It’s become clear over the last few days that the dollar is consolidating against its main counterparts: EUR, JPY, GBP. How long this continues is difficult to determine at the moment, but we may have to wait sometime before the dollar continues to push ahead making new high after new high. This is happening with a backdrop of equities continuing to rally higher. I’m tempted to say that we are seeing the most orderly adjustment of a carry trade. Ever since the Global Financial Crisis (GFC) the dollar has been the funding currency of choice, but now the euro and Japanese yen are being used as funding alternatives while borrowed dollars are being bought back. This is consistent with a static Federal Reserve balance sheet while central bank balance sheets in the Eurozone and Japan are aggressively expanded. Perhaps fears about what will happen when the Federal Reserve starts to contract its balance sheet are overblown, if others are willing to step in and provide seemingly endless liquidity? Indeed it seems that there is nothing standing in the way of a continuing rise in equity markets in this benign scenario of rising equity markets and rising dollar. Perhaps. But those of us who can’t help but peer forward into the murky future will inwardly shudder at what’s to come… granted such an endgame is months if not years away. What is it they say though? Death and taxes? Perhaps there are other things we can’t escape from!
Later on this morning we’ll get the latest MPC minutes, which should shed some light on voting patterns for the recent Bank of England no rate change decision. Expectations are for the balance on the board to remain the same at 7 (no change) – 2 (hike). This is all somewhat overshadowed now by Governor Carney and Prime Minister Cameron’s recent comments. But it will still be interesting to see what happens to the pound sterling, as events like this can sometimes shed some light on where market positioning is. This seems to be the most significant thing we are waiting for on what is quite a data light morning and afternoon. The FOMC minutes at 7pm London time is obviously the big show. Despite the disappointing industrial production numbers I suspect that retail sales will have more of an impact on the thinking of Fed participants. In my view nothing much has happened, domestically, to cause much of a change in the belief that the US recovery is gathering pace. I will however, be interested to see if concerns about the less cheery macro picture in the Eurozone, China and Japan is used to caution investors about the likely speed of normalisation in the US. That would not be good for the dollar.
One other thing.. it’s been interesting observing gold over the last week. Rumours about its demise have been somewhat exaggerated. From an Elliottician’s (Elliott Wave Theory practitioner) this has not been a great surprise to me, but the fundamental argument for lower gold prices has been compelling. Perhaps for now with the dollar consolidating, demand in Asia and a Swiss referendum to force the Swiss National Bank to begin gold purchases, there’s just enough of a case to stop gold investors from dumping the yellow metal. Talking about the Swiss… EUR/CHF has been slowly trending lower and is now at 1.2012. A mere 12pips away from the magical 1.20 level where the SNB in recent years has aggressively defended the franc (from further appreciation). Clearly this move lower is in anticipation of the referendum. Keep an eye out for happenings on 30th November, because no matter what the outcome of the referendum is, there will be some movement. Remember before SNB intervention EUR/CHF was trading closer to 1.05. It feels like an awful lot of money is betting on the 1.20 barrier being discarded. I find it fascinating… in a world where the ECB is trying to expand its balance sheet and the BoJ is being even more aggressive doing the same thing, how can the SNB be expected to give up on the 1.20 level? If they do get ready for the most rapid appreciation of a currency… ever! As I said.. fascinating times!!