As I noted yesterday, there are signs that the run of poor economic data is starting to turn around, ironically just as the IMF and others are issuing dire warnings about the fate of the global economy. Overnight China published trade data that was dramatically better than expected….on both sides. Exports were up 11.5% when economists had forecast a rise of 2.5% and note that for the prior month exports had been down 25.4%. On imports the fall was 7.6% when economists had expected a decline of 10.2%, and noting that imports were down 13.8% in the previous month. All in all a nice positive surprise. I’m uncertain at the moment if distortions have arisen because of the lunar new year, but I’m just going to mark this down as what looks like the start of a turn around. Perhaps we shouldn’t be too hasty about selling our dollars, if the news keeps improving Fed rate hikes will be back firmly on the agenda!

Another piece of good news has been the recovery in the oil price which is getting more and more attention. It’s good news because at the margin it seems that the positive impact of lower oil prices on consumption is not as great as expected (probably due to the combination of interest rates already at the lower bound), and at these levels some of the oil & gas sector debts which could have become toxic just might be survivable. The lowered probability of systemic failure from oil & gas defaults is a definite positive for risk sentiment and the equity market has been quick to pick up on it. It wouldn’t be a surprise if we see new year-to-date highs today or tomorrow. For sure it looks like equities are all set to break higher.

These positive news items provide the perfect environment to enable the macro community to move away from all the gloom and doom returning to expectations of a continuation of the global recovery. I’m not saying it’s going to happen, but the less worried we are about global growth, the more robust the dollar should become. Even the Japanese yen has retreated against the dollar this morning. It’s not a trend yet but it could be the start of one…

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Is it possible that the gloom of economy watchers is after the fact? We’ve had the terrible China inspired volatility of Q4, and then the start of this year, but now China seems to be stabilising and some of the data from the larger western economies seems to be doing the same. Meanwhile we have warnings from institutions like the Brookings Institute and the IMF about slowing global growth. It wouldn’t be the first time something like this has happened. I’m unsure myself, although the bias clearly has to be to the downside for now. Currencies continue to move in a directionless pattern with no major levels being breached apart from perhaps with USD/JPY. The consensus seems to be growing that negative interest rates are not the panacea some have hoped, but interestingly the Bank of Japan is resistant to accepting the policy has failed yet. Perhaps they’re right, perhaps more time needs to be given to see how the initiative works. It seems doubtful that there’ll be too many more moves into further negative territory though, not as things stand. Central banks are likely to push for fiscal policy to take more of the strain.

Even as oil prices rebound to new year to date highs (see chart below), there is widespread disappointment at the lack of an anticipated boost to consumption from lower oil prices. I’m still holding out hope for this, but my conviction is weakening! We need to see some decent retail sales, but just maybe… maybe negative rates in some countries are actually working the other way at the moment! Elsewhere, the Nigerian government is looking at privatising some of its nationalised oil assets. Whether this will help I’m not sure, it seems like a step in the right direction to at least tackle patronage, but Brazil is an example of a partially privatised state behemoth, and the corruption that still occurred. Baby steps…

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According to the Brookings Institute global growth is close to stalling, with falling manufacturing indices in major economies as well as declining business confidence. The IMF will published updated forecasts for 2016 tomorrow, it’s probably going to make for depressing reading. Couple that with a new thesis which argues that the boost to consumer disposable income from lower energy prices will be less than previously anticipated (this is because in the past with global inflation and interest rates higher lower energy prices gave central banks leeway to cut interest rates, but that’s not possible at the zero bound), there are certainly areas for concern. And now we have Larry Fink, the CEO of Blackrock the world’s largest asset manager, warning that negative interest rates are likely to hurt consumer spending, the news gets even worse. What we are experiencing now is a real life lesson in what negative rates actually do, as opposed to the theorising by economists. Reality and theory as is often the case are somewhat different. In this case, Larry Fink points out that savings are eroded by negative interest rates, and rather than encouraging consumers to spend money it raises their fears that their savings will not be enough for their retirement and thus they find more ways to cut expenditure. It’s a valid point, and one wonders why the big brains at the major central bank didn’t consider this aspect of negative interest rate policy.

Not much on the data front today, but there does appear to be some excitement in the markets. GBP/USD has jumped strongly in the last hour, most likely due to traders exiting short positions, I imagine others will come in to sell cable later on this morning, so I’m not expecting this bounce to last that long.

Elsewhere we are looking at more of the same with the dollar likely to be weaker against the NIRP currencies (JPY and EUR).

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I suspect that economic historians will be talking about what has been happening to the yen and the euro since December, both of these large currencies are currently backed with negative interest rates and yet they are some of the best performer’s year to date. This flies in the face of what most (certainly their respective central banks) would have expected, and explanations for why the opposite is happening will be the thesis of many an aspiring P.H.D I’m sure! Even after coded warnings in recent days by Japanese officials (Japan has a long history of currency intervention lets not forget) the market has continued to buy Japanese yen to such an extent that at one stage yesterday USD/JPY was down almost 2%!!

As long as USD/JPY is able to stay below 110.70 I suspect we will see the currency pair test lower lows, 105 looks easily within reach, before another bout of yen weakening starts. That’s my view with a technical hat on, and I believe the moves we’ve been seeing will be hard to stop as it feels like investors capitulating out of the very bets the BoJ and Prime Minister Abe have been encouraging. This move feels like it’s all about the pain! Intervention would only help people get out of losing positions, it wouldn’t encourage them to jump back in at this point.

Elsewhere the chronic weakness of sterling continues and we still have months to go before the referendum. Clearly there’s more to this than Brexit fears but it’s definitely a part of the equation.

Thematically risk assets are off to a great start today, you only have to look at currencies like the Russian rouble and South African rand which are much stronger on the open, or the fact that crude oil is already up 2% this morning after rising about 5% a few days ago. In the short term this feels like 4 or 5 years ago where risk rallied as the dollar weakened. I don’t think this is a paradigm shift, but we’ll have to keep an eye on things and see if the pattern justifies further analysis. For now despite very short term considerations, the major trends are for a weaker pound sterling (despite the good start this morning), stronger Japanese yen, and a gradual retreat of the US dollar.

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Good morning

Big news overnight was the FED minutes that indicated “many” committee members warned of risks to the US economy from foreign global developments. Discussions were held whether it was prudent to raise rates in April however a number of the members argued that “the underlying factors abroad that led to a sharp, though temporary, deterioration in global financial conditions earlier this year had not been fully resolved and thus posed downside risk.” In other words as per President Yellens comments in March, it appears the FED will delay any rate hike until such time that the global economy has shown signs of calm and return to “normality”. Now is simply not the right time to throw fuel on the fire by raising US rates and burning not only the US economy, but the global economy as well.

Although the FED’s outlook for the US economy was fundamentally unchanged, it clearly saw global economic and financial developments as tilting risks sharply worse. In other words, members called for patience. President Yellen, in her post-meeting press conference, argued that the reduced number of rate hikes projected by market participants was offset by ‘some deterioration in the global economic outlook’ and that the committee chose not to raise rates and to lower their own assessment of the appropriate path of their interest rate policy. The FED members are obviously concerned that the global economy fallout could have detrimental effects on the US economy forcing them to “walk on eggshells”. There is really no point in raising rates to satisfy some members, when that decision could come back and bite the FED hard. That would force them into making a U-turn and cut rates back to 0.00-0.25%, something the FED do not want to do as this in itself could lead to added market and global volatility (at a time when calm is needed).

Greece hit the headlines this week after an unsubstantiated report leaks revealed IMF officials discussing stalled programme talks, while unconfirmed reports in the media indicated that PM Tsipras was preparing for snap elections. Since the report was published, Greek bond and equity markets have sold off markedly. With the ongoing problems in Greece from the migrant issue, I have no doubt that the Greeks will plead poverty again and ask the EU for an extra handout and alter the terms of the loans from her creditors. The migrant issue is simply out of the Greeks hands and they do have a point. This is an EU problem and one that needs to be dealt with by the group rather than Greece alone. This ongoing issue is only going to get harder for the EU to sort out.

USDJPY – enjoyed a meteoric rise overnight post FED minutes, rising to 108.63 and its strongest level since October 2014. Japan’s Ministry of Finance indicated that it would take steps in FX markets if necessary (as if!!!). While Japan would probably like to see a weaker JPY (assist exports and the economy) unfortunately the market is currently dictating the FX rate and the BoJ would be well advised to simply stand back and let market forces dictate. No point in wasting reserves.

South Africa will hold local government elections on Aug. 3, President Jacob Zuma said on Wednesday, in what looks likely to become a referendum on his leadership after an attempt to impeach him and mounting concern about weak economic growth. To add fuel to the ZAR fire, ratings agency S&P revised 2016’s growth down to 0.8% from 1.6% and 2017’s growth from 2.15% to 1.8%.  Given the local issues with the drought and lower commodity prices, as well as the internal rife in the ANC (Zuma’s house) you must think the ZAR’s on a slippery slope and it is only a matter of time before the market sells the ZAR heavily again. Like the Proteas, things are not looking good for South Africa’s economy.

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We’ve got some encouraging data from the two largest economies in the world, the United States and China. Yesterday’s non-manufacturing ISM data in the United States showed a services sector which if anything strengthened slightly more than expected, when you consider that this is by far the largest component of US gross domestic product it is heartening news indeed. And in China the Caixin Services PMI also showed stronger than expected improvement, which might optimistically be taken as evidence that the economy of the Middle Kingdom is stabilising. Most analysts believe this is a consequence of the stimulus efforts implemented by the Chinese government already, but there are risks inherent in this, as the most likely sectors to benefit – property and finance – are to a large extent areas where substantial reform will be needed for the longer term health of the Chinese economy. It’s also worth pointing out that Eurozone retail sales came out much stronger than expected yesterday growing 2.4% year on year to February, and the services PMI in the UK was also stronger. Perhaps the real theme is the strength of the non-manufacturing sector in the major economies.

Whether the good news is a real turning point or not, markets seem to be reacting positively today, the dollar is stronger, equities are up and oil has been on a tear this morning, already up 2%. Of course regarding oil, this could also be because of news about falling rig counts in the US, and signs that OPEC might be able to come up with some sort of output freeze (I’ll believe that when I see it!). With regards to currencies, it will take more than what we’ve seen today to convince me that the counter-trend rally (dollar weakening) is over. The pound sterling and Japanese yen offer a bit more clarity than most of the other major currencies, the former is chronically weak, and the other is the best performing liquid currency so far this year. The strength of the Japanese yen is now of such concern that we are starting to hear comments from Prime Minister Abe, unfortunately this isn’t having much of an impact yet, this might have to run its course.

Finally, below is chart for job openings in the United States, which is collated from the JOLTS survey. It’s possible job opportunities in the US have peaked. Something to monitor in coming months as this could have a substantial impact on the US hiking cycle. Here is the Business Insider article that discusses the chart below…

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Mixed economic data over the last 24 hours. Weaker factory orders in Germany was a surprise and it shows that falling exports are having an impact. Truth to tell the PMI and manufacturing data coming out of Europe in the last day hasn’t been good, the likes of Spain and Ireland remain bastions of hope, but unfortunately they aren’t particularly large economies, at least compared to the likes of Germany, France and Italy. On the other hand the RBI in India has cut rates to the lowest level since 2011, lower oil prices are a boon for India which is a big importer. Australia has kept rates on hold, while in Japan corporate surveys show little confidence in the Bank of Japan’s ability to hit their 2% inflation target anytime soon.  Later on in the morning we’ll get PMI data in the UK along with aggregates for the Eurozone, I don’t hold out too much hope for the Eurozone for the reasons already mentioned. Perhaps the retail sales numbers for the Eurozone will paint a slightly more encouraging picture though. Later on in the day we’ll get a raft of ISM non-Manufacturing data.

The most noticeable thing this morning is the strength of the Japanese yen, I suspect this is partly to do with the inflation expectations survey I mentioned, but also the fact that the BoJ is fairly limited in terms of what they can do in the short term. Even though BoJ Governor Kuroda has indicated his willingness to further expand monetary policy, there is a G7 summit that Japan is hosting in April so it probably wouldn’t be politic to do anything extraordinary at the April meeting. You get the sense that extraordinary is what is needed now in Japan!

Markets have the feel of consolidation at the moment, it’s been a decent rally since the doldrums of mid-February and I wouldn’t be surprised to see a fairly directionless market for a few weeks. The basic trend of a weakening dollar in the short term is continuing, finding expression through USD/JPY today. I don’t see much stopping sterling weakness unless there is a turnaround in the Brexit debate. That could easily happen but I suspect it could do so closer to the referendum. For now we would expect to see sterling struggle to maintain current levels against its. It’s worth pointing out that Brexit is not just bad for the pound sterling, I suspect it would be a disaster for the euro as well.

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At a time when unlikely political insurgents like Donald Trump (can we still characterise him like that?) are making all the news, it’s remarkable how complacent the establishment in the UK has been regarding the EU referendum. It’s barely a month away, and we are yet to hear a compelling argument in favour of staying in, the rebels are making all the running it seems and the markets know it. Sterling has been chronically weak for weeks and the Financial Times notes today that cable option premia haven’t been this expensive since the global financial crisis. You could liken option premia to insurance premiums. The more risky the situation the more you have to pay, right now for sterling the markets are telling us things are as dicey as at the height of the panic in 2008. It’s no surprise that EUR/GBP has been climbing relentlessly since the Draghi disappointment in December.

The big news on Friday was the US labour market data and the data was slightly better than expected with 215,000 new jobs created, versus economist forecasting 205,000. Significantly the February data was revised upward as well which is always a sign of continued strength in the prevailing trend. For once wage growth didn’t disappoint with a better than forecast month on month increase of 0.3%, versus 0.2% predicted and a fall the previous month. I’m not sure this is enough to eliminate the concerns raised by Yellen in her speech earlier last week, but more of this and everything will be up in the air again. This was a very good set of data. It’s quite clear that the market agrees with me, because it didn’t have much of an impact on the dollar’s current malaise. Yes we got a little bounce in the greenback following the data release but in most markets the dollar is trading weaker again. The US equity markets liked the data though, and why not? It’s a perfect scenario, little threat of a rate rise change of view, but likely we’ll see a more confident consumer in the United States. We’ll need a few months of data like this to change expectations for sure. Of course the better than expected ISM Manufacturing data may have been the reason for the stock market rally, all in all Friday was a good data day in the US. Perhaps over the next month if we get more positive data surprises elsewhere in the world then the markets might start to believe that the Fed will be confident enough to set aside their newly cautious stance.

The naira continues to stabilise in the 320 – 330 range against the dollar. It is noteworthy that month end demand did not have the same impact that we saw last month. One month is too small a data point to go by, we’ll need to see a few month ends with the same sort of supply-demand balance to gain confidence that there are sufficient dollars available to meet demand in Nigeria.

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Mixed news from the east overnight, Chinese PMI’s showed an uptick for March which comfortably exceeded expectations and the data for February. Other business activity surveys also turned out positively in China, with signs that property sales are perking up again. So much so that some of the data is the best since as far back as October 2014. Despite this the export side of the economy still looks fragile, and the fact that it’s real estate doing well makes you immediately wonder if the government is adding some sort of stimulus. Whatever it is, it’s encouraging to have some positive economic news coming out of China, it feels like it’s been a while! Japanese data was a slightly different affair though, not so good news, with the Tankan describing business leaders as gloomy about prospects for the land of the rising sun. While the survey still considers conditions to be good for business, there is far less optimism in Japan than one might have hoped for, given the conducive monetary conditions. Perhaps negative interest rates aren’t a panacea after all.

Later on today we get the US labour market report, non-farm payrolls. Economists are forecasting a continuation of robust labour market growth, with 205,000 new jobs expected. In a way this might be the least anticipated report in some time, given Chairwoman Yellen’s comments earlier on in the week. It is clear that the Federal Reserve is retreating from the idea that the US economy as at or close to full employment. I must admit when I initially heard her comments, I thought it was a fudge to justify a more cautious approach to the hiking cycle. But perhaps it isn’t. After all we are seeing the same phenomenon in other advanced economies, not least the UK. Wage growth is anaemic despite very low unemployment rates and it is likely that globalisation is the root cause of it. Workers no longer have the bargaining power they once did and this might enable the economy to operate at much higher levels of employment before workers can feel confident that demands for better pay will be met. As of right now, a company like Procter and Gamble or Nestle, can juggle production amongst a myriad of manufacturing sites around the world. What distinction do they make between an employee in the United States, Mexico or South Africa?

Anyway what does all this mean for currencies? I suspect it might take a bigger positive data surprise to lift the dollar from here. Don’t get me wrong, interest rate differentials should still make the greenback a more attractive bet than holding euros or yen, but betting on a widening of that interest rate spread is becoming a more complicated business. As for the pound sterling, it exists in its own Brexit world at the moment, and bear in mind, the reasons to be more cautious about the dollar also apply to the pound. It is notable that the UK current account deficit data showed a deterioration yesterday despite the weaker pound, in fact the papers report that the deficit is now at a postwar high. If you weren’t already aware of how dependent the UK economy is on foreign capital that should tell you all you need to know! I’m not sure this Brexit debate could be happening at worse time.

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