks of July.

This was all part of the narrative of the dollar’s imminent decline and used in conjunction with the rising de-dollarization narrative as part of a new world order type of argument.  Nobody wanted to hold dollars, and this was the proof!  

Oops!  Maybe this narrative will need to be tweaked a bit as not only has the BOJ thrown a serious amount of cold water on the changing YCC story, with JGB yields slipping a further 2.5bps last night, but this morning we were also treated to a story about India’s Foreign Minister explaining the country will not support any common BRICS currency for trade.  There is no doubt that Russia and China would like to see the dollar lose its global hegemonic status, but wishes are just that.  Do not dismiss the dollar at any time in the near future, it is not going to lose its current status.  However, that doesn’t mean it will stop fluctuating in FX markets, those are two different things.

There once was a great big recession
Forecast by the ‘nomics profession
The Fed had raised rates
For thirteen straight dates
And so, growth seemed out of the question

But so far the data is showing
The ‘cononmy’s seems to be growing
With joblessness sinking
Quite many are thinking
No landing.  It’s truly mind-blowing

Aside from the yen news, the market continues to try to understand the current economic cycle, which is clearly not very similar to any cycle in recent memory.  Every day I read things from very accomplished analysts about the imminent decline in the US economy and how the Fed will be forced to eat crow soon enough.  As well, if I scroll a bit further down my Fintwit feed, I find different accomplished analysts who explain that the no landing scenario is the best estimate and that the economy is on solid footing with inflation declining smoothly and heading back to its “natural” spot of 2%.  

And in fairness, one can slice the data up in many different ways to draw both conclusions.  One of the most interesting features of this situation is how different asset classes are concluding very different things from the data.  Broadly speaking, the US equity market is all-in on the no-landing scenario, trading higher almost every day (yesterday’s NASDAQ performance excepted and due to some weaker than expected earnings numbers), while the commodity space is far more circumspect over continued growth with base metals, especially, under broad pressure for the past several months.  Given the importance of copper and aluminum in the industrial process for almost every manufactured item, the pricing certainly indicates anticipated weakness in demand.  We know this because there is no excess supply on the way.

As to the bond market, I fear that the signal-to-noise ratio from bond yields has greatly diminished during the period of QE.  I am not one to easily dismiss the recession signal from the inverted yield curve, and as we currently sit at -100bps for the 2yr-10yr curve and -160bps for the 3m-10yr, both extremely large inversions, it is easy to conclude that a recession is on its way.  

But consider, if you look at all the recessions that are used as the basis for the strength of this signal, only the Covid recession occurred after the Fed began its QE program in 2009.  Prior to the GFC, the Fed just never held very many long-term Treasury bonds and $0.00 of mortgage-backed securities on its balance sheet.  It is not hard to believe that the Fed has substantially distorted the yield curve for the past 14 years, driving long-term rates far lower than they otherwise would have been based on economic conditions.  What would 10-year Treasury yields look like if the Fed didn’t own the ~$7.25 trillion of long-dated paper that currently sits on the balance sheet?  I suggest 10-year yields would be A LOT higher.  100bps?  Maybe.  Maybe more, maybe less, but 10-year yields are not really telling us that investors believe the economy is going to slow down.  Rather, I might suggest they are telling us that many players are bidding for bonds because they must for regulatory reasons (banks and insurance companies) and that there isn’t as much supply available as the gross issuance would indicate.

But, keeping that in mind, the data that gets released regularly continues to confuse.  For instance, yesterday saw Initial Claims data fall further, back to 228K and below all forecasts.  The rising trend that we had seen a few months ago seems to be reversing.  At the same time, the Philly Fed data was weaker than expected at -13.5 and Existing Home Sales fell to 4.16M.  Finally, Leading Indicators printed at -0.7%, a tick worse than forecast and the 15th consecutive negative reading of this indicator.  So, which is it?  Employment strength means growth?  Or weakening manufacturing and housing points to weakness?  As I wrote earlier this week, we need a new term to describe the current economy, as recession in the traditional view doesn’t seem right, but growth remains lackluster at best with parts of the economy, notably manufacturing, seemingly in contraction.

Well, as we head into the weekend, that is a lot to consider, and perhaps inspiration will strike and we will all understand things on Monday.  Just don’t count on it!  Meanwhile, ending the week, equities are kind of unhappy, with the Nikkei not taking kindly to the BOJ talk and probably a few more losers than gainers in Asia.  That same sentiment prevails in Europe, with both gainers and losers but leaning toward negative while US futures are bouncing from yesterday’s declines.
Bond yields are drifting a bit lower this morning, but only on the order of 1bp-2bps in the US and Europe, although Gilt yields have risen 2bps on the back of much stronger than expected UK Retail Sales data released today.  We’ve already discussed JGB’s, and I expect those yields to grind lower from here along with the yen.

Oil, however, has continued its recent strong performance, up 1.2% this morning on supply concerns as there were larger than expected draws on inventories this week.  Meanwhile, gold (-0.2%) is edging lower as the dollar regains its footing.  Today, copper and aluminum are both a bit firmer, but their recent trend continues downward.

Finally, the dollar is definitely in fine fettle this morning, rallying against all its G10 counterparts except NOK (+0.4%) which is obviously benefitting from oil’s rally.  The yen (-1.15%) is the laggard, which given the BOJ news, is no surprise.  Meanwhile, in the EMG space, it is a sea of red with THB (-1.3%) the worst performer followed by KRW (-1.1%) and TWD (-0.5%).  The baht saw a setback with the ongoing political machinations as hopes for a new government have been delayed, if not dashed, while the won saw its exports fall sharply as Chinese economic activity slows.  Taiwan is feeling the same effects as South Korea in that regard.

And that’s really it for today.  There is no data nor any speakers on the calendar, so the dollar seems likely to simply follow today’s sentiment which, given its weakness over the past several sessions, is likely to see more short covering and potentially a bit more strength.

Good luck and good weekend
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Opening Move

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Forty trillion yen
Kishida’s opening move?
Or his legacy?

While it has been quite a week in the FX markets, and in truth, markets in general, it appears that both traders and investors are now tired and price volatility has ebbed.  While inflation remains topic #1 in most discussions, that poor horse has been beaten into submission at this point.  We already know that it is running hotter than most forecasts and that its composition is broadening.  This means the idea that Covid related issues, like used car prices or lumber prices, which have spiked (and in the case of lumber receded somewhat) due to supply chain issues is clearly no longer the only factor.  In fact, wages are beginning to rise substantially and with higher commodity prices, input costs continue to climb (see PPI) which is rapidly feeding into retail costs.  And it doesn’t appear this is set to slow anytime soon, despite the wishful comments by every central banker and finance minister around.  So, what’s a country to do?

Well, if you’re Japan, this is the perfect time to…spend more money!  And so, last night it was reported that new PM, Fumio Kishida, will be proposing a ¥40 trillion stimulus package in order to help support growth.  The rationale is that GDP is forecast to have contracted in Q3, rather than following in the footsteps of other major nations which all saw varying levels of growth.  Meanwhile, this being Japan, the home of the permanent deflationary impulse, one ought not be surprised at the fact that the BOJ and the government completely dismiss the recent PPI data (8.0% in October, a full point above expectations) as transitory given the decision that this will shore up the government’s approval rating.  And anyway, all the forecasts point to a still subdued 0.1% Y/Y CPI reading next week so there should be nothing to worry about.  After all, economic forecasts for inflation have been spot on around the world lately!

Since the last week of September, when USDJPY broke out of a six-month long trading range, the yen has fallen nearly 5%.  I believe that the BOJ is extremely encouraging of this movement as it has been a tacit policy goal since the initiation of Abenomimcs in 2012, when the BOJ really went all-in on its QE initiative in an effort to defeat deflation.  One thing for the Japanese to consider, though, is that history shows getting a little inflation is a very hard thing to do.  Once that genie is out of the bottle, it tends to be far more unruly than anticipated.  For Japan’s sake, I certainly hope that the PPI data is the outlier, but the risk of a policy mistake seems to be growing.  And after all, central bank policy mistakes are all the rage now (see Federal Reserve), so perhaps Kuroda-san just wants to feel like a member of the club.  At any rate, this morning the yen appears to be readying for the next leg lower and I would not be surprised at a move toward 116.75 before it’s all over.

But truthfully, there is not much to tell beyond that.  As mentioned, there is still a lot of discussion regarding inflation and its various causes and effects.  One thing to keep in mind is that history has shown the currencies of nations with high inflation tend to fall over time.  And this does not have to be hyperinflation, merely inflation running hotter than its peers.  Consider Italy, pre euro, where inflation averaged 5.4% and the currency regularly depreciated to offset the growth in prices.  In fact, the entire economic model was based on a depreciating currency to maintain the country’s industrial competitiveness.  The same can be seen in Turkey today, where each higher than expected CPI print leads to further lira weakness.

The point is, while Japan may not be able to create inflation, it is abundantly clear that we have done so in the US.  And when push comes to shove, if/when the Fed has to implement policy to support financial stability, they will be faced with the “impossible trinity” where of the three markets in question, stocks, bonds and the dollar, they will support the first two and allow the dollar as the outlet valve.  This means that eventually, a much weaker dollar is likely on the cards, not in the next several months, but very possibly within the next 2 years.  For payables hedgers, especially with the dollar showing short term strength, it may be an excellent time to consider longer term protection.  USD puts are very cheap these days.  Let’s talk.

Ok, so what do I mean by dull markets?  Well, equities are mostly higher, but generally not by very much.  In Asia, the Nikkei (+1.1%) was the big winner on the stimulus news, but both the Hang Seng (+0.3%) and Shanghai (+0.2%) were only modestly better on the night.  In Europe too, the movement has been relatively modest with the UK (FTSE 100 -0.4%) even falling on the day although the other major markets (DAX +0.1%, CAC +0.4%) are a bit firmer.  US futures are also pointing higher, with gains on the order of 0.2% across the board.

Bond markets are mixed as Treasuries (+2.2bps) are softer after yesterday’s holiday, but European sovereigns are all seeing modest yield declines (Bunds -0.9bps, OATs -0.6bps, Gilts -0.9bps).  That said, the peripheral markets also selling off a bit with Italian BTPs (+2.8bps) and Greek GGBs (+3.1bps) leading the way lower.

Commodities are actually the one market where there is still some real volatility as oil (-2.1%) leads the way lower alongside NatGas (-2.8%), although there is weakness in gold (-0.6%) and copper (-0.4%), all of which have had strong weeks.  Frankly, this feels like some position closing after a positive outcome rather than the beginning of a new trend.  In fact, if anything, what we have seen this week is commodity prices breaking out of consolidations and starting higher again.  Agriculturals are little changed and the other industrial metals like Al (+1.1
%) and Sn (+0.6%) are actually a bit better bid.  In other words, there doesn’t appear to be a cogent theme today.

As to the dollar, mixed is the best adjective today.  In the G10, we have several gainers led by the pound (+0.2%) as well as several laggards led by SEK (-0.4%).  The thing is, there is very little to hang your hat on with respect to stories driving the activity.  Neither nation published any data and there haven’t been any comments of note either.  In the EMG space, PHP (+0.6%) is the leading gainer on the strength of equity market inflows as well as central bank comments indicating they will seek to allow the market to determine the exchange rate.  On the downside, RUB (-1.0%) is falling sharply on the back of oil’s sell-off and rising geopolitical tensions with Russia complaining about NATO activity near its borders.  Between those two extremes, however, the movement is limited and pretty equal on both sides in terms of the number of currencies rising or falling.  Last night, Banxico raised rates by 25bps, as widely expected and the peso is weaker this morning by -0.25% alongside oil’s decline.

Data-wise, JOLTS Jobs (exp 10.3M) and Michigan Sentiment (72.5) are both 10:00 numbers, but neither seems likely to move markets.  NY Fed president Williams speaks at noon, so perhaps there will be something there, but I doubt that too.

For now, the dollar’s trend is clearly higher in the short term, especially if we continue to see Treasury yields climb.  However, as mentioned above, I think the medium-term story can be far more negative for the greenback, so consider that as you plan your hedging for 2022 and beyond.

Good luck, good weekend and stay safe
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Something Awry

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It’s not clear why there’s a concern
Inflation could cause a downturn
Cause stocks keep on rising
Though Jay’s emphasizing
The Fed, QE’s, set to adjourn

But still there is something awry
In how traders, every dip, buy
With growth clearly slowing
Though wages are growing
The value of stocks seems too high

One has to be remarkably impressed with the price action of risk assets these days and their ability to completely ignore growing signs that long-delayed problems are fast approaching.  The first of these problems is clearly inflation, something that has been ignored for decades by investors as long-term factors like globalization and demographics, as well as technological innovation, have served to suppress any significant inflationary impulse throughout the developed world.  Certainly, there were some EMG nations (Argentina, Venezuela, Zimbabwe) that managed to buck that trend and impose policies so horrendous as to negate the long-term benefits of stable prices, but generally speaking, inflation has not been a problem.

Then, Covid came along and the policy response was truly draconian dramatic, essentially shutting down much of the global economy for a number of months.  In hindsight, it cannot be surprising that the disruption to finely tuned supply chains that was imposed has been difficult to repair.  After all, it took years to achieve the true just-in-time nature of manufacturing and distribution across almost every industry.  While there are currently herculean efforts to get things back to the way they were, I suspect we will never again return to the previous situation.  A combination of policy decisions and population adaptations has altered the underlying framework thus there is no going back.

Consider the current energy situation (crisis?) as an example.  What is very clear now is that the price of energy is rising rapidly with both oil (+69% YTD, 0.85% today) and NatGas (+127% YTD, 1.0% today) continuing to climb with no end in sight.  Arguably, there have been a number of deliberate policy choices as well as some investing fashions which have dramatically reduced the investment in the production of these two key energy sources thus not merely reducing current supply but prospects for future supply as well.  Pressure from environmentalists to prevent this investment has done wonders for driving up prices, alas the mooted renewable replacements have yet to demonstrate their long-term effectiveness as uninterrupted power sources.  And this situation is manifest not only in the West, but in China as well, where they are currently suffering from major power shortages amid rapidly rising prices for LNG and coal as well as oil.  This morning’s WSJ has a lead article on how the rising price of NatGas is going to drive up winter heating bills substantially and the negative consequences for lower- and middle-income folks.

And yet…risk appetite remains robust.  You can tell because regardless of the news, equity prices consistently rise.  I grant it is not actually every day, but the trend remains quite clearly higher.  In traditional analysis, it would be difficult to rationalize this price movement as while the current situation may be working fine for companies, the fact is there are numerous issues that are coming, notably rising wages and a shrinking labor force, that are going to pressure margins, and arguably profits, going forward.  Clearly, however, that tradition is dead.  In its stead is the investor view that as long as the Fed keeps supplying liquidity to the markets economy, it will prevent any significant price dislocation.  Trickle Down theory remains alive and well on Wall Street.  This is evident today, where equity markets worldwide are higher, and has been evident in the fact that the recent Evergrande induced scare that resulted in a 5% correction was the first correction of that magnitude in more than a year.  The current investment zeitgeist remains; stocks only go up so buy more.  While I recognize I sound curmudgeonly on this topic, remember, reality is a b*tch and it will win out in the end.  Until then, though, it is unclear what type of catalyst is needed to change views, so risk assets are likely to remain in favor regardless of everything else.

And of course, today is a perfect example where equity markets are all green (Nikkei +1.8%, Hang Seng +1.5%, Shanghai +0.4%) in Asia and Europe (DAX +0.3%, CAC +0.4%, FTSE 100 +0.3%) as well.  Don’t worry, US futures are all pointing higher by 0.25%-0.35% at this hour, so all our 401K’s still look good.

Meanwhile, bonds are not required in a risk-on scenario so it should be no surprise that yields are rallying today with Treasuries (+3.3bps) leading the way but higher yields throughout Europe as well (Bunds +2.0bps, OATs +2.3bps, Gilts +3.7bps).  These price movements have been seen throughout the rest of the continent and in Asia last night with yields rising universally.

Commodity prices are broadly firmer, although with risk appetite robust, precious metals (Au -0.85, Ag -1.2%) are unwanted.  We discussed oil prices and we are seeing strength in the industrial metals (Cu +2.4%, Al +2.4%) as well as the Ags (corn +1.2%, wheat +1.4%, soybeans +0.7%).  In other words, risky assets are the place to be.

You should not be surprised that the dollar (and yen) are suffering on this movement given haven assets serve no purpose today!  In the G10 space, GBP (+0.6%) is leading the way higher followed by NOK (+0.55%) and then everything else is just modestly higher except JPY (-0.6%).  The sterling story seems to revolve around continued belief in BOE rate hikes coming early next year while NOK is simply following oil for now.

Of more interest, I believe, is the yen, which admittedly has been falling quite rapidly, down nearly 5% in the past three weeks, and quite frankly, shows no signs of stopping.  At this point, it doesn’t seem so much like Japanese investment outflows as it does like a speculative move that has discerned there is limited real demand for the currency.  Amazingly, last night, the new FinMin, Shunichi Suzuki, felt compelled to explain that, “stability in currencies is very important.” He further indicated that there was concern a weaker yen could cause prices to rise, especially energy prices.  Now, call me crazy but, BOJ policy for the past decade explicitly and the past three decades with less verve, has been to drive inflation higher.  Abenomics was all about achieving 2.0% inflation, something that had not been seen since before the Japanese bubble collapsed in 1989.  Now, suddenly, with inflation running at 0.2%, they are starting to get concerned that higher energy prices are going to be a problem?  Are they going to raise rates?  Are they going to intervene?  Absolutely not in either case.  Sometimes you have to wonder what animates policy maker comments.

As to EMG currencies, ZAR (+0.6%) and KRW (+0.4%) are the leaders this morning with the former benefitting from higher metals prices while the latter is responding to comments from the BOK governor that a rate hike could be coming at the November meeting.  On the downside here, TRY (-0.4%) continues to suffer from Erdogan’s capriciousness with respect to his central bankers, while THB (-0.3%) appears to be consolidating after a strong rally over the past week.

We have a bunch more data this morning led by Retail Sales (exp -0.2%, +0.5% ex autos) as well as Empire Manufacturing (25.0) and Michigan Sentiment (73.1).  There are two more Fed speakers, Bullard and Williams, but it seems unlikely that either will change the current narrative of a taper coming soon.

The reality is you can’t fight the tape.  As long as risk appetite remains buoyant, the dollar and yen are likely to remain on their back foot.  For the dollar, I see no long-term danger as I believe it will consolidate further before making its next move higher.  the yen, on the other hand, could be a bit more concerning.  If fear has gone missing, and with yields rising elsewhere in the world, a much weaker yen remains a real possibility.

Good luck, good weekend and stay safe
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A Tiny Tsunami

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Covid’s wrought havoc
Like a tiny tsunami
Can Japan rebound?

In what is starting off as a fairly quiet summer morning, there are a few noteworthy items to discuss. It cannot be surprising that Japan’s economy suffered greatly in Q2, given the damage to economic activity seen worldwide due to Covid-19. Thus, although the -7.8% Q2 result was slightly worse than forecast, it merely served to confirm the depths of the decline. But perhaps the more telling statistic is that, given Japan was in recession before Covid hit, the economy there has regressed to its size in 2011, right after the Tohoku earthquake and tsunami brought the nation to its knees.

Back then, the dollar had been trending lower vs. the yen for the best part of the previous four years, so the fact that it dropped sharply on the news of the earthquake was hardly surprising. In fact, it was eight more months before the dollar reached its nadir vs. the yen (75.35), which simply tells us that the trend was the driver and the singular event did not disrupt that trend. And to be clear, that trend was quite steep, averaging nearly 11% per year from its beginning in 2007. In comparison, the current trend in USDJPY, while lower, is much less dramatic. Since its recent peak in June 2015, the entire decline has been just 15.5% (~3.2% per annum). Granted, there have been a few spikes lower, most recently in March during the first days of the Covid panic, but neither the economic situation nor the price action really resembles those days immediately after Tohoku.

The point is, while the dollar is certainly on its back foot, and the yen retains haven status, the idea of a dollar collapse seems far-fetched. I’m confident that Japan’s Q3 data will show significant improvement compared to the Covid inspired depths just reported, but given the massive debt overhang, as well as the aging demographics and trend growth activity in the country, it is likely to be quite a few years before Japan’s economy is once again as large as it was just last year. Ironically, that probably means the yen will continue to trend slowly higher over time. But even getting to 100 will be a long road.

The other interesting story last night was from China, where the PBOC added substantially more liquidity to the markets than had been anticipated, RMB 700 billion in total via one-year injections. This more than made up for the RMB550 billion that is maturing over the next week and served as the catalyst for the Shanghai Exchange’s (+2.35%) outperformance overnight. This merely reinforces the idea that excess central bank liquidity injections serve a singular purpose, goosing stock market returns supporting economic activity.

There is something of an irony involved in watching the central banks of communist nations like China and Russia behave as their actions are essentially identical to the actions of central banks in democratic nations. Is there really any difference between the PBOC injecting $100 billion or the Fed buying $100 billion of Treasuries? In the end, given the combination of uncertainty and global ill will, virtually all that money finds its way into equity markets, with the only question being which nation’s markets will be favored on any given day. It is completely disingenuous for the Fed, or any central bank, to explain that their activities are not expanding the current bubble in markets; they clearly are doing just that.

But the one thing of which we can be certain is that they are not going to stop of their own accord. Either they will be forced to do so after changes in political leadership (unlikely) or the investment community will become more fearful of their actions than any possible inaction on their parts. It is only at that point when this bubble will burst (and it will) at which time central banks will find themselves powerless and out of ammunition to address the ensuing financial distress. As to when that will occur, nobody knows, but you can be certain it will occur.

And with that pleasant thought now past, a recap of the overnight activity shows that aside from Shanghai, the equity picture was mixed in Asia (Nikkei -0.8%, Hang Seng +0.6%) while European bourses are similarly mixed (DAX +0.2%, CAC 0.0%, Spain’s IBEX -0.75%). US futures are modestly higher at this point, but all well less than 1%. Bond markets are starting to find a bid, with 10-year Treasuries now down 1.5 basis points, although still suffering indigestion from last week’s record Treasury auctions. And in fact, Wednesday there is another huge Treasury auction, $25 billion of 20-year bonds, so it would not be surprising to see yields move higher from here. European bond markets are all modestly firmer, with yields mostly edging lower by less than 1bp. Commodity markets show oil prices virtually unchanged on the day while gold (and silver) are rebounding from last week’s profit-taking bout, with the shiny stuff up 0.5% (AG +2.1%).

Finally, the dollar is arguably slightly softer overall, but there have really been no large movements overnight. In G10 world, the biggest loser has been NZD (-0.3%) as the market voted no to the announcement that New Zealand would be postponing its election by 4 weeks due to the recently re-imposed lockdown in Auckland. On the plus side, JPY leads the way (+0.25%, with CAD and AUD (both +0.2%) close by on metals price strength. Otherwise, this space is virtually unchanged.

Emerging markets have had a bit more spice to them with RUB (-1.25%) the outlier in what appears to be some position unwinding of what had been growing RUB long positions in the speculative community. But away from that, HUF (-0.6%) is the only other mover of note, as investors grow nervous over the expansion of the current account deficit there.

This week’s data releases seem likely to be less impactful as they focus mostly on housing:

Today Empire Manufacturing 15.0
Tuesday Housing Starts 1240K
  Building Permits 1320K
Wednesday FOMC Minutes  
Thursday Initial Claims 915K
  Continuing Claims 15.0M
  Philly Fed 21.0
Friday Manufacturing PMI 51.8
  Services PMI 51.0
  Existing Home Sales5.40M  

Source: Bloomberg

Of course, the FOMC Minutes will be greatly anticipated as analysts all seek to glean the Fed’s intentions regarding the policy overhaul that has been in progress for the past year. Away from the Minutes, though, there are only two Fed speakers, Bostic and Daly. And let’s face it, pretty much every FOMC member is now on board with the idea that raising the cost of living inflation is imperative, and that if inflation runs hot for a while, there is no problem. Clearly, they don’t do their own food-shopping!

It is hard to get too excited about markets one way or the other today, but my broad view is that though the medium-term trend for the dollar may be lower, we continue to be in a consolidation phase for now.

Good luck and stay safe
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Times of Trouble

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In times of trouble
The yen continues to be
Mighty like an oak

Pop quiz! What percentage of the workforce is working at their primary site vs. home or an alternate site? Please respond with where you’re working and your guesstimates. Will publish results of this (completely unscientific) survey on Monday, March 16.

As markets around the world continue to melt down, investors everywhere are looking for a haven to retain capital. For the past 100 years, US Treasuries have been the number one destination in markets. Interestingly, the past two days saw Treasuries sell off aggressively. I think the move was initially based on the relief rally seen on Tuesday, but at this point, the fact that Treasury prices fell alongside yesterday’s stock rout can only be explained by the idea that institutions that need cash are selling the only liquid assets they have, and Treasuries remain quite liquid. And to be clear, 10-year yields are lower by 18bps this morning as that bout of selling seems to have passed and the haven demand has returned in spades.

But since the financial crisis, the second most powerful haven asset has been the Japanese yen. Despite the fact that the nation has basically been in an economic funk for two decades, it continues to run a significant current account surplus. As a consequence, Japanese external investment is huge and when fear is in the air, that money comes running back home. The evolution of the coronavirus spread can be seen in the yen’s movement as in the middle of February, when Japan itself was dealing with the growth in infections, the yen weakened to a point not seen in nearly a year. Since then, however, the yen has strengthened 7.5% (with a peak gain of 9.8% seen Monday) as flows have been decidedly one way. This morning the yen has appreciated 0.7% from yesterday’s close and quite frankly, until the pandemic starts to ebb, I see no reason for it to stop appreciating. Par will pose a short-term psychological support for the dollar, but if this goes on for another two months, 95 is in the cards. With that in mind, though, for all yen receivables hedgers, zero premium collars are looking awfully good here. Let’s talk, at the very least you should be apprised of the pricing.

Interestingly, the Swiss franc has had a somewhat less impressive performance despite its historic haven characteristics. While it has appreciated 4.5% in the same time frame, it has been having much more trouble during the latest equity market decline. And I think that is the reason why. Famously, the Swiss National Bank has 20% of its balance sheet invested in individual equities. This is a very different investment philosophy than virtually every other central bank. The genesis of this came about when the SNB was intervening on a daily basis while trying to cap the franc and ultimately needed a place to put the dollars and euros they were buying. I guess the view was stocks only go up, so let’s make some money too. Whatever the reason, as of December 31 the USD value of their equity portfolio was about $97.6 billion. I’m pretty confident that number is a lot lower today, and perhaps the idea about Swiss franc strength is being called into question. The franc is unchanged today and has been generally unimpressive for the past week.

Meanwhile, all eyes this morning are on Madame Lagarde and the ECB who will be announcing their latest policy initiatives shortly. While it is clearly expected they will do something, other than a 10bp cut in the deposit rate, to -0.60%, there is a great deal of uncertainty. Expectations range from expanding the TLTRO program with much more aggressive rates, as low as -2.00%, to a significant increase in QE to capping government bond yields. All of that would be remarkably dramatic and likely have a short-term positive impact on markets. But will it last? My sense is that until the Fed announces next week, and at this point I think they cut 100bps, markets will still be on edge. After all, the world continues to revolve around USD funding, and in times of crisis, foreign entities need access to USD liquidity. Look for more repo, more swap lines and maybe even a lending scheme although I don’t think the Fed can do something like that within their mandate.

Overall, the dollar is performing as the number two currency haven, after the yen, and has rallied sharply against commodity currencies in both the G10 and EMG spaces. For example, with oil down 5% this morning, NOK has fallen 3.6%, but both AUD and SEK are lower by 1.5% as well. In the emerging markets, Mexican peso continues to be the market’s whipping boy, falling a further 3.2% as I type, which takes its decline since the beginning of the month to 12.2%. meanwhile, the RUB is in similarly dire straits (-2.75% today, -11.5% in March) and we are seeing every single EMG currency lower vs. the dollar today. These are the nations that are desperate for USD liquidity and you can expect their currencies to continue to decline for the foreseeable future.

At this point, data is an afterthought, but it is still being released. Yesterday saw CPI rise a tick more than expected but the more interesting data point was Mortgage Applications, which jumped 55.4% as mortgage rates collapse alongside Treasury yields. This morning brings Initial Claims (exp 220K) and PPI (1.8%, 1.7% core) with far more interest in the former than the latter. Consider, given the enormous economic disruptions, it would be easy to see that number jump substantially, which would just be another signal for the Fed to act as aggressively as possible.

At this point, as the equity meltdown continues, the dollar should remain well supported vs. everything except the yen.

Good luck
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Set For Stagnation

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When thinking of every great nation
Regarding its growth expectation
The US alone
Is like to have grown
While others seem set for stagnation

The upshot of these circumstances
Is regular dollar advances
Within the G10
It’s euros and yen
That suffer on policy stances

Another day, another dollar rally. This simple sentiment pretty well sums up what we have been seeing for the past several weeks. And while there may be a multitude of catalysts driving individual currency movements, the reality is they all point in the same direction, a stronger dollar. Broadly speaking, data from around the world, excluding the US, has been consistently weaker than expected while the US continues to hum along nicely. Now, if China’s economy remains in its current catatonic state for another month, one has to believe that US numbers are going to suffer, if only for supply chain reasons. But right now, it is difficult for anyone to make the case that another currency is better placed than the dollar.

For example, last night we saw Australian Unemployment unexpectedly rise to 5.3% as the first measured impacts of Covid-19 make themselves felt Down Under. Traders wasted no time in selling Aussie and here we are this morning with the currency lower by 0.75%, trading to new lows for the move and touching its lowest level since March 2009. Perhaps the Lucky Country has run out of luck.

The yen keeps falling
Like ash from Fujiyama
Is an end in sight?

At this point in the session, the yen has seen its largest two-day decline since November 2016, in the immediate wake of President Trump’s election, and has now fallen more than 2.0% since Tuesday morning. It has broken through a key technical level at 111.02, which represented a very long-term downtrend line. This has encouraged short-term traders to add to what is believed to be significant outflows from Japanese investors, notably insurance companies. One of the other interesting things is that Japanese exporters, who are typically sellers of USDJPY, seem to be sitting this move out, having filled orders at the 110 level, and are now apparently waiting for 115. While it is unlikely that we will see the yen continue to decline 1% each day, I have to admit that 115 seems quite realistic by the end of the Japanese fiscal year next month.

And those are just two of the many stories that seem to be coming together simultaneously to encourage dollar buying. Other candidates are ongoing weak Eurozone economic data (Eurozone Construction output falling and reduced forecasts for tomorrow’s flash PMI data), rate cuts by EMG central banks (Indonesia cut by 25bps last night), and more confusion from China regarding Covid-19 and its spread. Last night, they changed the way they count infections for the second time in a week, and shockingly the result was a lower number indicating the spread of the disease is slowing. However, at this point, the virus count seems to be having less of a market impact than little things like the announcement that Hubei province is keeping all factories shuttered until at least March 10. Now I don’t know about you, but that hardly seems like the type of thing that indicates things are getting better there.

There is a new tacit contest in the market as well, trying to determine just how big a hit the Chinese economy is going to take in Q1. If you recall two weeks ago, the initial estimates were that GDP would grow at a 4%-5% rate in Q1. At this point 0.0% seems a given with a number of analysts penciling in negative growth for the quarter. And folks, I don’t know why anyone would think there is going to be a V-shaped recovery there. It is going to take a long time to get things anywhere near normal, and there has already been a lot of permanent demand destruction. On top of that, one of the things I had discussed last week, the idea that even if companies aren’t generating revenue, they still need to pay interest on their debt, is starting to be seen more publicly. The news overnight that HNA Group, a massively indebted conglomerate that had acquired trophy assets all around the world (stakes in Hilton Hotels and Deutsche Bank amongst others) is unable to pay interest on its debt and seems to be moving under state control. While the PBOC cut rates slightly overnight, the one-year loan prime rate is down to 4.05% from 4.15% previously, it appears that the Chinese government is going to be fighting the Covid-19 fight with more fiscal measures than monetary ones. That said, the renminbi has been falling along with all other currencies and has traded back through 7.00 to the dollar after a further 0.35% decline overnight.

The point is that you can essentially look at any currency right now and it is weaker vs. the dollar. Each may have its own story to tell, but they all point in the same direction.

I would be remiss to ignore other markets, which show that other than Chinese equity markets (Shanghai +1.85%), which rallied last night after news of further stimulus measures, risk is mostly on its back foot today. European equity markets are generally lower (DAX -0.1%, CAC -0.1%) although not by much. US futures are pointing lower by 0.2% across the board, again, not significant, but directionally the same message. Treasury yields continue to fall, down another 2bps this morning to 1.54%, and gold continues to rally, up another 0.3% this morning.

Yesterday’s FOMC Minutes explained that the Fed was pretty happy with current policy settings, something we already knew, and that they are still unsure how to change their ways to try to be more effective with respect to achieving their inflation target as well as insuring that there are no more funding crises. On the data front, yesterday’s PPI data was much firmer than expected, although most people pretty much ignore those numbers. Today we see Philly Fed (exp 11.0), Initial Claims (210K) and Leading Indicators (0.4%). Monday’s Empire Mfg data was stronger than expected and the forecasts for Philly Fed are for a solid increase. Yet again, the data picture points to a better outcome in the US than elsewhere, which in the current environment will only encourage further USD buying. For now, don’t get in front of this train, but if you need to hedge receivables, sooner is better than later as I think we could see this run for a while.

Good luck
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Fears Melt

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As Covid fears melt
Like the snowpack during spring
The yen, too, recedes

Remember when there was a universal idea that if the world’s second largest economy, and its fastest growing one at that, essentially shut down due to complications from an exogenous force (Covid-19), it would force investors to show concern over their risk allocations and seek out haven assets? Me neither! Remarkably, equity investors have become so convinced that central banks collectively have their “backs” that there is virtually no interest in limiting positions. This is certainly true across all equity markets, where after a mere twenty-four hours of modest concern over the fact that Q1 iPhone sales would be negatively impacted by Covid-19, the all clear signal was given. This time that signal took the form of the Chinese government announcing that they would be supporting the domestic airline industry, either encouraging takeovers of smaller airlines in financial trouble by their larger brethren, or via direct capital injections into companies. My sense is we will see both of those actions in order to be certain that no airlines go under.

Headlines like the following: “Chinese Companies Say They Can’t Afford to Pay Workers Now” from a Bloomberg story are seen as irrelevant and have no impact on risk assessment. Apparently the idea that the Chinese private sector, which accounts for two-thirds of GDP growth and 90% of new jobs, has basically been shuttered is not relevant in the calculations made by equity investors. Let me just say that the idea of risk has certainly evolved lately.

But this is the story. Equity investors are convinced that central banks will never allow stock markets to decline again and will do everything in their power to prevent any such decline. And while that may be true with regard to central bank efforts, there is a potential flaw in the theory. Central bank power, just like virtually everything else, is subject to the law of diminishing returns, and we are already seeing that situation in Europe and Japan. So even though central bankers may try to stop all declines, do not be surprised when a situation arises where they cannot do so.

Interestingly, bond market investors have a somewhat different view of the landscape as we continue to see interest in Treasuries and bunds with yields in both instruments continuing to grind slowly lower. However, for now, the equity markets are in the spotlight and driving the narrative.

So, with this in mind, it is easier to understand that Asian markets mostly rallied last night (Nikkei +0.9%, Hang Seng +0.5) although Shanghai edged lower by -0.15%. European markets are rocking this morning with the DAX (+0.55%), CAC (+0.7%) and FTSE100 (+0.8%) leading the way higher despite news that Adidas and Puma have seen sales collapse to virtually zero in China. US futures are also pointing higher, on the order of 0.3% as we would not want to be left out of the action here.

Treasury yields continue to sink, however, with the 10-year down to 1.56% while German bunds have fallen to -0.42%. So there is clearly some demand for haven assets, perhaps just not as much as we would expect. And finally, in the FX market, havens have lost their appeal. Most notably, the yen has tumbled 0.5% this morning, trading well back through 110 and touching its weakest point since last May. Clearly, there is no fear in FX traders’ collective minds. Funnily enough, gold prices continue to rally, having closed above $1600/oz yesterday for the first time since March 2013, and are higher by a further 0.5% this morning.

With this as a backdrop, it is very difficult to paint a coherent picture of the markets today, at least the FX markets. In the G10 space, we have already discussed the yen’s decline, marking it as the worst performing major currency today. On the flip side, NOK is the big winner, +0.5% as oil prices rebound on the news that Chinese airlines are not all going to disappear. CAD is the second best performer, also on the back of the oil news, although it has only managed a 0.25% gain. And other than those three currencies, nothing else has moved more than 10 basis points from last night’s closing levels. On the data front overseas, UK CPI was released a tick higher than expected at 1.8%, although the pound has seen exactly zero movement on the back of the data. If nothing else, new BOE Governor Andrew Bailey must be happy that the road to 2% inflation is not quite as steep as previously expected.

In the EMG space, movement has been even more muted with the biggest gainers ZAR (+0.3%) and RUB (+0.25%) on the back stronger commodity and oil prices while the biggest decliners have been HUF (-0.3%) and TRY (-0.25%) with the former seeing profit taking after a nearly 2% rally in the wake of central bank discussions of tighter policy to fight inflation there, while the lira is responding to a rate cut of 50 bps as the central bank seeks to unwind the drastic tightening it implemented in mid-2018 amid major inflationary pressures. And while I wish there were some more interesting stories, the reality is the big narrative of central banks preventing risk sell-offs remains the only theme in the market.

Looking at this morning’s data we see Housing Starts (exp 1428K), Building Permits (1450K) and PPI (1.6%, 1.3% ex food & energy). Then at 2:00 we get a look at the FOMC Minutes from January’s meeting. Fed watchers are focusing on any discussion regarding the balance sheet and repo as it remains clear there is not going to be any interest rate change anytime soon.

So that’s what we have for today. Arguably, the dollar is ever so slightly on its back foot, but the movement has been infinitesimal. While I continue to believe that ultimately the Fed will ease policy further, for now, the dollar remains the brightest bulb in the box, and so should continue to attract buyers.

Good luck
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A Dangerous Game

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In ‘Nineteen the story was trade
As Presidents Trump and Xi played
A dangerous game
While seeking to blame
The other for why growth decayed

But ‘Twenty has seen both adjust
Their attitudes and learn to trust
That working together,
Like birds of a feather,
Results in an outcome, robust

In a very quiet market, the bulk of the discussion overnight has been about the upcoming signing ceremony in the East Room of the White House tomorrow, where the US and China will agree the phase one piece of a trade deal. Despite the fact that this has been widely expected for a while, it seems to be having a further positive impact on risk assets. Today’s wrinkle in the saga has been the US’ removal of China from the Treasury list of currency manipulators. Back in August, in a bit of a surprise, the US added China to that list formally, rather than merely indicating the Chinese were on notice, as President Trump sought to apply maximum pressure during the trade negotiations. Now that the deal is set to be signed, apparently the Chinese have made “enforceable commitments” not to devalue the yuan going forward, which satisfied the President and led to the change in status. The upshot is that the ongoing positive risk framework remains in place thus supporting equity markets while undermining haven assets. In other words, just another day where the politicians seek to anesthetize market behavior, and have been successful doing so.

Chinese trade data released last night was quite interesting on two fronts; first that the Chinese trade surplus with the US shrank 11%, exactly what the President was seeking, and second, that the Chinese found many substitute markets in which to sell their wares as their overall trade surplus rose to $425 billion from 2018’s $351 billion. And another positive for the global growth watch was that both exports (+7.6%) and imports (+17.7%) grew nicely, implying that economic growth in the Middle Kingdom seems to be stabilizing. As to the yuan, it has been on a tear lately, rising 1.4% this year and nearly 4.5% since early September right after the US labeled China a currency manipulator. So, here too, President Trump seems to have gotten his way with the Chinese currency having regained almost all its losses since the November 2016 election. Quite frankly, it seems likely that the yuan has further to climb as prospects for Chinese growth brightened modestly and investors continue to hunt for yield and growth opportunities.

But away from the trade story there is precious little else to discuss. The pound remains under pressure (and under 1.30) as the idea of a BOE rate cut at the end of the month gains credence. Currently the market is pricing in a 47% probability of a rate cut, which is up from 23% on Friday. After yesterday’s weak GDP data, all eyes are focused on tomorrow’s UK CPI data as well as Friday’s Retail Sales where any weakness in either one is likely to see the market push those probabilities up even further.

As haven assets are shed, the Japanese yen has finally breached the 110 level for the first time since May and quite frankly there doesn’t appear to be any reason for the yen to stop declining, albeit slowly. Barring some type of major risk-off event, which is always possible, the near term portents are for further weakness. However, as the year progresses, ongoing Fed QE should serve to reverse this movement.

Even the Emerging markets have been dull overnight, with no currency moving more than 0.3%, which in some cases is nearly the bid-ask spread. For now, most market participants have become quite comfortable that no disasters are looming and that, with the US-China trade deal about to be completed, there is less likelihood of any near-term angst on that front. While a phase two deal has been mooted, given the issues that the US has indicated are important (forced technology transfer, state subsidies), and the fact that they are essentially non-starters in China, it seems highly improbable that there will be any progress on that issue this year.

On the data front, this morning brings the first US data of the week, where NFIB Small Business Optimism actually disappointed at 102.7 and the market is now awaiting December CPI data (exp 2.4%, 2.3% ex food & energy) at 8:30. The headline forecast represents a pretty big uptick from November, but that is directly related to oil’s price rally last month. The core, however, remains unchanged and well above the 2.0% Fed target. Of course that target is based on PCE, something that is designed to print lower, and there has been abundant evidence that the Fed’s idea of the target is to miss it convincingly on the high side. In other words, don’t look for the Fed to even consider a tighter policy stance unless CPI has a 3 handle.

And that’s really it for the session. Equity futures are pointing slightly higher as European equity indices are edging in that direction as well. Treasury yields are hovering just above 1.80%, little changed on the day and showing no directional bias for the past several weeks. If anything, the dollar is slightly higher this morning, but I would be surprised if this move extends much further at all.

Good luck
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Growth Can Be Spurred

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In England this morning we heard
From Vlieghe, the BOE’s third
Incumbent to say
That given his way
He’d cut rates so growth can be spurred

The pound is under pressure this morning after Gertjan Vlieghe became the third MPC member in the past week, after Carney and Tenreyo, to explain that a rate cut may be just the ticket at this point in time. Adding these three to the two members who had previously voted to cut rates, Haskel and Saunders, brings the number of doves to five, a majority on the committee. It can be no surprise that the pound has suffered, nor that interest rate markets have increased the probability of a 25bp rate cut at the January 30 meeting from below 25% last week to 50% now. Adding to the story was the release of worse than expected November IP (-1.2%) and GDP (-0.3%) data, essentially emphasizing the concerns that the UK economy has a long way to go to recover from the Brexit uncertainty.

However, before you turn too negative on the UK economy, remember that this is backward-looking data, as November was more than 6 weeks ago, and in the interim we have had the benefit of the resounding electoral victory by Boris Johnson. This is not to say that the UK economy cannot deteriorate further, just that there has been a palpable change in the tone of commentary in the UK as Brexit uncertainty has receded. Granted, the question of the trade deal with the EU, which is allegedly supposed to be signed by the end of 2020, remains open. But it is very difficult for market participants to look that far ahead and try to anticipate the outcome. And if anything, Boris has the fact that he was able to renegotiate the original Brexit deal in just six weeks’ time working in his favor. While previous assumptions had been that trade deals take years and years to negotiate, it is clear that Boris doesn’t subscribe to that theory. Personally, I wouldn’t bet against him getting it done.

But for now, the pound is the worst performer of the session, and given today’s news, that should be no surprise. However, I maintain my view that current levels represent an excellent opportunity for payables hedgers to add to hedges.

The other mover of note in the G10 space is the yen, which has fallen 0.4% after traders were able to take advantage of a Japanese holiday last night (Coming-of-age Day) and the associated reduced liquidity to push the dollar above a key technical resistance point at 109.72. Stop-loss orders at that level led to a quick jump at 4:00 this morning, and given the broad risk-on attitude in markets (equity markets worldwide continue to rebound from concerns over further Middle East flare ups), it certainly feels like traders are going to push the dollar up to 110, a level not seen since May. However, the other eight currencies in the G10 have been unable to generate any excitement whatsoever and are very close to unchanged this morning.

In the EMG space, Indonesia’s rupiah is once again the leader in the clubhouse, rising a further 0.7% after the central bank reiterated it would allow the currency to appreciate and following an announcement by the UAE that it would make a large investment in the nation’s (Indonesia’s) sovereign wealth fund. The resultant rally, to the rupiah’s strongest level in almost a year, has been impressive, but there is no reason to believe that it cannot continue for another 5% before finding a new home. This is especially true if we continue to hear good things regarding the US-China trade situation. Trade has also underpinned the second-best performer of the day in this space, KRW, which has rallied 0.5%, on the trade story.

While those are the key stories thus far this session, we do have a full week’s worth of data to anticipate, led by CPI, Retail Sales and Housing data.

Tuesday NFIB Small Biz Optimism 104.9
  CPI 0.3% (2.4% Y/Y)
  -ex food & energy 0.2% (2.3% Y/Y)
Wednesday PPI 0.2% (1.3% Y/Y)
  -ex food & energy 0.2% (1.3% Y/Y)
  Empire Manufacturing 3.5
  Fed’s Beige Book  
Thursday Initial Claims 218K
  Philly Fed 3.0
  Retail Sales 0.3%
  -ex autos 0.5%
  Business Inventories -0.1%
Friday Housing Starts 1380K
  Building Permits 1460K
  IP -0.1%
  Capacity Utilization 77.0%
  Michigan Sentiment 99.3
  JOLTS Job Openings 7.264M

Source: Bloomberg

So clearly there is plenty on the docket with an opportunity to move markets, and we also hear from another six Fed speakers. While you and I may be concerned about rising prices, it has become abundantly clear that the Fed is desperate to see them rise further, so the only possible reaction to a CPI miss would be on the weak side, which would likely see an equity rally on the assumption that even more stimulus is coming. Otherwise, I think Retail Sales will be the data point of choice for the market, with weakness here also leading to further equity strength on the assumption that the Fed will add to their current policy.

And it is hard to come up with a good reason for any Fed speaker to waver from the current mantra of no rate cuts, but ongoing support for the repo market and a growing balance sheet. And of course, that underlies my thesis that the dollar will eventually fall. Just not today it seems!

Good luck
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