The price action was interesting yesterday. Equities dipped in the European morning, but rallied as US markets opened. I can’t say it’s something I’ve been keeping an eye on recently but sentiment segmentation is often interesting, albeit I don’t suggest that European investors are bearish and US investors bullish at this time. What is clear this morning is that dollar strength appears to have stalled for the moment and the equity market rally continues unabated.
The euros woes also appear to be continuing unabated too, and even though it’s been two days since a new year to date low has posted (versus the dollar), it has seriously underperformed its peers and has barely participated in the dollars pullback. This is just another sign that the conditions may finally be in place for a structural weakening of the single currency. At the peak of the Eurozone crisis there were often debates about why the euro was able to maintain its strength despite the catastrophic headwinds it faced. It seems the answer is clear now. Quite apart from central banks recycling their intervention dollars (Emerging market central banks fighting against domestic currency strength bought huge amounts of dollars when intervening, but would then need to rebalance their currency reserve portfolios back to their model weightings. This always means buying euros versus dollars as the euro, rightly, has the second largest weighting in any decent model), but also European banks were forced to sell their US assets to shore up their balance sheets. The suspicion is that those sales are in the multiples of trillions, which would be one heck of a head wind for anyone betting on euro weakness. The reason I mention this, is that perhaps most of that flow has gone now. Arguably with bund yields below 1% and US 10yr yields above 2% there’s a compelling reason for structural flows in the other direction. The time may come for a steady decline in EUR/USD on a 2 – 3 year view, surely it will take at least that long to solve the problems of France, Italy, Spain et al, assuming some new crisis doesn’t hit the US in the interim. I’m not saying that that big trade starts now, I’m just speculating that the next serious attack on the euro might not be resisted by hidden forces in quite the way it was in the past. Furthermore there are reasons for the euro to become a major funding currency just like the Japanese yen has been, but I’ll expand on that another time. Food for thought
Big data out of the US today, with inflation numbers, in particular the Core PCE numbers that the Federal Reserve pay special attention to. But perhaps they’re not as big as we think anymore? After all one of the key takeaways from Jackson Hole has been the absolute focus on employment, regardless of what happens to inflation. For now I’ll keep an eye on the dynamic between the dollar and overall risk sentiment. Have a great weekend!
Equities are a bit softer this morning and so is the dollar. The current paradigm remains in force (equities higher è dollar higher); when or if this changes it will be something to watch for and perhaps try to understand. I’ve noticed some journals are creating narratives for the bounce in EUR/USD, but as we’ve noticed in recent days, the bear trend has matured and is due a counter-trend move, if only to give sellers some time to regain their strength. Monday being a public holiday in the U.S and Canada might also explain, at least in part, any pullbacks that occur as the week nears it’s close – quite simply short term traders may just be taking some skin out of the game for now. Not surprisingly the low, in EUR/USD was within an established support zone. I’m uncertain how large a bounce we will get from there, but the 1.3330 zone represents the most obvious and recently established of resistance zones.
Some Eurozone country data this morning: Spanish GDP has come in roughly in line; as has German unemployment; but Italian retail sales is showing an accelerating downward trend, it’s worth noting, though, that this is the non-seasonally adjusted number, the seasonally adjustment is published later in the morning. In aggregate for the Eurozone, money supply growth has increased slightly, although private loans have somewhat declined, perhaps a bit more than expected. What does this all mean? Yet again the evidence is right in front of us, tough tough times for the Eurozone economic area. Business and consumer sentiment data later on this morning is likely to reinforce this message. But if and when data disappoints later on this morning and the euro continues to strengthen, it will support the theory that we’re in the midst of a pullback in the EUR/USD bear trend (or should I just say a pullback in dollar strength? Perhaps that’s as appropriate).
This all means that sterling is likely due a recovery of some sort as well. It’s been interesting observing the UK earnings season in recent weeks. A number of high profile corporates with a global footprint have identified recent sterling strength as a serious impediment to profit growth. This may or may not be true, but the cynic in me wonders if this has been an opportune time for corporate leaders to appeal to the Bank of England about maintaining the status quo in rate policy. Perhaps they’ll be able to convince Carney to hold off on raising interest rates.
Preliminary GDP and Core PCE price numbers are the big data points to come out of the US later in the afternoon.
Yet another record high for the S&P 500 yesterday risk sentiment remains positive. Durable goods numbers came out for the US as well and ignoring the flashy headline numbers (22.6% up vs 7.5% expected) the less volatile adjustment which excludes defence spending and aircraft orders was actually a mild disappointment (0.5% down vs 0.5% up expected). There was also a slight disappointment with the annual number for the Case-Shiller house price index. Consumer confidence numbers posted an improvement, but I’m always sceptical about how much to read into this as the level of the equity markets certainly influences consumers. But the key point is that money kept coming into the equity markets.
As I said yesterday, there are definite signs that dollar momentum is waning. That said, the euro has made a new low versus the dollar again today, but this has the feel of an endgame in the short term, as traders pile on to position for the ECB’s version of QE, which seemed to be the implication of Draghi’s Jackson Hole contribution. We’ve seen sentiment numbers come out for Germany, France and Italy today with slight declines for all of them (not a huge surprise there!), although it’s worth noting that both the German and Italian numbers were a bit worse than expected, but the French Business Climate number was in line with expectations. All in all, just another confirmation.. if it was needed that all is not well with the Eurozone recovery. While I do anticipate some sort of pullback in the dollar in the next few weeks, I wouldn’t be surprised if the euro underperforms its peers in a bounce. For that reason the odds are that the EUR/GBP bounce has run its course and we’re set for new lows.
While the carry trade has not participated in the risk rally to date, I think the probability of some catch up trading will increase the longer the equity market rally continues. USD/MXN, USD/BRL, USD/INR and USD/KRW are just some of the charts I’ve looked at recently that looked primed to go lower. As the bigger investors come back from their holidays, whether in Lake Como or the Hamptons, the odds are increasing that we see a re-coupling of a trade that has worked so well over the last decade. It’s a decidedly riskier trade than in the past, with pronouncements from central banks likely to have an even bigger impact (if that’s possible), but while the music is still playing why not continue to play the game? Just make sure you get to one of those chairs before the other guy when the music stops. For that reason perhaps the real bet is emerging market currency volatility? Much easier to define your losses!
For the rest of today the data is scarce unless you’re a commodities guy with a specific interest in US energy resource consumption.
So… Jackson Hole has been concluded. Yellen didn’t really say that much, but the tone of the conference (she was only one of a number of academic/ central banker speakers) was mildly hawkish. A number of speakers argued that the current unemployment is as a result of labour market rigidities, the implication being that monetary policy isn’t the cure – hawkish! However there was one speaker who argued the effectiveness of monetary policy. But this was neither here nor there in my view… possibly the biggest moment in the conference was the intervention of Mario Draghi the ECB president: his speech acknowledged the downward path of inflation over the past year, and indicated that the ECB is likely to take action. Some key market watchers are now speculating that said action could occur as early as next month!
Even though I’ve implied the conference was mildly hawkish in terms of the Federal Reserve, risk sentiment remained bullish into the end of the week, with the S&P 500 making a new record high, indeed we’ve now seen the index attain the 2,000 level for the first time ever. A huge psychological level no doubt. The bigger picture implications for currency markets (which as I noted last week have broken with the pattern of the last decade (with equities rallying in conjunction with dollar strength the name of the game right now) would appear to be a persistence in the ongoing bearish EUR/USD trend. Despite this, I have serious reservations about how much further the euro weakness can go in the short term, particularly against the dollar. There are increasing signs of weakening momentum in the technicals and if I were running a short EUR/USD position I would be tightening my stops and keeping a close eye on the price action. It seems to me that a correction of some sort is a high probability in the very near future. And given the fact the trend has been so strong for the past few months, it’s possible that when it happens it could be a vicious bounce. Prepare accordingly!
Some useful macro data out later today. In the US we have durable goods orders, Case-Shiller house price data and consumer confidence. Tomorrow we get some sentiment data from some Eurozone economies. For now I’m keeping an eye on USD price action.
For all my talk of lazy summer months, the S&P500 made record highs yesterday, in conjunction with that Nasdaq 100 (the more tech/ growth biased index) has been at year to date highs, and the Hang Seng is at the highest levels since 2011. Trying to fight the rise of asset valuations is clearly a fools game. Markets have shrugged off geopolitical risk, the threat of policy normalisation from at least 2 major central banks (BoE, Fed) and powered upwards. Where else can people put their money right now?
In the currency space we’re seeing something slightly different. The experience, certainly of the post 2008 world has been of the equity rises dollar falling variety, but this is not happening right now. EUR/USD is lower than at any period since early November 2013, and while there are signs of weakening momentum with some positive divergence on the daily RSI charts, it’s tough to find definitive support levels that could halt its slide before about 1.3150. Other major currency pairs appear to have the capacity to tolerate further dollar strength, not least GBP/USD and USD/JPY before we approach territory where the dollars march might be halted. Emerging market currencies reinforce the thesis that the carry trade is not a real participant in this risk rally. USD/ZAR, USD/MXN, USD/BRL, all look like they could go higher in the short term (USD up). I think this is noteworthy, and one could argue that it makes sense. Normalisation would jeopardise the carry trade, but under the right circumstances why wouldn’t equities continue to rally if major economies are confident enough with their underpinnings to move interest rates into a post crisis era?
Yellen speaks today, the theme will be labour markets. As I mentioned at the start of the week, both the Bank of England and Federal Reserve have made comments about wage growth being weak despite improvements in overall people at work. The feeling is that normalisation might not have to occur until employers are forced to bid up wages to attract workers. It’s entirely possible that Yellen says something to this effect, and risk markets will love it. It’s dovish, while acknowledging that the macro situation is correcting. But it also means that we aren’t able to earn decent interest on our cash, so… equities anyone?
Not much on the data front today. In fact it’s all about Canada, with retail sales and inflation number to come.
What a day it was for Central Banks!! First the BOE announced their minutes and it emerged that TWO of the BoE’s interest rate setters voted to increase interest rates by 0.25% at the last meeting. They cited that the prospect that wage growth would pick up and that the last number should not be rubber stamped as the way forward. This was the first split in vote since July 2011 and marks a real change in the thinking of the setters. The MPC’s two dissenting voices “noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up”.
This was followed by the FED announcement and more to the point that Fed officials discussed in the July meeting the prospect of increasing interest rates earlier than expected. I have noted in this Blog (previously) that the Gov. and her colleagues will not have a problem pulling the trigger earlier than expected AS LONG as the economic stage presents an opportunity to do so. Too early and they risk putting all the QE and monetary policy framework in danger. It really is as simple as that.
The FED has kept America’s short-term interest rates near zero since the end of 2008, as it battled to fuel growth after the financial crisis of 2008. It had signalled previously that it could potentially wait until the middle of 2015 to increase interest rates, and only when it felt comfortable that the world’s largest economy had regained strength and weaned itself off other fiscal stimulus measures. So it came as a surprise to many Economists that at its July meeting they discussed whether they should take action sooner, according to minutes released on Wednesday.
With the Gov. impending speech at the Jackson Hole on Friday the Fed further stated that “The committee should provide additional information to the public regarding the details of normalisation well before most participants anticipate the first steps in reducing policy accommodation to become appropriate.” They also “stressed the importance of communicating a clear plan while at the same time noting the importance of maintaining flexibility so that adjustments to the normalisation approach could be made as the situation changed and in light of experience.”
So what does this all mean for currencies? Well as I noted in our Blog yesterday, the USD is mounting a serious challenge with 1.3300 broken (EUR/USD), 1.6600 (GBP/USD – it has retraced all gains from yesterday’s rate decision), 103.80 (USD/JPY).
It is my opinion that the USD (and I have said this many times) will break 1.3000 handle and by the year end could very well be trading around the low 1.20’s that’s how confident I am. Everything you read points to 1 main catalyst for this and that is the USA is coming OUT of the economic stagnation while EUROPE seems to be heading back IN to another mild (we hope) recession. This will have a marked impact on all currencies and therefore I expect to see a pickup in volatility as market makers begin to turn their positions around to reflect the anticipated change. Already we are seeing this in FX volatility levels.
EUR/GBP is going to be a tricky one in that if as I said above this is all about the USD then it is a case of whether the GBP falls in line with the EUR or given the state of the UK economy does GBP get a boost and thus drive EUR/GBP lower back to 0.7900. For now it looks like the cross is going to be somewhat side-lined with the main players focusing on USD crosses.
The coming months will indeed be interesting given the snippets of information the CB’s are giving us about the potential to hike rates. Make sure you are well positioned. You have a few months yet to get your affairs in order before the rate hike happens for real!!
Back on the 01st August I wrote the following on our Blog; “If you remember what I wrote a few weeks ago, I kept going on about how we felt the USD was due a spot in the limelight. OK I raise my hands and admit I got the timing a little wrong but at least the thought and view was there. I remain confident that the USD will continue to drive higher (vs the majors) given the bounce we have seen recently in economic numbers. We knew after FED Gov. Yellens’ recent comments that they were looking very seriously about the timing of the next rate hike. All in all these numbers just add fuel to the fire and reinforce our view that the hikes (incl the BOE) will happen sooner rather than later”.
And so here we are 2.5 weeks later and the USD has now broken 1.3300 (EUR/USD), 103.25 (USD/JPY) and flirting with the 1.6600 (1.6610) handle in GBP/USD. While CPI in the US came in as expected, housing starts registered impressive gains which gave traders a reason to buy the USD and then some!! Are the markets gearing for a hawkish tone in the FOMC Meeting Minutes and are they expecting the usually dovish Gov. Yellen to express a hawkish tone in Jackson Hole (Friday)? What ever the reason, it seems the market sees the USD as the place to be right now.
GBP/USD is showing real signs of stress. From the highs of 1.7190 seen late July to 1.6610 the GBP has fallen like a stone after various economic indicators point to a delay in raising rates. That is somewhat strange in my opinion given the state of the UK economy in general and how it is faring vs similar economies in Europe and State side. While I agree the numbers have been disappointing I do not feel the move to such an extent has been warranted. This can only mean the USD is playing a bigger role in peoples perceptions of the GBP. Reading different economic commentary you can see there is still a division amongst Economists with some still sticking to rate hikes later in 2014 and others pushing it back into Q1-2 2015. However as I have previously stated, with the UK elections in May 2015 any rate decisions around that time are generally a no-no, which tells me it HAS to come either much earlier or after the elections.
Disappointing German PPI numbers have just added fuel to the fire again reinforcing what we know already, severe slow down in Europe. This is giving the USD further lift and is likely to fuel the next leg of the USD’s rally towards 1.3000 and beyond. I have commented many times previously that any recovery globally is dependent on a recovery in the US. I have noted previously that the EUR/USD exchange rate or more importantly the strength of the EUR vs the USD has been pain in the side of the ECB. To make European goods more attractive one has to “weaken” the currency. This is what we are seeing now and should have an overall positive effect on local manufacturing.
EUR/GBP has certainly had a bumpy ride. Trading up to 0.8034 (1.2447) yesterday before recovering after US housing numbers to published. The currency is back to 0.8000 (1.2500) and while all fingers point to a recovery of the GBP vs the EUR, it is nevertheless likely to encounter a few blips on the way. GBP is holding onto the 1.6600 handle as I write this which in turn is giving a lift to GBP/EUR ahead of the BOE minutes which are about to be publish (9.30am Local time). It will be interesting to see what the votes were at the last BoE MPC meeting back on the 7th August.
Wish you a good day ahead
The rally in risk markets continues this morning, but the expression is primarily through the equity markets. The dollar appears to be bid vs most developed market currencies, and treasuries have halted their slide. It feels like correlations are just easing off a bit, but it’s difficult to read too much into the price action, for example the chart for EUR/USD looks like nothing more than a period of consolidation. This surely makes sense given the moves we’ve seen since the beginning of July.
Some interesting data today: this morning we see inflation numbers come out of the UK, with expectations of a slight reduction, and in the afternoon we see inflation numbers also published in the US. As with the UK, the numbers are expected to show a slight deceleration in price growth. If the data comes out in line with expectations, it would certainly reinforce the narrative from the Bank of England’s Inflation report last week which implies that inflation is far from a threat at the present moment with tepid wage growth. But the way I would look at this data event is… what if the inflation number actually exceeds expectations? That would certainly be sterling positive if it’s the UK number, but probably injurious to risk markets if the US market has the positive surprise. Something to think about.
As EUR/GBP continues its somewhat choppy recovery, there is simply nothing impulsive about this bounce, which leads me to believe that once the market has had time to digest the moves over the last few months, the bear trend will re-assert itself. As I’ve mentioned before the immediate target if the reversal pattern from last week remains in force is the 0.8100 area. It’s just tough to get a sense of how quickly we get there with this meandering price action, but a bear trend that has persisted for a few months, probably needs a while to catch its breath.
The inflation data could potentially excite markets for a while today, but as I’ve said before the big stuff will be later at Jackson Hole. I expect the choppy price action to persist further into the week.
So… Jackson Hole this week. I’m wondering if we’re due another seminal one. Remember some of the key speeches from years ago where Greenspan and Bernanke identified topics that became a focus for the market in the succeeding years. There are obviously major issues that central bankers can highlight which will set the tone for the next 12 to 18 months: soft labour markets; wage growth; how to normalise economies after years of zero interest policy (ZIRP). Any of these topics could give a boost to volatility in front of key macro data events in the next year. Lord knows we could all do with a bit of volatility. I know it might seem a strange thing to say, but what we have in global capital markets at the moment is not normal. It’s so abnormal that in many ways it terrifies me! Primarily because of what might happen before we can get back to normality. Anyone expecting volatility to trend higher in a gentle way is probably being far too optimistic, markets don’t generally work that way.
Anyway, the focus at Jackson Hole this time around appears to be labour market dynamics. We should expect to get an insight into how Federal Reserve guidance on labour market data will prepare normalisation of short term interest rates. I’m not sure there’s anything more important that this in the macro-scope right now. The speed at which rates go up will dramatically impact the value of the US dollar, risk sentiment, the appropriate discounting mechanisms for stock valuations. The price of tins of baked beans, and guns… you name it. It is a very big deal! Just hints about Fed thinking regarding normalisation have dramatically impacted risk sentiment in the last 12 months, now we’re that much closer to such events actually happening. I get goose bumps just thinking about it!
For now, I suspect the recent Bank of England Quarterly Inflation Report encapsulates the reality the Federal Reserve is facing. Solid looking employment growth with tepid wage growth. Central banks will pay more attention to the weakness of wage growth for now despite the obvious rationality of the current phenomenon. We should all feel better that as employment growth continues to improve, there’ll be a lesser burden on social security outlays, which will improve the fiscal position, which will lower long term rates etc etc. My point is… despite central banker concerns we’re probably a lot closer to things getting even better.
Let’s see where the markets are right now… the dollar is backing off from recent strength today and equities are looking a bit firmer, with the NASDAQ posting year to date highs this morning. Yet again I believe key levels in the dollar index have held, which doesn’t bode well for uber dollar bulls. As you’ve probably guessed, I’m doubtful that Yellen’s speech on Friday will be what dollar bulls need. In any case most of its victims – EUR, GBP – look due for a bounce. The case for a cable bounce looks far more obvious than for EUR/USD, so I’m inclined to see EUR/GBP weakness ahead, but only in the very short term. It does look like the head & shoulders bottom reversal is in play, which means our target should be close to 0.8100, but there’s nothing stopping a dip back over the day.
The new high in the NASDAQ has seriously dented my belief that we’re likely to see a deeper correction. This fits in with a narrative that anticipates a more dovish speech from Yellen than perhaps the market would have expected. Tech outperforming broader markets tends to be a bullish signal, and new highs just reinforce that suspicion.
Following on from yesterday’s comments FX rates and FX in general back in the limelight (ignoring FX volatility for now) as economic numbers recently published all showing conflicting data.
Eurozone back in the doldrums after the economic recovery ground to a halt across the region and France demanded a radical shift in policy. Furthermore, the French sounded out an early warning shot that austerity overkill is driving Europe into back into a depression. Growth fell back to zero in Q2, while Germany contracted by 0.2%. Italy is already in a triple-dip recession having contracted at -0.20% for the previous 1/4. Yields on 10-year German Bunds fell below 1% for the first time in its history (currently 1.01%), beneath levels seen during the most extreme episodes of deflation in the 19th century. French yields also recording record lows currently trading at a yield of 1.40% (10yr). Much of the Eurozone is mirroring the pattern last seen in Japan as it slid into deflation in the late 90’s.
Crumbling yields are primarily a warning signal that stagnation could be around the corner or a bet by investors that the ECB will soon be forced to launch quantitative easing (QE) and buy government bonds across the board. French Finance Minister fired a warning shot that France would no longer try to meet its deficit targets and in so doing inflict any further damage to its economy. He stated that “Growth is too weak in Europe and inflation is too low. We must therefore stop reinforcing the causes of this depression.”
The collapse of economic recovery in Europe leaves the ECB in a delicate position. Gov. Draghi offered no clues last week on when the ECB might finally resort to QE, insisting that it will wait to gauge the full effects of its negative deposit rate and the result of new loans to banks in September and December. This delays any likely QE until at least early 2015. European banks are nevertheless downsizing their lending (to customers) to meet their new capital ratios. Having said that the IMF said QE is a far more powerful instrument. Gabriel Stein, from Oxford Economics recently commented “The ECB will do as little as possible in the hope that something will come along to save them, and the euro will weaken. They are desperate not to do QE.”
What this all means for the FX rates is (as I see it) a complete turn-around in fortunes. I commented months ago that any recovery in Europe is wholly dependent on a full recovery in the USA. One of the ways to aid this recovery is to make European goods more attractive (financially) by letting the EUR weaken. We have seen this pattern in play now for the past 6 weeks as the EUR (USD) has fallen from 1.37’s to the current levels of 1.34. I have said over and over again that this is just the start and we are likely to see a much greater reversal as we head into Q3/Q4. It is no longer a matter of IF but WHEN the next leg of the EUR collapse will start in earnest.
Having said that I do not believe (despite the recent move) the GBP will suffer the same fate. The reason is quite simple, the UK economy is thriving compared to its European neighbours. This difference (in GDP) will in my opinion continue to give the GBP an upper hand over the EUR especially. Vs the USD I believe the fall will be less extreme and in fact once we have a better idea of when rates are likely to rise the GBP should recover against the USD.
Time will tell!!!!
Have a great weekend