We got preliminary Q3 GDP numbers for the United States yesterday, it was a bit of a disappointment. Economists had forecast a slowdown, to 1.6%, in the pace of growth in Q2 (3.9%), but the number printed at 1.5%. First of all, this data is lagging, and I don’t think many are particularly surprised, after all we’ve spent the last few months talking about how economic activity has deteriorated somewhat. For me, far more impressive has been the US consumer, who has continued to spend at a robust pace, certainly outperforming the rest of the US economy. Bottom line if the US consumer is doing well, the US economy will be ok in my view. Admittedly the US consumer did not do quite as well in Q3 (3.2%), as forecast (3.3%), but these are fine margins, and probably subject to later revision.

Yesterday we also got German CPI data yesterday, which was flat instead of the slightly negative number anticipated by the experts. Couple that with much better than expected industrial production numbers in South Korea, and to my mind we are already starting to get data that increasingly supports my contention that all we have seen in recent months is evidence of some sort of mid-cycle dip. These happen, in life there are no straight lines, things tend to be jagged and imperfect, and that’s ok. This morning’s retail and consumer spending data from Germany and France respectively is not as impressive as one might have hoped for, but I wouldn’t call it disastrous. All in all the macro data over the last 24 hours, particularly the disappointing GDP data from the US, has let the wind out of the sails of the recent dollar rally. I’m not bothered in the least. Lagging data and weak hands make poor bed fellows, and short term positions are clearing out before the trend continuation I expect. As it happens, EUR/USD reached trend-line support and bounced after what looks like a fairly cut and dried five wave impulsive sequence (see chart below), a correction towards 1.1120, 1.12 or even as far as 1.1260 would not be a surprise at this point. It’s what will happen after this bounce which will seal the deal for me. An aggressive fall in EUR/USD will start to really look like the greenback is regaining its lost momentum.

I’ll finish with a few titbits about China. President Xi has been doing the rounds in Europe, as I’m sure everyone knows by now. Recently in Germany a deal has been agreed to set up an exchange where renminbi denominated products. Whether this is Germany cosying up to China, or China promoting the use of their currency (they launched agreements in the UK that will enable London to become a main base for renminbi trading), the effect is the same. The question remains though, when will that currency become fully convertible? We are probably still years away from that. The other, far more momentous piece of news, is that the Middle Kingdom is scrapping its one child policy. The demographic damage done over the last 3 decades probably means that while population decline is likely to be slowed at the margin, the socio-economic changes that have happened to China in recent years probably means that the impact will be far less than desired. I don’t imagine a lot of young aspiring Chinese women will all of a sudden discard their career plans over this! And also bear in mind that the policy was less strictly adhered to far away in the Chinese countryside. Still it’s big news..

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If yesterday’s GOP debate is anything to go by then there’s virtually no chance of Jeb extending the Bush dynasty – his performance was poor, and his funding is drying up. He won’t be 45, and will be forever excluded from the elite family discussions between 43 and 41. Perhaps that’s no bad thing, dynastic politics tends to be frowned upon in most advanced democracies. Of course the current betting still suggests that that’s what we’ll get, but that will be 42’s wife becoming 45 if there are no more Benghazi or email server revelations. Don’t hold your breath!

Before such historic events can occur we have to deal with the hurly burly of the present, and an institution that could have a significant impact on the US economy and therefore the Presidential elections was at it again yesterday. Federal Reserve decision makers have shown signs of disagreement about when interest rate normalisation – i.e., hikes – should start. We’ve heard from a range of FOMC voters – there are those firmly in the rates on hold camp and there are others who appear keen to hike rates in 2015. Yellen and her deputy are firmly in the camp that would like to see interest rates rise sooner rather than later, and the message from the Federal Reserve yesterday seems to be staying on point… this time there was less talk about global financial and economic risks that threaten the US economy, and it certainly looks like a December hike will be on the agenda. I should point out that the best forecasters still anticipate March for the first hike, albeit most of those guys have tended to hedge and say that there is still a substantial risk of an earlier hike. The reason for the Feds relative hawkishness is that despite the slowing in the pace of job growth, household spending and investment continues to move along at a solid clip, and let’s not forget the fact that jobless claims continue to fall.

I can’t say I’m too surprised, and this is the point I was trying to make recently. Any signs of strengthening elsewhere are likely to take the Fed off the leash. So what’s happened recently? Well apart from stocks recovering and a sense of calm returning to markets in general, the ECB recently talked about looking to extend its quantitative easing programme. All of this takes the pressure off the Federal Reserve because these events reduce the probability of any negative blowback on the US economy. The moment the US central bank is afforded the luxury of just focussing on the domestic economy, they can’t help but put interest rate normalisation back on the agenda.

That leads to a scenario that was firmly in play late last year and the start of this year. Those two sides of the ledger are again suggesting that EUR/USD should go down hard. These are: ECB thinking about expanding QE à EUR should weaken; and Fed thinking about hiking rates à USD should strengthen. It is no surprise EUR/USD took a hit yesterday evening, and I think this is likely to persist. Don’t expect GBP/USD to hold out, whither the euro goes, so will its neighbour the pound sterling, gravity demands it! And so we fully expect GBP/USD weakness to continue. As I have mentioned in a recent blog, the UK’s current account deficit might be another, more fundamental reason, why sterling is likely to be vulnerable in the coming months, but this in the here and now is a more immediate threat to its value…

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Good morning

The big event of the day and likely to keep every “trader” on their toes is of course the FOMC meeting later today.

The one thing almost everyone has in common is no one is looking for the FOMC to raise interest rates …not to mention the number looking at a December rise has also diminished (given the disappointing data). With the ECB suggesting they are prepared to go into (greater) negative interest rates and expand their QE initiative coupled with the PBoC cutting their rates for the 5th time in 2015 (China’s GDP dropped below psychological 7% –> 6.90% printed) the FED will be under extreme pressure to keep the norm and not rock the global financial markets/economies boat.

If you combine the ECB, BoJ, PBoC and BoE (assets and power) as one the FED will need to tread very carefully so as not to “upset” the work that is currently being done in those economies (latter 4). the last thing the FED needs is a trade/currency war with their “friends”. China alone have $5.1 tn in assets vs the $4.4 tn for the FED. China has enormous foreign currency reserves which can be used to pump into the Chinese economy not to mention their ability to devalue their currency (which I have noted is definitely on the cards).

Ms. Yellen has a lot to worry about. Recent disappointing US economic data, coupled with disappointing global economic data will keep the pressure on the FED to maintain rates where they are. If the FED were to raise rates which in turn (and we have spoken about this previously) will lead to an even stronger USD, the resulting strength will no doubt cut deeply into US export earnings and potentially lead the US back towards a recession, something NO ONE wants right now. What the FED needs to do now is support the PBoC, BoE, BoJ and ECB by not doing anything that could harm the intense work being done by those 4 Central Banks.

The recent move in the USD obviously hasn’t helped matters so today’s FOMC meeting and minutes will have short term implications for the USD. As no conference is scheduled for after the announcement we will have to dig deep to see if any rhetoric has changed in the minutes. Strap on your seatbelt we are in for a volatile period.

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Macro data could only have been described as mixed yesterday. Business expectations in Germany were much better than expected and an improvement on the previous month; industrial production improved in Singapore versus the previous month, albeit not quite as much as expected; consumer confidence in South Korea improved but the same fell in Brazil, although perhaps it wasn’t as bad as feared; industrial trends were much worse than expected in the UK and much worse than the previous number; and finally new home sales dropped a lot in the United States, despite expectations of flat sales growth.

Potentially very significant news in the US came from Washington with Congress and the White House able to reach a tentative deal to avert another fiscal crisis. The agreement should allow some small increases in spending in the next two years, and combines a rise in the debt limit with an accord which prevents default. This looks like a clear win for the lame duck President, in a year that has been remarkably successful for Obama. It seems highly unusual for him not to have fiscal battles with his colleagues on the hill! It will certainly enrage the GOP base going into an election year.

Perhaps just as significant will be the Chinese Communist party’s plenum which is intended to approve a new 5 year plan. China is currently in danger of falling into the middle income trap, so this plenum could be the most important at least since the downfall of the Gang of Four. Not just for China, but for the world, after all, China is now an integral part of the global economy, its fate is now inextricably tied to the rest of us. The need to move from an export led, manufacturing based economic structure to a more domestic focussed consumption led structure will have huge ramifications economically and socially in China, and also in the rest of the world. You only have to look at the economic stresses being felt in such far flung regions as Australia and Brazil to comprehend the impact the Chinese economic slowdown has already had around the world.

At the close of today’s market, Apple will post its earnings. These are likely to be huge with rumours of a successful start for new products like the iWatch, this could give quite a lift to equity markets and risk sentiment in general. I continue to remain bullish stocks into the end of the year, my suspicion is that we are over the worst of the global slowdown data. I could be wrong, but as I’ve said many times, this has never looked like an endgame scenario, and now we have central banks talking about more monetary largesse.

What does all this mean for currencies? Looking past short term fluctuations, I continue to maintain that the conditions for a stronger dollar remain in place. There is no question that the euro now looks more vulnerable with ECB talk of expanding QE, I also remain just as negative about the pound sterling and I was intrigued to see an article in the Financial Times this morning that points out that the current account deficit has been growing in recent years in the UK and not for the traditional reasons. Britain has always been a poor exporter but this has actually been improving. It is precisely where the UK has been historically strong that the weakness has become increasingly evident – the investment account, i.e., the difference between what the UK earns from its foreign holdings and what foreigners earn on their UK assets. Perhaps the legacy of empire, but that was always a source of surplus for the UK economy but years of huge fiscal deficits have put paid to that. I have tended to look at GBP/USD charts from a longer term technical perspective, but this information could add a new more alarming twist. If the deterioration in the investment account persists we could one day see another sterling crisis. Either way, I continue not to like GBP very much..

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Good morning

Finally some volatility. As we have been saying here over the past month (and beyond) the PBoC reacted as expected and cut both interest rates (-0.25%) and RRR (-0.50%) on Friday. Furthermore they removed the deposit rate ceiling to further liberalise interest rates. Now to complete our predictions we are just waiting for the PBoC to DEVALUE the currency once more (currently 6.3500 mid). While Q3 GDP recorded a rise of 6.90% (better than expected) the PBoC are still disappointed to be below the 7% psychological barrier and therefore more is needed to stimulate the Chinese economy. The AUD(USD) & NZD(USD) rallied on the back of the rate cuts given their economies are so dependant and intertwined with China.  The news boosted the stocks as it once again reinforces China’s determination to re-build their economy.

The good news unfortunately was overshadowed by news from the ECB (Draghi) that MORE QE is coming in December and furthermore, the door is open to a DEPOSIT RATE CUT (further into negative territory). The EUR got rightly slapped and tickled collapsing at one stage to sub 1.10. In solidarity the GBP dropped like a stone too despite the incredible Retail Sales numbers on Thursday (+1.90%) when the GBP rallied to 1.5513 before falling back and then getting sold off in style.

This week sees the FOMC meeting on Wednesday, New Zealand Thursday and Japan (BoJ) Friday. There is a chance the latter could ease further given the disappointing economic data and weak corporate inflation numbers. Nothing new then from Japan.

BOE’s Governor Carney said that “while there’s been a lot of progress paying down debt, there’s still a substantial proportion of British households carrying a lot of debt”.  “On top of that, the fact is that real wages have not come back to their level before the crisis. If we think there is a prospect, a possibility – that’s a possibility, not a certainty –of rate rises, then that is far, far better to let the British people know so they can prepare.” I think this is something we knew already. UK rates are not ready to go higher despite the decent economic data of late (Wage growth and Retail Sales vs disappointing CPI). For this reason and coupled with the overall desire to hold USD, my views remain the same and I continue to call for the fall in GBP(USD) sub 1.50 handle over the coming weeks.

The ZAR (S.Africa) had a torrid few days, with the student protests against hikes in university fees starting to bite. Then on Friday the EUR got sold off and considering the EU is SA’s biggest trading partner the ZAR fell further (5%). Corruption and nepotism remains rife in SA and despite the ANC’s promise to eradicate poverty and improve living conditions amongst the poor, this has just not happened. It will be interesting to see how the government react to this latest issue (cast your mind back to the mining protest that turned deadly). At the end of the day the government have their work cut out and change HAS to happen but that unfortunately is not something I would expect anytime soon. ZAR will thus continue to trade heavily.

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Some better news in North East Asia overnight, South Korean GDP came in better than expected and a distinct improvement on the prior number. In addition, Japanese manufacturing PMI was much stronger than forecast, and unlike the expected number was an improvement on the previous print. Perhaps signs of stabilisation? There’s no question that financial conditions have eased considerably from the tense situation that pulled the Federal Reserve back from the brink just a week ago. Indeed with the S&P 500 up well over 2% yesterday, and European bourses even stronger, the stresses afflicting the global asset markets are bleeding away. This is all no doubt related to Mario Draghi’s early Christmas present to the markets – his signalling that the ECB is contemplating an expansion of their quantitative easing programme.

Funnily enough, one of the reasons for the ECB to look into this has been the rather restrained performance of the Eurozone economy, Mr Draghi had better not look now, but the manufacturing PMI data coming out this morning for the Eurozone giants France and Germany almost belies the need for further extraordinary monetary policy! So far we have seen French data that was not only an improvement on last month’s number but also bucked the economist expectation of a weaker outcome. In Germany the picture was a bit more nuanced, with a better composite number masking slightly weaker manufacturing data, but much improved data from services. We’ll be getting a host of data from the Italians a little bit later this morning, which will give a fuller picture of just how the 3 largest Eurozone economies are doing, and the aggregate Eurozone PMI data coming out later will of course add to the overall picture.

I’m also waiting to see what the US manufacturing PMI data looks like this afternoon and the Baker Hughes Rig Count will give us a sense of how the US oil economy is faring in this new world of $50 oil. It’s just possible with all this good news popping through the cracks that talk of normalisation might pick up again more quickly than most expect. It doesn’t matter though.. there are 2 reasons why EUR/USD might fall (i) the dollar appreciates or (ii) the euro falls. Mario Draghi talking about extending QE is fuelling option (ii) and thus compared to yesterday’s open EUR/USD is 2% lower now. We haven’t seen comparable moves in EUR/USD since the peak of the late summer risk wobbles.

Does this mean that the continuation of the big dollar trend is at hand? I won’t embarrass myself by stating that right now. One big move doesn’t a trend make! Technically some interesting levels have been taken out, but nothing I would consider too significant. The level I am watching out for is 1.0808 in EUR/USD – the lows of the summer period. 1.51 is a rough equivalent for GBP/USD. Yet again it looks like equity markets are rallying into dollar strength. All of this has been happy news for emerging market currencies as well. Not a huge surprise as one would expect commodities to benefit from a dose of monetary largesse. Let’s see if this persists for a few days at least before we talk of new trends though…

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Good morning

The main event of the day is the ECB meeting later today (not change in rates expected) followed by Draghi’s conference where there are calls for the ECB’s QE programme to be extended past the current Sept 2016 end date. There is no doubt that further assistance is needed and such a decision will cement the ECB efforts to strengthen the EU and avoid any further shocks to the system. The EUR(USD) could be slightly affected by such a decision but overall the currency remains firmly entrenched in the range of the past few months. Truth is all eyes are on next week’s FED/FOMC meeting though again no change in rates in expected though it will be interesting to see what Ms. Yellen has to say following the rate decision announcement. Overall the USD remains range bound vs the majors.

Today also sees the publication of UK Retail Sales (9.30am). Last print saw an increase of 0.20% with Economists polled predicting better results this time round at +0.30%.  On a separate note, BoE Governor Carney spoke yesterday and reinforced what we know already that the UK economy grew fastest and strongest amongst comparable Western Economies. The Gov. said membership of the EU had helped to lift UK growth and living standards, while enhancing Britain’s flexible jobs market and “dynamism”. Mr Carney said the UK had been the “leading beneficiary” in many ways of the “Four Freedoms” of the movement of goods, services, people and capital across borders, adding that Britain should seek a “principled” and “upfront” guarantee from the eurozone that the EU is a multi-currency zone.

Overall I think EURUSD and GBPUSD will continue to trade sideways (in the range) awaiting fresh news. As I have previously said I think my prediction at the beginning of this year for the EUR(USD) to trade at PARITY is not going to happen. We got close 1.0450’s but unfortunately it was not meant to be. The strong USD has indeed had a material impact on US corporates and US data as a whole so it would not surprise me if the FED/ECB/BoE had a “hand” in slowing down the USD rally.

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The recent IMF annual meeting, held in Lima Peru this year, could have easily been described as unsettling by participants. Global growth forecasts have yet again been trimmed, no surprise there, but the news that private sector debt in emerging markets have been building up to $3 trillion is enough to get any sane person sweating. When you consider that the number one risk to global growth at this point, at least according to one of the members of the Bank of England’s MPC is a ‘disruptive slowdown in China’, you don’t need to be the most creative thinker to see what collateral damage is possible in the months and years ahead. Just think of Brazil where the likes of Eike Batista were betting huge on a never ending surge in demand for his commodity products; or consider the number of investment projects which have been shelved in the Shale gas industry in the United States; the oil sands industry in Canada; or perhaps the mining industry in Australia. You get the picture… there are many who would have lost huge amounts of money, and others who started projects that were dependent on those very same projects. All caught with their pants down. It can’t be pretty. The point I’m trying to make is that I can well imagine that down the line, maybe next year, or the year after we’ll hear horror stories about these failed investment plans, only time will tell if they will be enough to tip the world into its next economic crisis. When you consider all that, it is understandable that great caution is taken with regards to monetary policy and normalisation by the economies which lead the recovery… the United States and United Kingdom in particular. I could well understand if you take from this a certain loss of conviction in my bigger picture bullish dollar view…. Not a bit of it! What’s the alternative? Why should the dollar fall significantly from here? Any circumstance which causes the more suspicious regional economies and their currencies to strengthen will by its very nature give the Federal Reserve and the Bank of England the wiggle room to start their normalisation processes. Fundamentally the economies of Britain and the United States remain very solid, if not spectacular, but the risk of economic catastrophe elsewhere is what seems to be making policy normalisation less likely.

Yesterday saw more conflicting views from Federal Reserve policy officials, Williams was talking about a need to raise rates soon, on the other hand Dudley was saying that it’s too soon to hike. I could go on, but there is a clear split amongst the voting members. It seems entirely unrealistic to expect rate rises in 2015, and possibly even the first half of next year.

Later on this morning we get an update on the state of government finances in the UK, and a monetary report from Canada. Nothing particularly exciting. Looking at spot markets at the moment, I continue to expect a reversal of recent pound sterling strength versus the dollar. I also expect GBP to underperform versus the EUR. It’s been a tough time recently trying to pick market turns, but this still seems like the most likely path at present. As we head into the end of the year, we also continue to expect a continuation of the emerging market currency relief rallies.

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Good morning

So China’s growth has dipped below 7% for the first time in 6 years….but on the flip side the number was 0.10% below the “critical” 7% and better than the 6.80% the market was expecting. The result, EURUSD stays firmly entrenched in the range with next weeks FOMC meeting the key event.

The USD is likely to remain range bound as long as there are no shocks to the system in the way of data or announcements. I am still of the opinion that the FOMC will probably stay put for now despite the calls for a rate hike by some FED members. One could strongly argue that the US economy could easily withstand a 0.25% rate hike now, but then why press the button when they could equally wait for another few months to see the US jobs market pick up (and inflation). There are fundamental issues that need to be sorted in China (and the US) before (I think) the time is right for a hike. In fact MS Yellen says the decision to hike is now firmly “data determined”. So on the basis of this the FED will hike when they SEE first hand that there has been an improvement in the data both in the US and China.

Our very good friend at UBS wrote this morning in his FX comment The U.S. Treasury published their “Report to Congress on International Economic and Exchange Rate Policies”. Regarding the CNY the reports mentions: “The core factors that have driven RMB appreciation remain in place: strong external balances which include a sizeable and growing current account surplus, sharply improved terms of trade, and ongoing net inflows of foreign direct investment. Given economic uncertainties, volatile capital flows, and prospects for slower growth in China, the near-term trajectory of the RMB is difficult to assess. However, our judgment is that the RMB remains below its appropriate medium-term valuation.” The report also mentioned that capital outflows from China topped $500 billion in the first eight months of this year, according to new calculations. I have commented many times in this commentary that the PBoC will not stand by and let the economy neutralise. They definitely have the option of reducing interest rates AND devaluing the CNY (currency).  The CNY has in fact appreciated over the past week from 6.36 to 6.34 and while the report says there is more room to appreciate I think if the data remains disappointing the PBoC will draw their “weapons” and devalue again. No doubt the reduction in rates and the devaluation has gone some way to help the economy (as we saw yesterday the GDP dropped only 0.10% while the market was expecting 0.20%). Should this trend continue the PBoC will be seen as having done the right thing at the right time to boost the economy. Q4 will no doubt be crucial to the FED’s decision as to whether they raise early or not.

Gov Carney speaks at 10am this morning. I guess he too will reiterate what we know already that rates will go up but that decision too is “data dependent”. With UK CPI dipping below 0.00% recently, the BoE will also want to sit tight until such time the data becomes more consistent and trending in the right direction. No point in triggering a rate hike and hurting the economy after the monumental terrific work they have achieved since the financial crisis started in 2008. As such I expect the GBP to remain range bound however the trend still remains DOWNWARD (weakening GBP).

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In a seeming break from the recent pattern, Chinese data came out slightly better than expected. Although it’s no barn burner, Q3 GDP was forecast at 6.8%, but came out at 6.9% versus the 7% in Q2. Perhaps the weaker industrial production numbers and retail sales data are of greater relevance as they are more current, and less subject to inaccuracies than lagging GDP numbers. But even here, while the industrial production numbers were slightly disappointing, the retail sales data looked quite encouraging to me – a slight improvement on both the previous data and expectations. At the end of the day the Chinese are trying to rebalance their economy from manufacturing to a more consumer driven structure, this data will certainly help, although we need a decade of such numbers to get us to the end goal.

It’s no surprise that markets in general are fairly calm, as the data is not particularly controversial. Today is actually a very quiet day on the data front, with the Chinese data by far and away the most significant. The only other item of interest to look forward to today is another speech from Lael Brainard, one of the newer FOMC members. She is very much on the dovish side, and seems to one of a few members who strongly oppose the tone of recent speeches by Chairwoman Yellen and her deputy Fischer. Both have been talking up interest rate normalisation given the achievement of the Fed’s labour market target. The problem is that Brainard and one or two others do not agree with the underlying economic theory behind the push for interest rate normalisation. The theory states that once the labour market tightens up, wage growth is inevitable and therefore there is a serious risk of rising inflation. This is all about the Philips Curve, and to be fair, Brainard has a point… this theory was discredited in the 1970s. I’m sure the likes of Yellen are aware of this, but there are other arguments for normalisation, not least the fact that investment decisions in this current zero bound environment seriously misprice the cost of money and are likely to prove to be expensive misallocations of capital. You only have to look at the problems the Chinese are having now. The bottom line is that there is an increasing uncertainty as to when interest rates will normalise in the United States. On this basis there might not even be a positive case to be bullish dollars at the moment. There would still, however, remain a strong negative case for dollar bullishness, which is that other currencies actively want to depreciate versus the greenback at the moment. Whether you look at the Japanese yen, the euro or even the Swiss franc. And given the relative strength of the US economy this should remain the case.

From all this I remain comfortable with my bigger picture view which looks for an eventual continuation of dollar strength, the seeming dissent amongst US policy makers does make the timing more difficult to determine at the moment.

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