While the clock ticks down to BoJ’s July 31st Monetary Policy Statement, where officials could be expected to debate policy changes to sustain, not tighten, their stimulus program, 10-Yr JGB continue rising. On Monday the 23rd of July and following the announcement for policy speculation, 10-Yr JGB improved by 4bps and were markedly boosted cumulatively higher hitting a daily top 6bps higher, at 0.09%, amid BoJ’s conclusion to offer unlimited amount of bonds purchasing at fixed 0.11% rate. But note, BoJ has been forced to prop-up the yield cap before, although, followed through with purchasing bonds only once.
Although bank officials ought to remove speculation as a driving force of market direction, “maintaining stimulus” allows the major elements of inflation and negative interest rates come into discussion in the July meeting, which require JGB and ETF buying added on the agenda. At this periodical stage though, any adjustments of the target JGB, or buying of ETFs, would have to remain limited to talks only, as any hasted adjustment could harm the yield control, rather than mitigate market distortions. Despite the naysaying, note that BoJ’s unorthodox policies and practises since the initiation of QE in September 2016 have held back Japanese Yields from rising along with US and European yields and kept the 10-Yr JGB Yield target near zero. This allowed Japan to gradually reduce its asset purchasing program without having investors think it is “tapering”.
Considering Japan’s slowing in Core Inflation from an anticipated 0.6% to 0.4% (0.7% YoY) at the July 24 report, the lowest since November 2016, it would most likely be unorthodox to even consider changes to Japanese interest rate targets before the Core index inches higher towards the 2% target. An extreme option would be to lower the inflation target of course, as the aggressiveness in bond buying hasn’t really pushed the CPI higher like it did in Europe for example. Another strong option would be to change the target for 10-Yr bonds in order to accommodate for a wider trading range. Of course, this will most likely be determined in the July meeting but as a softer approach BoJ could examine guidelines to increasing the long-term yields and hence inflation more naturally.
FX Market Specialist.
Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
Euro recorded its largest weekly loss in 19 months after June 14 ECB news conference and, although EU President Mario Draghi reiterated an end of QE in December, he added that interest rates will be changed depending on what is the state of the convergence process and as long as “inflation remains aligned with ECB’s current expectations of a sustained adjustment path”. Interest rates were held steady in June 14 meeting.
German Yields started trading downwards following the announcement, dragging US Yields back below 3.0%, at 2.90%, while German Yields fell to 0.39%.
For the period until summer 2019, the ECB has to keep sufficient flexibility. This signals that a rate hike may not be seen before Q4 2019, unless if in September meeting, as the final decision will depend not only on a “sustained” inflation but also on other downside risk factors, such as trade tensions and other risks linked to economic slowdown.
On June 15 and following the ECB’s announcement, Eurostat reported Eurozone’s Final CPI figures for the month of May. Eurostat posted a final inflation number of 1.9% compared to a previous figure of 1.2%, reviving the possibility for tightening, while since then, markets welcomed June’s reading as inflation hit the 2.0% inflation target YoY on the July 18 event. With inflation supporting ECB’s plan to end QE by end of 2018, ECB’s goal in order to effectively hike rates would be a close to 2% inflation rate over the medium term. That of course contains other implications, such as the price of Oil and the rise in energy cost, which may not be a good driving factor in the medium term.
FX Market Specialist.
Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
The Bureau of Labour Statistic’s Nonfarm Payroll report was published last week, just a few days after the US Independence Day and a rather noiseless week on the economic calendar. Although NFP showed that the US economy continues to hire at a robust rate markets were surprised by an overshoot in Unemployment Rate to 4% and a slower than anticipated wages growth pace. Average Hourly Earnings rose by 5 cents to $26.98, a 2.7% YoY, or 0.2% MoM versus an expected 0.3%, driving Dollar down.
With inflation increasing 0.2% last month, marking a May 2012 record and a change of 2.9% YTD, Fed remains indeed on track in delivering another interest rate hike, but with Dollar having been knee-jerked lower following the NFP it is certain that a good CPI report in July will have FOMC members returning back from the nascent sell-off more confident and anti-pressured.
A positive Consumer inflation report this Thursday could see the markets returning back to pre-NFP levels and the probability of two more hikes increasing further. This should enable buck-dominated pairs to decline and position Dollar for decent longs as higher inflation will bring more pressure for hiking rates and drive Dollar’s value higher ahead of August 1st FOMC Meeting. If Core Inflation jumps from 2.24 to 2.3% then Core PCE, the Fed’s favourite inflation measure, will most likely reach the 2% target as it currently stands at 1.96%, lagging only 0.28%. This would imply a much stronger boost on the buck and further gains on increased chances of interest rate hikes, reiterating the Fed’s path to gradual policy normalisation.
FX Market Specialist.
Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
- 美国和欧盟的利差在6月份联邦公开市场委员会（FOMC）会议后进一步转变：随着联邦基金利率上升至2.0%，FOMC成员重申美国经济前景强劲，美国和欧洲之间的利差扩大。结果，对于利差交易者而言，做空欧元/美元似乎甚至更加有利可图了。截至2018年7月2日16:11 (GMT+3)，欧元较6月13日下跌了190点。
- 处在多年来最高价位的油价和美联储偏好的通胀指标 — 个人消费支出平减指数（PCE：随着石油价格持续上涨，由成本推动的通胀也在上升，经济增长可能出现暂时性放缓，直到投资者在价格开始下降时重新布置持仓为止。美联储通过今年多达4次的加息来抑制通胀的行动，可能的确合理。但在通胀超过期待已久的PCE目标时，不应忽视数据，因为加息似乎并没有抑制油价的上涨。
- 工资数据预计将到达年度最高位，增长的障碍较少： 随着工资数据上月升到0.3%，风险偏好稳定推动美元上涨，并随着贸易战的担心而保持这一状态。快速增长的工资支撑了加息并为之提供了合理理由，但本月的指引是否会进一步推动美国利率上涨的问题依旧，因为对贸易战的担忧开始令企业削减雇佣。
苹果股价在公布的盈利意外较预期强劲后上涨了8.1%。而且，其他技术企业例如STMicroelectronics、 英飞凌（Infineon）、BE Semiconductor和阿斯麦（ASML）在苹果股价上涨提振市场信心的背景下，涨幅在1.1%至3.8%之间。
交易股票CFD让您可以交易部分全世界最受欢迎的品牌，分散您的交易组合。请在 这里学习 我们大量关于股票且内容丰富的教程
- 美国和欧盟的利差转变： 自4月初以来，10年期美国收益率从2.7298%上升到昨天3.0315%的最高位，同时短期和长期国债利率收窄。随着美国收益率达到4年来的最高，而欧盟利率稳定在0.0%以下，美国和欧盟的之间的利差利好美元的概率增大。请注意，持续上升的收益率表明不断提高的利率将抑制通胀，所以投资者认为美联储2018年将加息4次。
- 油价处在数年来的最高位，存在通胀压力： 随着油价触及新的历史高位，美联储2018年的政策前景变化可能会比预测的快。自上次联邦公开市场委员会（FOMC）会议以来，由于政策制定者发出了对加息4次设置的障碍提高的信号，这一论调已被搁置很久。但利率未来最可能逐渐上调。由于高企的油价增大了通胀压力，市场共识确实发生了变化，这反过来增大了对再次加息的关注。
- 股价和财政政策影响： 考虑到股市近期处于财报季末，以及特定公司新闻、宏观经济事件和地缘政治因素之间的关系，尽管并无历史规律可循，但波动的增大是同步的。鉴于迄今财政政策的变化对经济活动和支出的支撑，正面的业绩带动企业用工需求的增加，良好的就业增长数据可期。
- 由于经济活动使得再次加息成为可能，工资预期提高： 尽管就业市场报告显示平均小时工资数据增长0.3%，与经济学家的预测一致，但一季度小时工资增长达2.7%。该数据是超越3月份疲弱数据的一个关键因素，并增大了对美联储本年度会再加息3次而非2次的期望。正如上文所述，随着收益率和通胀持续升高，工资提高将会巩固这一预期。
- 美国和欧盟的利率差异： 正如市场自去年1月以来的预测那样，鲍威尔完成他的首次加息，美联储将利率从1.5%上调至1.75%。市场的确预计2018年还会有两次加息，甚至三次，但保持对鲍威尔的言词洗耳恭听，因为对美联储政策收紧的敏感性是影响方向性行为的一个关键因素。加息以及进一步的加息预期将使得息差朝着有利于美元的方向运行。
- ISM制造业和非制造业指数： 美国供应管理协会（ISM）制造业就业指数为57.3%，与2月份的59.7%相比下降4.02%，但与此同时，尽管特朗普的金属关税政策造成的恐慌性采购产生大量新的订单，2月份ISM非制造业就业指数与1月份的61.6%相比下降了6.6%，为55%。这两份报告在美国经济活动中占比超过三分之二，因此，接下来重要的是关注即将在周三发布的ISM服务业PMI。
- 波动性和股票市场： 2018年第1季度波动性指数（VIX）上升81%，表明大部分市场又重回恐慌。在美国工资上涨超过预期，预示着通胀上升，这反过来又预示着加息的背景下出现恐慌抛售之后，股票承受压力并出现2年内的首次调整。美国联邦公开市场委员会在三月份果然加息，但公布的2月份非农就业数据中工资数据下降使得通胀上升的担忧得到缓解。
- 首次申请失业金人数： 首次申请失业金人数在上周下跌至45年新低，而市场预计申请人数将增加1.5万。4周移动平均线比上周平均值低1.2万。此报告的发布使得首次申请失业金人数连续第158周保持在30万以下，说明就业市场表现强劲。美联储的年底失业率目标依然为3.8%，因此，投资者将关注每周变化。
- 油价和通知数据： 上个月油价在60美元/桶下方调整，同时核心CPI下跌至0.2%（预计0.2%，前值0.3%），符合预期。这并不一定是不好的消息，最近如果上涨至66美元附近可能会对美联储发起挑战，因为通胀走强将需要收紧政策。
- 美国和欧盟的利率差异： 正如市场自去年1月以来的预测那样，鲍威尔完成他的首次加息，美联储将利率从1.5%上调至1.75%。市场的确预计2018年还会有两次加息，甚至三次，但保持对鲍威尔的言词洗耳恭听，因为对美联储政策收紧的敏感性是影响方向性行为的一个关键因素。加息以及进一步的加息预期将使得息差朝着有利于美元的方向运行。
- 美国和欧盟的利率差异： 美联储在1月31日的联邦公开市场委员会(FOMC)会议上维持利率稳定，声明几乎没有变化。数据仍然利好，美联储将持续强劲的数据与失业率的下行压力结合，然而，利差尚未受到影响，但可能小幅拖累欧元。预期欧洲央行将在本周四发布利率。
- ISM制造业和非制造业就业指数： 美国接近充分就业，2月份增加5.5%和5.3%（非制造业）将使得劳动力市场承压，原因是就业的扩张速度远超过产量。考虑到2017年的薪资增长，这意味着招聘前景乐观，并可能推动工资进一步上调，而最近的税收调整将刺激需要。
- 消费者信心和股市： 美国消费者信心升至2004年的纪录高位99.9，但通胀预期不变，原因是就业上涨，特朗普实施的税改推动收益率上升，股市在两年来首次修正。请注意，在借贷成本上涨之后，消费者信心未来几个月可能下滑。
- 实际数据与市场整体预测和均值的偏差： 经济学家对于去年实际整体数据的预测总共少了15.3万人。这一数据的均值已经加入1月份的预测数据中。前值与实际数据相比较，该数据的偏差仅为-5800。
- 美国和欧盟的利率差异： 美联储12月份加息的决定，导致利差有利于美元，美元与欧元的利差增加了25个基点（从1.25%到1.50%），同时资本流入扩大。但请注意，美元最近是受信心而非利率的推动。
- 供应管理协会(ISM)制造业就业指数： 该就业指数相对疲软可能预示着数据偏弱，尤其是考虑这是该指数连续第4个月差于前一个月。该指数与非农就业人数之间5年的相关性为0.66，而非制造业就业指数对比非农就业人数同期的相关性为0.63。2月1日的ISM制造业采购经理人指数报告应当可以为投资者提供更多线索。
- 消费者信心和股市： 尽管股市的上涨并不能证明消费者信心将会跟进，但在过去10年中，两者或多或少同起同落。密歇根大学消费者信心是一个重要的指标，而因为上个月的数据与非农就业人数一样令投资者失望，使得数据十分悲观。
- 美国国债收益率： 由于美国国债收益率与非农就业人数之间是负相关，就业人数加速增长对2-10年利差造成负面影响。值得注意的是对10年期收益率的影响超过2年期收益率，所以对于2-10年利差的影响是正面的。
- 石油价格和通胀数据： 油价是美国经济的一个重要变量，对通胀有着直接的影响。油价正处于涨势，所以对非农就业人数是一个负面的信号。但注意美元也非常疲软，经济欠佳意味着原油需求的减少。
美国 - 美元
考虑到风险偏好反映了美联储的加息周期和大幅度的政策作用，加上鲍威尔与耶伦一脉相承、逐渐正常化的宽松货币政策立场，我认为2018年美元指数可能被拉低至88.00 - 85.00的水平。
欧洲 - 欧元
因此，以上述内容为基础，加上2018年维持低息，我预测欧元/美元将继续涨至1.278 - 1.311美元。
英国 - 英镑
考虑到英国脱欧的后果、英国议会的利益分歧、长达10年后的加息和提前大选的可能性，我看空英镑。在有希望达成协议和存在小幅加息可能的情况下，我预测英镑/美元2018年全年都将高于1.27，并可能向1.39 - 1.41靠近。此外，我认为宏观基本面可能走软。
日本 - 日元
加拿大 - 加元
考虑以上所有因素，我认为加元兑美元2018年将继续看涨， 但涨幅比2017年小得多。预测美元加元上涨不会超过1.3500，年底前将下跌到1.185 - 1.192的水平。
澳大利亚 - 澳元
新西兰 – 纽元
根据黄金的图表和考虑最近的加息，以及2017年4季度美国的长期和短期债券收益率下滑，我预测金价年中温和上涨到1400 - 1450美元之间，并且在2018年年底跌到每盎司1245美元的低位。
FX Market Specialist.
FX Market Specialist.
This special report is provided as general market commentary and does not constitute investment advice.
BoE Interest Rate Decision, Thursday November 2
“As the latest GDP grew higher than the 0.3% that economists had anticipated (ac. 0.4%) and Unemployment Rate hit a 43-Year low back in July, BoE may be raising the interest rates in November; the first hike after a long period of 10 years. Despite that, scarce capacity in employment remains a concern. Policy makers must cautiously think as the UK’s economic performance largely depends on whether a transition deal with Europe is reaching or not.
With inflation hitting 3.0% YTD (est. 3.0%, target 2.0%), the highest level since April 2012, and the increased uncertainty over Brexit, the pressure on MPCs intensifies, especially when considering the 0.4% fall on real wages compared to last year.
The probability of a hike rate soared to 80% over the past few days in anticipation of curbing inflation and towards a path of gradual monetary normalisation, however, the UK’s economy has not been on its strongest footing and concerns over a weaker Pound weigh in. On the contrary, at the latest MPC meeting the MPC votes increased to 2-0-7 (exp 2-0-7, prev 2-0-6), with more members voting to hold rates unchanged. This estimate has now changed to 9-0-0, signalling that bond buying is likely to provide more yields to investors, albeit at the cost of tightening borrowing.
The risk to consumers still remains real and is one of BoE’s top concerns.
FED Policy Rate, Wednesday November 1st
While US GDP grew by 3.0% in Q3 following a 3.1% gain in Q2 Consumer Spending rose 2.4% following a figure of 3.3%, albeit, both grew higher than economists’ estimations. Analysts’ estimations for a GDP figure of 2.6% were influenced in anticipation of a decline due to damages caused by hurricanes. Although nagging worries surrounding low inflation pressures keep inflation away from the 3.0% target demand from consumers and businesses, along with the latest Payroll report, may be paving the pathway for a December hike.
* The Bureau highlighted that the collection data was incomplete and further revisions may be seen in November 29th, when the 2nd estimate will be released.
With the Unemployment Rate falling to 4.2% (est. 4.3%) and the Bureau admitting that the Unemployment Rate was not affected by hurricanes, job growth seems to be followed by the growth in labour force. This in return supports some further strengthening in the US economic growth and especially in inflation since the pace in wage gains also shore up while consistent upward revisions took place.
On October 17, Dollar was boosted by US Yields as the 10-Year Bond climbed above the 2.39% of July 7 on greater prospects of monetary policy. Dollar soared higher days later on a Senate Budget approval, marking the most meaningful day for Trump and his tax reform plan, while Dollar was rising against Yen some 1.7%. The latest political developments found the budget bill passed and ECB’s Draghi announcement of the QE changes just minutes before a report said Yellen was out of the Fed Chair race. The 10-Year Yield accelerated to its highest levels since March 20, 2017 at 2.44% where it lies today (26/10/2017 | 16:15 EDT), along with a fresh 14-Week high in USD/JPY.”
Stavros Tousios, FX Market Specialist. This special report is provided as general market commentary and does not constitute investment advice.
- 挑战者职位削减下跌 4.4%
- 工资从0.2%增长到0.5% 普遍预测是0.3%，平均时薪增加到0.5%，远高于预期和美联储的通胀目标2.0%。美国平均时薪目前是26.55。2017年三季度的全职员工每周时薪的中位数为859美元，比一年前高3.9%。
- 失业率跌到16年的低位： 尽管失业率跌至4.2%的16年低位，9月份通胀率按年增长2.2%，但低于普遍预测的2.3%。美国通胀率为2.23%，低于上个月的1.94%。另一方面，美国失业率为4.20%，低于上个月的4.40%。根据美国劳工统计局的数据，无法确定飓风艾尔玛和哈维对全国失业率造成影响。
- 参与率升至63.1%： 美国劳动力参与率相比上个月的62.90%升至63.10%。最重要的是，它支持失业率的下滑，而最近的上涨意味着就业市场强劲。
- 8月份NFP修订： 尽管9月份NFP为负，8月份的数据从15.6万向上修订到16.9万，而平均时薪增加，刺激美元走强。通缩成为一大担心，最近工资增长（连同修订）为投资者提供了理由一股脑买入美元。
- 挑战者职位削减下降4.4%： 挑战者报告目前落在32.346，低于上个月的33.825。本季度标志着自1996年第3季度以来的最低水平。
1. 失业率下滑： 尽管失业率小幅跌到4.3%，7月份实现从2001年5月份以来的最低失业率，然而多数劳动力市场的职位增长来自一些低收入行业，尤其是兼职工作增加34.9万，而全职工作下跌5.4万。
2. 参与率增加： 参与率的月环比增长几乎不变，但年同比增加0.4%。劳动力市场的待业人数是16万人，比一年前低32.1万人。认为找不到合适工作、心灰意冷的待业工人是53.6万，而就业人数增加34.5万。
3. 6月份的ADP职位增长17.8万，不及预期的18.7万： ADP报告暗示职位增长可能超过预期，因为9000个职位的增长利好非农就业报告前景，然而，过去12个月的情况并非如此，ADP私人领域的就业增长平均超过20万。这一估计值首次低于20万，非农就业数据却相当理想。投资者对ADP报告失去信心，因为ADP和劳工统计局之间的分歧扩大。6月份的报告同样从22.2万上修到23.1万，然而5月份的数据被从15.2万下修到14.5万。
4. 债务上限抑制欧元涨势： 尽管上周五耶伦和德拉吉并没有谈论货币政策，让投资者颇感失望，然而欧元突破上一次的高点、技术阻力位1.1913。对于债务上限和哈维飓风的担心，以及美国经济可能放缓，都刺激欧元兑美元升至2015年1月份以来的最高水平。在此前三周经过整固之后，欧元可能开启下一波的涨势。查看月线图，似乎更加清晰。
1. 失业率和就业不足率下跌: 尽管失业率跌到4.3%，是2001年5月以来的最低水平，但就业不足虑(U-6)也从8.6%跌到8.4%，是2007年11月份以来的最低水平。下图显示官方数据与U-6就业不足率的比较。由于参与率低而不是正面的失业数据，两个利率都下跌。
4. 数据发布期间欧元创出新高，但美元指数并未创出新低。 去年11月欧元美元触及1.13000的高位，而美元指数在美国总统当选当天触及95.905的低位。7月2日，5月份的NFP发布日期，欧元重新试探1.13000关口，但美元指数甚至没有达到11月份的低位，仅仅跌至96.605，距离去年的 96,905仅300点。并非所有主要货币对兑美元表现良好，美元日元占指数的13.6%，是主要的贡献因素。
5. 4月份贸易赤字超预期，所以第2季度GDP从4.0%下修到3.4%。 由于出口下滑0.3%而进口增加0.8%，显示进口增长快于出口，但美国的商品和服务相对欧洲更加便宜。考虑到贸易结余是GDP的关键构成，美元下跌让分析师下修GDP估计0.6%。美元变化导致美国的贸易下滑，第2季度商品和服务出口在GDP的比重从第1季度的-0.0217跌到-0.5216，请参见下图。
Euro – Yen hit a fresh 17-Month high at 130.761 earlier in the week due to the latest sell-off in the Euro Bond market while BoJ is expected to hold its soft monetary policy unchanged as the introduction of Yield-Curve control in 2016 is far from improving inflation. According to analyst from Danske Bank, it is very early to even start talking about an exit strategy, despite that the weekly 200 SMA stands firm around 130.700.The recent decline to 129.000 levels may be the beginning of the impulse wave investors have been waiting for.
The record move was supported by Draghi’s remarks which were heard at the Central Bank Forum in Portugal back in June, as well as ECB’s shift to tighten monetary policy, however, the pair managed to maintain a bullish bias since April 27 th , above 120.000, since BoJ decided to keep interest rates unchanged on both April 27 and June 16 reports. With the next interest rate decision approaching on the 20 th of July, it will be very interesting to keep an eye on the price of EurJpy and predict how rates will change in the future.
Speculation of the pair may be completed via a few different tools. Our Correlation Matrix shows us a positive correlation of 83% with USDJPY, a negative correlation of 65% with EURUSD, both based on a period of 300 days.
原油价格 – 看空：
地缘政治紧张局势：沙特指控卡塔尔支持ISIS引发外交战，新立老国王萨勒曼的长子Mohammad bin Salman为王储，是石油市场最新出现的地缘政治危机。尽管新晋王储不大可能直接调整石油生产政策，但更加激进的对外政策可能引起油价重新承担政治风险溢价。投资者似乎已经就沙特皇室因国王反对伊朗和卡塔尔的立场而进行的人事变动，增加了看涨油价的投资。伊朗和卡塔尔两国都跻身世界最大产油国，而后者因为向ISIS提供资金而受到关注；卡塔尔的产量估计为每天620,000桶。但投资者减少了他们的净多头持仓，因为新晋王储负有结束对石油的依赖并转向全球能源市场的使命。实际上，这位王储正在寻求出售国家销售公司的大部分股份，为此他将需要石油市场实现再平衡以获得良好的售价，所以对于油价看涨还是看跌的不确定性增加。
ISIS在仅仅3个月内发起3次袭击，此后伦敦警方加强了泰晤士河两岸的安保。已有7人宣布死亡还有21人伤势严重。在内政部表示对英国圣战组织境外资金和背后支持的调查可能不会公开之后，杰里米•科尔宾（Jeremy Corbyn）和法隆（ Tim Farron ）双双对特蕾莎•梅（Theresa May）就拖延已久的调查发起质询。美国股票期货和英镑在袭击后轻微下跌。标普500和纳斯达克在周日夜晚双双下跌约0.14%，而道琼斯工业平均指数下跌0.11%。英镑兑美元今日早盘开市下跌约0.2%。
WHAT ‘S SPECIAL ABOUT THIS MONTH’S NFP ?
April’s NFP consensus expectation was for a 194.000 increase in employment change. EUSUSD reacted in a positive manner, giving the opportunity to market participants to take advantage of a +40 pips move (see graph below).
The actual report showed an increase of 211.000 jobs compared to the slow growth of 98.000 positions that were added in the previous reporting month of March, whilst unemployment rate continued to slide. A solid employment report with nothing signalling a diversion of the Federal Reserve Bank from its transitory bet.
Most job gains (see figure) were seen in Leisure and Hospitality (+55.000), Education and Health Service (+41.000), Professional and Business Services (+39.000), Financial Activities (+19.000) and Mining and Logging (+10.000).
Does US economic stability mean we should expect more bulls in the upcoming NFP? No, not necessarily. This alone cannot constitute a good reason. Here’s our top-5 factors investors may want to consider for May’s NFP.
1. An Unemployment Rate number lower than the expected does not necessarily mean the markets will react positively, however they will definitely be highly volatile.
2. A lower figure on the Unemployment Rate will be a new record low since May 2007, signifying a boost in the US Dollar may occur.
3. The Employment-Population ratio and positive GDP are an indication of how good the economic health of the US has been which could have a positive impact to the USD.
4. May has been the best month since 1990, a month in which markets have been reacting positively for the US Dollar over the past 17 years, adding an average of 177.700 jobs per May.
5. Statistics show that there is a correlation between the Dollar Index and NFP % change, signalling that the recent Dollar Index decline may have a positive impact on NFP.
Now, let’s take a closer look at those key five points…
1. Fed’s unemployment rate forecast looks vulnerable due to 3-month average of 177.700 growth in jobs (see figure below). Chances are that the Fed will expect a further decrease in unemployment rates, however keeping up with the projected labor force of 115.000 may prove to be the cause of higher inflation.
2. April’s unemployment rate fell to lowest since May 2007, and has been in a bearish momentum since last October, excluding the month of January. There is some bragging on the record low from Washington however this growth pace will not definitely keep pushing the unemployment rate down. Since interest rates remained unchanged in the last FOMC meeting this could be suggesting a dovish move. The Feds decision to prioritise low unemployment over low inflation could play a big part as the unemployment rate/ labor force numbers come together (see below graph).
3. April’s data reflect to Fed’s bet that 1st quarter GDP was negatively impacted due to residual seasonality issues. Policy makers get a confirmation that the Bureau of Economic Analysis indeed left some seasonal effects out of the equation when computing the actual performance of the US economy. The conclusion is that the unemployment rate may be ‘lagging’ and a further decline could be seen. The civilian employment-population ratio may be a good indicator to look at as it is not as affected by seasonal variations. The current E/P ratio is 0.1% behind Feb 2009 level of 60.3% (see graph below):
4. May has historically been the best month since 1990. Average change in employment for the period has been 127.995 with 1994 being the best year on record (see graph below). Looking through previous statistics reports could provide valuable insights that have a directed impact on the markets, on the value of the U.S Dollar as well as on the price of Gold. May is also considered to be the best month for wage growth.
5. US Dollar Index has been relatively low during May due to political turmoil. The Dollar Index slid to 97.43 as investors saw an opportunity to focus on safe haven currency pairs. But how does this relate to NFP, you may ask? Simply put, since there is a negative correlation on the negative side between the change in non-farm payroll and the US Dollar Index this means we could be expecting another positive NFP for the US in May.
A closing word…
Remember that sharp spikes occur across many currency pairs, with a lower impact than the spikes on EURUSD due to weaker volatility. For example opportunities may arise on USDJPY, USDCHF, Gold etc., depending always on your risk appetite. In addition, the price normally retraces back to normal levels by the end of the day, so, investors may look to take advantage of the market once the market starts settling down.
上周被解雇的美国联邦调查局局长詹姆斯·科米（James Comey）爆出重大新闻。总统唐纳德·特朗普Donald Trump）对外宣称解雇的原因是卡尼对“希拉里·克林顿邮箱丑闻”调查的处理不当。而据《纽约时报》的消息，科米已经向司法部副检察长Rosenstein索要了更多资料以调查特朗普/俄罗斯之间的联系。这起调查与俄罗斯黑客干预民主党全国委员会和希拉里竞选，以帮助唐纳德·特朗普当选有关。
French Elections: The Vote That Could Devastate The EURO
On 23 April 2017, the French electorate will vote for a new President. Whilst market pundits are split on who is likely to take the Presidential title, all agree that the vote outcome may mean bad news for the European Union and for the Euro. The impact of the French elections will have consequences beyond France and beyond Europe, and is likely to impact on the global economy. How will you tailor your trading strategy to accommodate such impact?
Goodbye to an unpopular President
Francois Hollande’s approval ratings with the French populace have fluctuated wildly during his tenure as President, ultimately securing him as one of the most unpopular French Presidents of all time. Presiding over a country struggling to overcome great economic difficulty, he has failed to fulfill his manifesto pledge to bring down unemployment, and leaves behind him a fragile, culturally diverse & disillusioned electorate.
A French revolution to rock the Euro
The implications of the vote are far-reached and will have a tangible impact. While the two strongest candidates for the Presidency both promise to offer relief, change and an improved quality of life to the frustrated electorate, they both have very different ways of achieving such a result. Famously coining the EU as an ‘Anti-democratic monster’, Le Pen – President of the far-right party, The National Front - adopts a zero-tolerance approach to the Eurozone and pledges to take steps to follow Britain on the road to exit the EU. Helped by current anti-islam sentiment rife within France, Le Pen is currently topping the polls along with bookies’ favourite Emmanuel Macron, to win the race.
How can you protect your trading strategy?
While the French Presidential race is an unpredictable one, our clients are advised to diversify their portfolio in order to limit any volatility on the Euro. If you are currently trading on the Euro, keep up-to-date with the latest news on the French elections by visiting this page.
The Eurozone’s economics would seem to suggest a stronger currency, but instead the continent’s political problems are weighing the single currency down.
The recent news we’ve had on the European economy – particularly Germany – has been good. Growth is strong and improving – the EU purchasing managers’ index continued to rise in February to the highest level since the Greek debt crisis.
The EU has finally come out of deflation. Unemployment is still high, but falling. An agreement on Greek debt seems…well, if not likely, at least possible.
Overall, the EU economic data has been surprising on the upside since October, and more so than in the US, except for a brief period earlier this month.
So why is EUR/USD falling? In a word: politics. The net sum of all the details can be seen in the spread between US and German 2-year bonds. Despite the improving economy & inflation picture in the EU, this spread is now the widest it’s been in 17 years. And that’s putting downward pressure on the euro.
The reason for the widening spread, at least on the Eurozone side, isn’t because of economics, as we’ve seen. It’s because of Eurozone politics, which has caused a “flight to safety” into German bonds. Consider the following:
- Close race in the French election France is holding a presidential election in April and May. For a long time it was assumed that the Eurosceptic National Front candidate, Marine Le Pen, would probably come in second in the first round, but then would be soundly defeated in the second round. Now however her odds seem to be improving as the other candidates are all facing their own problems. The possibility of an NF victory is affecting financial market sentiment towards France.
- Eurosceptics gaining in Italy It’s not only France where the Eurosceptic party is gaining. In Italy, former PM Renzi resigned as head of the governing Democratic Party (DP) as the party tries to counter the growing popularity of the 5 Star Movement, which wants Italians to hold an “Ixet” vote. The two parties are about even in the polls nowadays. The country is being run by a caretaker administration; fresh parliamentary elections may be held this year, which would give the 5 Star Movement a chance to take power.
- Netherlands election as well The indications are that the anti-EU Party for Freedom (PVV) is headed for the largest number of seats in the 15 March Parliamentary elections. That doesn’t mean they’ll be able to form a government, as the main parties have vowed not to enter into a coalition with them. But a wave of new parties entering Dutch politics could upset that calculation. In any case, if the PVV do become the lead party, it may make their brand of politics seem more mainstream throughout Europe as the Netherlands is a founding member of the EU.
- Greece…again (or still?) The Eurogroup of Eurozone finance ministers Monday met to discuss Greece’s debt problems. Apparently they made enough progress to send officials back to Athens for more negotiations. The Greek government has agreed to examine measures to cut its deficit, which could give the IMF the confidence it needs to continue contributing to the country’s bailout. Nonetheless, the situation is likely to hit the headlines again in July, when a major debt repayment comes due.
- Merkel no more? Finally, German Chancellor Angela Merkel has been described as the “indispensable European” for her leadership of the Continent over the last decade. Nonetheless, it looks like she might not be the “indispensable German.” Her counterpart in the Social Democratic Party (SPD), Martin Schulz, is gaining on her in the polls. The thought that this well-known and experienced politician – effectively, the leader of the West -- might be pushed out of office in the federal elections in September causes investors sleepless nights even if Schulz is a similarly resolute supporter of the EU.
The result is that even though the overall EU economy is doing better than it has been in some time, the euro is starting to have a risk premium attached to it. This risk premium is likely to last to some degree at least until the Germans elections are over in the fall. Even then, the results of the elections may continue to tinge the outlook for the single currency.
Of course by then Britain will have triggered Article 50 and the FX markets will have something new to worry about, not to mention any missteps by the Trump administration during the coming months. And what’s going to happen with North Korea now that China has started to turn the screws on them…and how might that affect the yen? There’s lots else that can happen over the intervening months.
I’d like to discuss my general expectations for what’s likely to happen in the FX markets this year. Much depends on how the Trump presidency and the Chinese economy work out. In general, I expect the dollar to continue to gain and for the yen and pound to weaken further.
We’ve seen the dollar soar after the presidential election as market participants expect the incoming Trump administration to cut taxes and boost infrastructure spending. Alas, those expectations ignore the way the US government actually works: the president submits a budget but Congress has to pass it. The Republican Party has been willing to pass tax cuts but is generally less enthusiastic about increased spending. In fact, the current plan among Congressional Republicans is to shrink the government’s budget, not expand it. The gap between what Trump is looking for and what Congress is planning currently totals many trillions of dollars. The wrangling over US fiscal policy is likely to be the main risk to the dollar in 2017.
Nevertheless, I still expect the dollar to strengthen further. There’s likely to be some fiscal boost, if not everything that Trump hopes for. Moreover, in December the Fed boosted its interest rate forecasts without even assuming a more expansive fiscal policy. Thus the monetary policy divergence that’s kept the dollar rising for several years now is likely to continue into 2017, albeit with perhaps more volatility as US politics weighs on the outlook.
The outlook for the yen is to a large degree the mirror image of that for the dollar. Not only has the Bank of Japan pushed short-term rates into negative territory, but it’s also capped long-term 10-year rates at zero. So even if rising US Treasury yields exert an upward pull on long rates elsewhere in the world, they won’t have the same impact on Japan. The widening yield gap between Japan and the rest of the world should keep the yen on a depreciating trend during 2016. On top of that, the Trump administration’s focus on countries that run significant trade surpluses with the US is likely to be to Japan’s detriment, as it runs the fourth-largest surplus of any single country.
The outlook for the euro is particularly clouded. I expect the currency to be weak in the beginning of the year as the market worries about political risk. Elections in the Netherlands in March and France in April and May are likely to keep the specter of euro disintegration haunting the market. In addition, the Italian banking crisis is another centrifugal force for the currency union to deal with.
However, I expect the elections to pass without much lasting impact and the pro-EU establishment parties to continue to govern. In particular, I don’t expect the National Front to come to power in France. That should mean less political tension in the Eurozone after May, just in time for people to start worrying about Britain again.
After plunging in the wake of the Brexit vote, the pound has had a respite recently as the British economy has proven more resilient than the pundits expected. Moreover, Britain has benefited through the contrast with Europe: the challenges Britain faces are now well known, while the impact of politics on Europe is more difficult to assess. That’s caused some selling of EUR/GBP. But by the late spring, concerns about European politics should be waning just as the wrangling between Britain and the EU over Brexit begins in earnest. At that point, the full impact of this historic move is likely to hit the markets and the pound is likely to suffer another leg down, in my view.
The commodity currencies: AUD, NZD, CAD
The outlook for AUD and NZD is tied to China, and the outlook for China isn’t that great, in my humble opinion. The Chinese government has been using every monetary and fiscal technique in the book to boost growth, but 2017 is likely to be the year that the book ends and the economy has to face reality. Moreover, Trump’s plans for revamping the global trade system are aimed squarely at China, which will compound an already difficult situation.
AUD is likely to be the main victim of slower Chinese growth. China takes 32% of the country’s exports and developing Asia overall takes 48%. A slowdown in China’s growth, particularly in its property sector, will hit Australia’s commodity exports. Moreover, the global supply of iron ore is set to increase (and the price fall) as new mines in other countries start producing.
NZD is less vulnerable to a Chinese slowdown than AUD is. China only takes 18% of the country’s exports (Australia takes 17%, the US takes 12%) and most of those exports are agricultural products, not building materials. If the economy slows, people might not buy a new house but they will still have to eat. Moreover, milk prices have been rising recently, in contrast to iron ore & coal.
CAD is vulnerable to a downturn in oil prices, but the correlation seems to be waning recently. On the other hand, unlike AUD, Canada is leveraged to an accelerating economy: 73% of Canadian exports go to the US, which I expect will continue to enjoy fairly robust growth in 2017. And the Trump administration has said that they don’t have a problem with Canada’s trade patterns, so NAFTA renegotiation is not a significant threat. If the USD continues to rally because of a strong US economy, Canada should be a major beneficiary. That ought to help the CAD outperform the other commodity currencies.
It’s that time of year again when I do my favorite column, in which I ask: how did the FX experts perform last year? I’m going to look at the “market consensus” forecast for currencies at the beginning of 2016 to see what value, if any, the FX forecasting community added to our sum of worldly knowledge.
The answer this year is actually good: the pundits did pretty well in forecasting the dollar in 2016. Other currencies though…not so well.
For “market consensus,” I’m using the Bloomberg forecasts at the beginning of the year. Bloomberg collects forecasts for the major currencies from economists at the major banks and professional forecasters. It then takes the median of these forecasts and publishes that as the “market consensus.”
The simplest way to measure the performance is just to look at the direction: did the currency go up or down vs the dollar as forecast? Looking at 31 major currencies, in 2015 the market consensus got the direction right only 55% of the time, or little better than a coin toss. This year though, the pundit community did substantially better: they got 20 right, or 65%.
The forecasts were pretty accurate, too. Using the absolute value of the discrepancies between the forecast change and the actual change, the median forecast was only 3.4% off the actual turnout (average was 6.2%).
The graph shows the forecasts on the Y axis and the actual returns on the X axis. A correct forecast would lie on the yellow line. A currency above the line did worse than expected; one below the line, better.
As a control, at the beginning of the year I also used Excel’s RANDOM() function to forecast the direction. I just generated “up” or “down” calls randomly, not the actual rate. Alas, my super-duper quantitative forecasting technique, which I’ve named Gittler’s Unbiased Electronic Simulation Scorecard, or GUESS, only got 17 right or 55% -- about what you’d expect from a random program and this year not as good as the experts.
What were the big outliers? Several of them had to do with political surprises. The pound was forecast to rise, but needless to say it plunged – the vote for Brexit was a surprise. Same with MXN, which plummeted because of Donald Trump’s unexpected victory in the US election. TRY weakened far more than forecast following the coup in Turkey.
On the other hand, a number of the commodity currencies performed unexpectedly well, most notably BRL. It was forecast to fall by 5.6%, but in the event it rose by 22%! Adding on the high level of short-term rates in Brazil, anyone with a short position in BRL would’ve suffered grievously. The ZAR was expected to remain pretty steady, but actually rose 12.6%. The experts were bullish on RUB but not bullish enough. Finally, NZD was forecast to decline, but the turnaround in milk prices towards the end of the year resulted in a gain.
Among the G10, the yen was forecast to decline by 3.8% but wound up rising 2.8%; not that big a difference, but an important one in such a key currency. On the other hand, the euro forecast was pretty much spot on: it was forecast to fall 1.5% and in the event fell 3.2%. Not bad!
But before you start believing what everyone on CNBC says, note that we are only talking about the forecasts against the dollar. The market expected the dollar to be up, and got it right. But what about all the other cross-currency forecasts embedded in these forecasts? We can get an idea of how well the pundits did outside of the dollar by looking at the forecasts against the euro. Here, the record isn’t so great. In fact, it’s pretty bad. In this case, the experts only got the direction right 11 out of 31 times or 36% -- far worse than tossing a coin. My extraordinarily sophisticated GUESS methodology on the other hand got 58% right – almost tradable!
I do this exercise annually for two reasons. One, I think it’s valuable to look at how the experts did to remind us not to believe uncritically everything we hear or read. Yes, some very smart people do spend a lot of time thinking about currencies and analyzing the world economy and it’s well worth hearing what they have to say. They may well think of things that had escaped us and provide some valuable insights. But just because they’re smart and knowledgeable doesn’t mean they’re always right. Unexpected and inherently unpredictable events – so-called “black swans” – can and do occur. Sometimes things just don’t go as expected. And just because events flow logically in retrospect doesn’t mean that they can be reliably forecast in advance.
This shouldn’t get us discouraged, though. The second reason I do this is to demonstrate that the small investor actually has a fighting chance against the experts: they can and do get it wrong sometimes, too. Nobody has a monopoly on wisdom.
Donald Trump won a stunning upset victory in the US Presidential election. The Republican Party also retained control of the Senate and the House of Representatives, so that gives them a clean sweep of the US government.
The market reaction was pretty much as was anticipated: a swift risk-off reaction. The only surprise was that markets calmed down so quickly. One reason may have been because of ECB promises to intervene if necessary. Another reason we will discuss in a moment.
The election has serious repercussions not only for the US economy, but for the global economy as well. Nineteen Nobel Prize winners in Economics recently wrote an open letter to US voters. They warned that Trump “offers an incoherent economic agenda. His reckless threats to start trade wars…his trillions of dollars of unfunded tax cuts, his casual suggestion that the United States could threaten default on its debt…each of these proposals could jeopardize the foundations of American prosperity and the global economy.”
So the immediate result of his election is uncertainty. And the VIX index did indeed go shooting up initially, although it’s since come back down
The other reason why markets may have calmed down despite the apocalyptic tone ahead of the election is because investors are considering not what Trump intends to do, but more importantly, what he can do. The fact is that many of his positions, such as opposition to free trade, go against mainstream Republican positions. He will have little if any support in pushing this agenda. Virtually none of the Republican members of Congress openly supported him during the election, which is quite remarkable. He’s therefore likely to encounter strong opposition from his own party as well as the Democrats in getting the more radical aspects of his policy through Congress. This is the US system of checks and balances at work.
Meanwhile, the increase in uncertainty and the sharp decline in the stock market makes a December rate hike less likely. That’s going to be negative for the dollar in the short term, but may help support stock markets.
Investors will be waiting to see who Trump appoints to key positions, such as Treasury Secretary and Secretary of State. They will also want Fed Chair Yellen to confirm that she intends to serve out her term, which runs until January 31, 2024
While the dollar may be weakening in general, several emerging market currencies could be pushed higher over the coming months. Trump has expressed his determination to fight back against what he alleges is currency manipulation to gain an unfair advantage in trade. China’s FX policy in particular is likely to come under attack, even though China has been intervening to support its currency recently, not weaken it. That could prove positive for other Asian currencies but negative for their stock markets.
In the longer term though, while the Trump victory isn’t good for the dollar, it’s not good for the euro either. The Brexit vote and now this are likely to embolden the anti-Europe, anti-Euro forces in Europe. They make it more likely that the Italians will vote “no” in their referendum in December and may improve Le Pen’s chances in the French Presidential election in April. So while the US election is negative for the dollar short term, it’s even more negative long-term for the euro, I’d say, because Europe overall has more economic and political problems than the US does.
One other question: what does this mean for oil? Trump and the Republicans strongly opposed the deal with Iran that lifted US sanctions on the country. It could be that they try to renegotiate that deal or even just abrogate it. That could hurt Iran’s ability to sell oil and probably send oil prices higher. I think though that given the multilateral nature of the agreement, which included China, Russia and the European countries as well, it would be hard for the US to pull out now.
Investors may be wondering what is likely to happen in the financial markets after the US Presidential election. We know roughly what’s likely to happen, because we saw some natural experiments recently.
For example, during the first debate between Clinton and Trump, observers sensed that Clinton was getting the better of Trump. As that happened, there was a big switch to risk-on: stocks gained, while the safe-haven assets – gold and JPY – fell. MXN was the biggest mover. Mexico has been a particular target of Trump’s, with his threat to dismantle the NAFTA agreement, throw out Mexican immigrants and build a wall between Mexico and the US. So the MXN has been the main bellwether of the election, and it rose sharply.
Clinton has positioned herself as the continuation of President Obama’s legacy. In that respect, much less will change immediately if she becomes President. Furthermore, as we’ve seen, the US stock market is likely to rally if she wins. No immediate disruption to the economy and a higher stock market should allow the Fed to go ahead and raise interest rates in December. In that case, the dollar is likely to go up overall, too. The exceptions might be vs MXN, as I said, and CAD, which is also at risk from a Trump presidency and could be expected to gain somewhat.
A “risk on” environment, higher dollar and Fed tightening would probably be bad for gold. But global stock markets can be expected to rally, particularly EM stocks, since the risk of a trade war would be averted.
Similar trends are visible over the longer term. As this graph from the Iowa Electronic Market, a market for betting on the outcome of the election, shows, Trump’s popularity (the red line) bottomed out on Oct. 23rd. It then started to rise sharply.
The US stock market peaked on the 24th, then started declining as Trump’s popularity rose. Global stocks were dragged down with US stocks. On Oct. 28th, the FBI announced that it was investigating more of Clinton’s emails, which gave a big boost to Trump again, and stocks and the dollar continued to fall, while gold rose (gold is inverted in this graph).
But then on Sunday the 6th, the FBI announced that there was nothing new in the emails, and Trump’s chances of winning suddenly fell back. With that, stocks and the dollar rose, while gold fell.
So just as the debate showed a big “risk on” shift when it looked like Clinton was more likely to win, the evidence of recent days is that if Trump wins, market sentiment will shift strongly to “risk off.” Gold and JPY are likely to benefit the most, while stocks may decline globally.
Trump’s main policy focus has been on trade. Mexico would be his first target, but Canada would be affected as well, as so much of its exports go to the US. Moreover, all emerging market countries that export to the US would be vulnerable, such as China, Korea, and Singapore. We could expect MXN, CAD and the currencies of other countries that export to the US – plus commodity exporters in general -- to fall in case of a “risk off” trade.
The impact of a Trump victory on the dollar overall is hard to determine, though. On the one hand, if he caused the US stock market to fall and generated uncertainty about US economic policy, then the Fed would probably delay hiking rates in December, much like the Bank of England cut rates after the Brexit vote. That could weaken the dollar.
Furthermore, historically trade wars have been bad for the dollar, and the market might start discounting that. And most economists think Trump’s economic policies would be damaging for the US economy, which makes it hard to see why the USD should rally.
BUT…we saw back in 2008 how even when the US was the source of a global meltdown, the US bond market and the US dollar were still the ultimate safe-havens and money flowed into the US. The dollar strengthened despite the fact that the collapse of the US housing market caused the global financial crisis. That might happen this time, too. Except of course the picture is complicated by Trump’s threat to renegotiate the national debt, which means Treasuries might not be considered as safe as they were before.
In short, a Clinton victory would probably mean a rally in risky assets, such as stocks, commodities, USD, MXN and CAD, and a bear market in safe-haven assets, such as gold, silver, JPY and to a lesser extent CHF. A Trump victory would probably mean the reverse. The implications for the dollar overall are hard to predict in case of a Trump victory, however. It’s likely to gain vs EM currencies, but its performance against the G10 is uncertain.
Probably the cleanest way to position for your expected result is either through MXN/JPY or gold.
There were two major changes in the outlook for the pound Thursday. First, the UK High Court ruled against the government on Brexit. It said that Parliament had to have a chance to vote on the Article 50 declaration. The UK Supreme Court will hear the case again in early December. Assuming that they agree, then it’s likely that there will be a general election next year before a new parliament votes on the issue. That means Article 50 probably won’t be triggered by next March as planned. More months of uncertainty but at the same time, more time within the EU and therefore less disruption to the UK economy. That should be good for the pound.
As for the vote, it’s unlikely that Parliament would decide to block Brexit entirely. Instead, they will probably try to ensure that Britain stays inside the Single Market. In other words, a “soft Brexit,” which would also tend to be better for the pound.
Then the Bank of England came in with a more hawkish than expected policy. They unanimously decided to keep rates unchanged, but that wasn’t the main thing at all. Whereas before they had said they expected to cut rates again, now they say rates could go either way. They raised their 2017 forecast for inflation to 2.7%, far above the 2% target, and said there’s a limit to how much of an overshoot they’ll tolerate. So this is very positive for the pound as well.
The weekly Commitment of Traders’ report shows that investors are still holding nearly record short positions in the pound. Following this news, I expect to see further short-covering push the pound back up.
Incredible volatility overnight! For no apparent reason, GBP just suddenly collapsed as computer-generated sell orders flooded the market. But just as the currency collapsed for no perceptible reason, it quickly rebounded for no reason either. It went from down an incredible 6.1% in a couple of minutes to down 1.7% in an hour, which still a pretty sharp move when you consider that there was no real reason. (Cable went from $1.2610 to $1.1841 on Bloomberg, another site recorded a low of $1.1378. It recovered back to around $1.2450 within an hour.)
The collapse demonstrates the dangers of algorithmic trading, when computers trade directly with each other at nanosecond speed. It can be particularly dangerous during times of low liquidity for a currency pair. That was the case with sterling today during the Asian trading day.
Such events are becoming more frequent in financial markets as regulators require banks to back their operations with more capital. With higher capital requirements, risk-taking appetite and the ability of market participants to take large positions diminishes at the same time as more and more trading is being done by computers without human intervention. There was a similar “flash crash” in ZAR recently as well.
There was some big news out overnight: OPEC agreed on a production cut! This is the first time in eight years they’ve agreed to something like that. Expectations for the informal meeting that took place yesterday were quite low, so oil prices shot up over 5% on the news.
The group agreed to restrict its total output to 32.5mn-33mn b/d. The smaller number would be a cut of about 750k b/d from what OPEC said it pumped in August.
Now, this isn’t all that it seems. First off, they didn’t decide on individual country quotas. Who will cut production by how much? That’s the hard part. That will be decided at the Nov. 30th meeting.
Secondly, Iran was exempted from the deal. Iran is currently pumping around 3.68mn b/d, which is about 11% of total OPEC output. Since Iran has said that it wants to increase production back up to its pre-sanction level as a percent of total OPEC output, even if we estimate a 13% market share for Iran, which is on the low side, and OPEC cuts production to the low end of its range, that would mean Iran would boost its production by at least 545k b/d. That alone would wipe out most of the supposed cuts.
Furthermore, OPEC was pumping around that much oil from March to June. It’s not a major cut in production at all.
And when it was pumping that much oil, Brent averaged $45/bbl, which is pretty much what it averaged before the meeting. So it’s not clear this will do much to shore up prices, especially if US producers jump in and increase their production in response.
Nonetheless, the news is bullish for oil in that it signals a new approach by Saudi Arabia, which up to now had been intent on maximizing market share at the expense of price. So it could help to boost prices over the longer term. We’ll just have to see how OPEC and particularly Saudi Arabian policy develops. We’ll have to see how things go at the Nov. 30th meeting.
Personally, I think the price of oil is capped, because if OPEC restricts production and pushes prices up, US producers will just respond by increasing their production and push prices back down. So overall output won’t be restricted at all and prices will be unable to rise in a sustained fashion, in my view. However, there may be plenty of opportunity for volatility.
Last night was the first of three US presidential debates. With the polls so close – Clinton leads by less than 2 percentage points -- the debates have the potential to sway the undecided voters and tip the election either way.
The market clearly thought that Clinton won the debate. As the graph shows, both the stock market futures and the Mexican peso took off shortly after the debate started at 01:00 GMT. The Mexican peso is seen as a bellwether for Trump’s chances of winning the Presidency, because he has threatened not only to build a wall between the US and Mexico, but also to rip up the North American Free Trade Agreement, NAFTA, which has done a lot to promote manufacturing in Mexico.
The debate may have convinced some people who were undecided, but it looks like it didn’t manage to change many people’s views. For example, the readers of the right-wing Drudge Report web site overwhelmingly thought that Trump won.
Similarly, the readers of Fortune Magazine, a business publication with a generally Republican readership, gave Trump a small win even though the magazine’s own writers gave the debate to Clinton. Fortune said, "the Democratic nominee presented as composed and commanding, ticking through her policy prescriptions while landing a series of devastating blows on Donald Trump’s record and readiness. A fidgety Trump meanwhile tried repeatedly to ruffle her with interruptions while riffing his way through his own answers, but struggled on both counts."
But a more scientific poll by CNN/ORC, which assembled a group of voters more representative of the US voting population, showed 62% of viewers thought Clinton had won while only 27% thought Trump did.
That doesn’t mean Clinton now has the election sewed up. Four year ago, polls showed Mitt Romney won his first debate against Barack Obama by about the same margin, and we all know how that election turned out.
What these polls show to me is the power of confirmation bias. That’s the scientific way of saying that people hear what they want to hear. People who support Trump naturally found his arguments & style more convincing, while people who support Clinton naturally preferred her performance.
The question is what the undecided people thought. With the race so close, the undecided people could tip it either way. In that respect, the debate was a success for Clinton: the CNN/ORC poll showed that 34% of the respondents said they were more likely to vote for her after watching the debate, whereas only 18% were more likely to vote for Trump. (47% said it had no effect; these were probably people who were already decided.)
What the market thought was clear: the market thought Clinton won. That’s considered to be good for stocks, good for the dollar, good for risk-sensitive currencies such as AUD and SEK.
The reason is that investors like stability and dislike uncertainty. Whether you agree with her ideas or not, Clinton represents continuity. Although many of her views and policy goals are different than those of President Obama, both she and he are selling her candidacy as a way to build on the successes of the Obama presidency. In that respect, she represents continuity.
Also, investors no doubt remember how well the dollar did when her husband was in office. Once Treasury Secretary Lloyd Bentsen was replaced by Robert Rubin, the administration’s mantra became “a strong dollar is in the best interest of the US” and the dollar enjoyed a multi-year rally under the first President Clinton.
Trump on the other hand represents change, at least insofar as he would be a change from the incumbent. He is also known to have almost violently different views on trade than anyone who’s occupied that office for the last several decades. There’s been a free-trade consensus among policy makers of both parties for quite some time, but he’s pledged to rip up almost all the country’s trade agreements if he gets into office.
When President Bush imposed tariffs on Chinese steel back in 2002, the move was enormously detrimental to the dollar. Imagine what would happen to the poor dollar if Trump made good his promises to rip up NAFTA and pull the US out of the World Trade Organization!
We had the long-awaited FOMC meeting last night. As expected, the Fed did not hike rates, but it did keep the door open for a rate hie in December.
They said that “the case for an immediate increase in the federal funds rate is stronger” than it was when they last met in July, as the near-term risks to their outlook are now “roughly balanced.” But they decided in any event “to wait for further evidence.”
Chair Yellen explained that slack in the labor market is being taken up somewhat more slowly than in previous years. What that means is that even though the number of new jobs each month is pretty strong, as shown by the steady rise in the nonfarm payrolls, the unemployment rate is no longer falling – it was the same 4.9% in August as it was in January.
And broader measures of unemployment, such as people who are working part-time but would rather work full time, have flattened out, too. The Committee wants to let the unemployment rate get below 4.8%, which is what they estimate to be the long-term equilibrium level of unemployment in the US.
It’s curious that Yellen spent a lot more time talking about employment than she did about inflation, which is consistently running well below their forecasts. That suggests to me that they are largely ignoring the inflation picture and instead looking to raise rates as soon as the employment situation makes it politically possible.
Also she explained that since monetary policy is “only modestly accommodative,” if inflation did start to accelerate they wouldn’t have to raise rates very quickly or very far to shift to a tighter policy.
The divergence of views among FOMC members is increasing. Three of the 12 voters dissented, because they wanted to hike rates at this meeting. At the same time, the dot plot shows that there are two people who see no need for a rate hike at all this year. So the committee is becoming more polarized.
Nonetheless, the message from the meeting was clear: even though they still want to hike, they see the future path of rates being shallower than it was before. You can see here how the average forecast for rates at the end of each year came down compared to what they thought in July. The blue line represents what the market is expecting, which is still much lower than what the FOMC expects.
The median FOMC member is now looking for only 2 rate hikes next year instead of 3 previously. (That’s assuming they have one hike this year.)
And they continue to lower their estimate of the long-term equilibrium level of rates.
While they revised down their interest rate forecasts, there were really no significant revisions to their economic forecasts. So they must simply believe that the appropriate level of interest rates is getting lower for any given level of economic activity. Over the longer term, that could be negative for the dollar – except that every major central bank probably thinks the same way.
Unusually, the implied interest rate on the fed funds rate futures actually moved up slightly after the meeting – previously, the FOMC has revised down its forecasts but the market has moved down its forecasts too each time. The market may think Fed is reaching the limit of its dovishness. That’s why I think although the immediate impact of the meeting was negative for the dollar, I think this may represent the bottom or near the bottom for the US currency. I expect the market will start to give more credence to the Fed’s tightening intentions from here and that is likely to support the US currency going forward.
The Bank of Japan (BoJ) today surprised the markets with yet another tweak of their monetary policy. As expected, it focused on the shape of the Japanese Government Bond (JGB) yield curve, but it contained enough new and unexpected aspects to provide several surprises.
First, a short history of BoJ policy. They introduced “Quantitative and Qualitative Monetary Easing”, or QQE, in April 2013. When that didn’t work, they introduced “QQE with Negative Interest Rates” in January of this year. Now that they see negative interest rates actually harm the economy, they’ve switched to “QQE with Yield Curve Control.”
There are two major components of this new program:
Yield curve control: At the short end of the yield curve, BoJ has kept the benchmark rate for part of bank reserves unchanged at -0.1%.
At the long end, will target 10-year Japanese Govt Bond (JGB) yields at around current levels of 0%. They’ll buy bonds if yields start to move up, or they will lend money for up to 10 years at a fixed rate if yields start to move much lower. I’ve never heard of anything like that before. Their longest operations up to now were 1 year. The ECB’s long-term refinancing operations are 3 years.
Anchoring the 10-year yield at 0% has two effects. First off, they’re guaranteeing that if the banks (or anyone else) buy 10-year bonds at this level, they won’t lose money. Secondly, by preventing 10-year yields from going below zero, the yields of longer-term bonds should stay positive. That will help the profitability of insurance companies and pension funds, which need longer-term assets to match their long-term liabilities.
In any case, cutting the interest rate on bank reserves further into negative territory would have hurt bank profits, so this is better than the alternative, as far as the banks are concerned.
- Inflation-overshooting commitment: This is even more radical, in my view. Before, they were pledging to get inflation back up to 2% by a certain time. They never met that target, so they just kept pushing it out further and further. Now they’ve scrapped the target date and instead pledged to keep expand the monetary base until inflation is stable above the 2% target. In other words, they’ve committed to overshoot their inflation target. This is the only central bank in the world (that I know of) that has taken such a radical step.
They also said they will cut interest rates further if necessary
The moves seem aimed at reducing the harmful side effects from the negative rate policy, which was hurting bank profitability and could make them less willing to lend
Japanese stocks rose as banks & insurers are seen as benefiting from the moves. That’s the white line in this graph. USD/JPY, the yellow line, moved up almost in lockstep with the stock market. That seems to have been the path by which the BoJ’s moves affected the currency market.
But the graph shows, once the Tokyo stock market closed, the yen began strengthening again. That’s because these moves won’t directly impact the currency. It’s an indirect impact: by making banks and insurance companies more profitable, they won’t need to hedge their overseas investments so much and they may be more willing to take risks. But on the other hand, by making Japanese bonds more attractive, the BoJ could be discouraging them from investing abroad. So the impact on the currency isn’t that clear.
Meanwhile, the JGB yield curve steepened somewhat as 10-year yields, which had been below zero, moved up to around zero %. Rates at the longer end moved up as well, which may have been as much the BoJ’s intention as anything else.
All told, I believe that the BoJ’s pledge to keep policy loose not only until they achieve their inflation target but until they overshoot their target on a sustainable level is the most radical thing I’ve heard from a central bank. I think in the long term, that should work to weaken the yen, because it promises that they will just keep trying and trying. But in the short term, I’d say a lot depends on what the Fed decides tonight.
Today I’d like to discuss what impact the dramatic and largely unexpected Brexit vote will have on the world. But before I do, I’d like to discuss an event that happened almost 20 years ago: the Russian bond market default. The connection may not be immediately relevant, but I think it explains a good deal of why we are now entering into one of the most dangerous periods I’ve seen for the markets.
You may remember that Russia defaulted on its bonds back in 1998. At that time, one of the favorite investments for hedge fund was to borrow money in the low-interest-rate yen and invest it in high-yielding Russian bonds. When the Russian bond market collapsed and their assets suddenly plunged in value, all these hedge funds rushed to close out their positions and repay their liabilities. The result was an enormous rally in the yen – up something like 4 yen a day every day for a week.
The reason the Brexit vote reminded me of that event was this: it was completely understandable in retrospect, but completely unforeseen in advance. I don’t remember anyone warning that a collapse in Russian bonds would affect Japan. Yet it did, very much so. Now that we know why it did, we can see the cause and effect and we feel that we should have been able to forecast it. But certainly nobody did at the time.
Now we are hearing a lot of predictions and forecasts for what will happen after Brexit. That’s only natural; we all have to make plans for the future, and so we all want to have an idea of what the future is going to be like. Unfortunately, it’s inherently unknowable. The one thing we can be certain about the future is that it’s unlikely to be the way anyone imagined. As Daniel Kahneman said in Thinking, Fast and Slow (a book that every investor should read – twice),
…our tendency to construct and believe coherent narratives of the past makes it difficult for us to accept the limits of our forecasting ability. Everything makes sense in hindsight…And we cannot suppress the powerful intuition that what makes sense in hindsight today was predictable yesterday. The illusion that we understand the past fosters overconfidence in our ability to predict the future.i
I’d like to list some of the effects we’ve already seen from the Brexit vote. The disintegration of the Conservative Party leadership might have been foreseeable, even though PM Cameron had pledged ahead of time not to resign, but the Labour Party too? Boris Johnson out of the running for PM? Perhaps the gating of the UK commercial property funds was foreseeable, but who predicted that Brexit would accelerate the collapse of Italian banks? (I’m not even sure what the connection there is myself – it seems to be based on the expectation that the ECB will have to keep rates lower for longer, and that’s a particularly difficult environment for the troubled Italian banks.)
In fact, one of the consequences of the vote so far seems to be the absolute reverse of what everyone predicted. Most pundits – myself included, again – expected Brexit to be the first domino in a chain that would see voters in at least France and the Netherlands pushing for their own referendum. But so far the impact seems to be the exact opposite: voters in Spain strengthened the pro-European center-right party, while polls in Denmark, Finland and Sweden have shown increased support for staying in the EU. Perhaps people are seeing the problems that the UK is suddenly confronting by voting to leave and re-evaluating whether it’s worth it. Could it be that the ultimate impact of the Brexit vote could be greater Eurozone integration? Perhaps the Italian banking crisis will be the impetus. Seems hard to imagine, but not impossible.
The impact isn’t just in Europe. For example, during the recent FOMC meeting, participants said they thought it would be “prudent” to wait for the result of the referendum “in order to assess the consequences of the vote for global financial market conditions and the U.S. economic outlook.” Now that they know the result, how much longer will they wait? Brexit has sent the yen up sharply and thereby destabilized Japanese markets. Investment decisions on hold globally, economic activity lower, oil prices fall…what will be the impact on the Middle East?
In short, the implications of this event for investments are both global and unknowable. Money is flowing out of Britain (or it would, if the property funds would allow redemptions); where will it go to? If people sell their Belgravia flat, will they buy one in Vancouver instead? If they bail out of gilts, will we see the US long bond trade with a 1-handle, and US mortgage rates fall further? Will my house in Phoenix increase in value because of discontent in Sunderland?
Nonetheless, we have to make decisions based on our incomplete knowledge. Even doing nothing, even keeping our money in cash, is a decision. Cash in which currency?
We know that uncertainty has increased and that it’s likely to last some time. In that context, the typical trades in the FX market are to buy dollars; buy the safe-haven JPY and CHF; and sell the main currency affected, GBP. High-beta currencies such as AUD and SEK are also likely to be hit. Of course, these currencies have already moved a considerable amount. But just because they are cheap or expensive doesn’t mean they can’t get cheaper or more expensive.
The best plan at such times is to remember the wise words of Howard Marks, of Oaktree Capital: “You can’t predict. You can prepare.”
Fed and SNB lower their real interest rate forecasts: are we all turning Japanese?
Four major central bank meetings in 24 hours and no change in policy at any of them. The Chinese philosopher Lao Tzu summed it up when he said, “By doing nothing, everything is done.”
Yet as spectators at a soccer match well know, no score doesn’t mean no action. What emerged from two of these meetings was the conclusion that real interest rates – interest rates minus the rate of inflation -- would stay lower for longer than expected.
In the US, the FOMC lowered its forecast for end-2018 interest rates by around 50 bps to 2.46% on average from 2.95% (2.38% from 3.00%, using the median). Yet the forecast for inflation was left unchanged for both 2017 and 2018. That means lower real interest rates. The Swiss National Bank reached the same place but from the other direction. It kept its rates the same while predicting a slightly higher inflation rate – make that, less deflation – for 2016 and a slightly higher inflation rate for 2017. That too means lower real rates.
What was particularly significant for the Fed was the change in their forecast for the longer-run level of the Fed funds rate. Their median forecast for that fell 25 bps in March and another 25 bps this time as well. That’s a huge move, considering that this is their forecast for the long-run equilibrium level of rates – the rate over several economic cycles. It’s particularly significant given that there was no change in their forecast for the long-run rate of growth or inflation. They are now saying that for a given growth and inflation combination, interest rates will probably be lower than they were before. Note that their forecast of a future long-run Fed funds rate of 3% is only slightly more than half the actual long-run average, which is 5.73% (from 1954 to end-2007).
The Fed’s downgrade of this longer-term rate coincides with an important break in the market’s expectations for inflation. Until recently, the market’s inflation expectations were closely correlated with the current price of oil. But in late April, the two started to diverge significantly, with inflation expectations headed lower even while oil prices headed higher. Perhaps the market thinks that higher oil prices are only temporary (as do I); perhaps they see energy prices having less impact on inflation over time. Whichever, this change in inflation expectations is worrisome for the Fed, as Chair Yellen admitted: “we can’t take the stability of longer-run inflation expectations for granted,” she said at the press conference.
Note that this is also the week that 10-year German Bund yields went negative, suggesting that in Europe too, investors see little prospect of inflation any time soon. (Rates of course are also affected by the presence of a major non-profit-seeking buyer, namely the ECB.) We haven’t quite reached that point in either the US or the UK, however.
Is Japan’s experience a harbinger of things to come? There, overnight rates have been 50 bps or less since 1995, yet inflation has only exceeded 1% when the government raised the consumption tax. It could be that we are going to see global conversion to the Japanese norm, at least among the advanced economies.
What does this mean for currencies? In the near term, probably a weaker dollar as the “monetary policy divergence theme” fades even further from view. It is bullish for emerging market currencies as the reduced likelihood of any Fed tightening improves the outlook for those economies. It improves the outlook for carry trades; within the G10, that means NZD and AUD, the currencies with the highest interest rates, may benefit, while in EM, RUB, TRY and ZAR have the highest rates.
I would recommend caution with carry trades right now and also with EM currencies in general. That’s because these trades don’t perform well when during a risk-off environment, and next Thursday is the Brexit vote – which could turn out to be a serious, serious risk-off event.
Speaking of which, the statement following the Bank of England meeting today laid out the Monetary Policy Committee’s expectations for what would happen to sterling if the country votes to leave the EU. “On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply,” the MPC predicted. “This would be consistent with changes to the fundamentals underpinning the exchange rate, including worsening terms of trade, lower productivity, and higher risk premia.” Note that by saying the fall would be “consistent with changes to the fundamentals,” they are in effect ruling out intervening in the FX market to counter any such decline. We could see some major volatility if the country votes Leave.
What to expect from the upcoming central bank meetings: ECB, BoJ, Fed
Webinar held on 3 March on www.fxstreet.com The recording can be accessed at: https://www.fxstreet.com/webinars/sessions/what-to-expect-from-the-upcoming-central-bank-meetings-ecb-boj-fed-20160303/
Hello everyone! This is Marshall Gittler, head of investment research here at FXPRIMUS.
Today I’m going to be discussing the upcoming central bank meetings We’ve got three biggies in the next two weeks: the ECB on the 10th (Thursday), the Bank of Japan on the 15th (next Tuesday), and Fed on the 16th. In addition, the Bank of Canada and RBNZ both meet on Wednesday, March 9th (Thursday in NZ). There’s also going to be a Bank of England meeting on March 17th, but that is likely to have relatively little market impact now that all the Monetary Policy Committee members are voting the same way.
So there’s going to be a lot of central bank activity in the near future. And as we all know, the markets are being totally dominated by the central banks nowadays.
So what can we expect from these meetings? Well, let’s first see what the general world conditions are.
The main things to notice are:
- Growth in most countries is stagnant at best, slowing at worst
- EM countries in particular are slowing sharply
- Global trade is falling
- Inflation is still well below target almost everywhere
- Financial markets are volatile (although not as volatile as they were back in January)
I’d like to take the fourth point, sluggish inflation. It’s true that inflation has picked up in many countries, but it’s still well below the central bank’s official target in most of them. We can see here that in the US, it’s moving back towards target, but the EU and Japan are nearly in deflation! So it’s hard to see how those two are going to hit their targets without further action. That’s why I think we might see further action from some central banks.
But…how do lower interest rates help an economy? In theory, they should boost lending. But you can see here that bank lending hasn’t picked up very much outside the US even though interest rates are at record low levels. That’s because companies don’t borrow just because money is cheap, they borrow it because they think they can invest that money profitably. Why should they bother building a new factory if they don’t think they can make money with it? This is the other problem that central banks face: lowering interest rates hasn’t worked in one of the main ways it’s supposed to.
So if lowering interest rates doesn’t encourage borrowing, what does it to? It weakens the exchange rate. That’s one way that central banks can help their economies out. But of course a country’s exchange rate will fall only if other countries don’t lower their rates too. If everyone lowers their interest rates, then relative interest rates remain the same and nobody wins – they just wind up in the same situation but with everyone worse off.
Furthermore, negative interest rates have started to have the opposite effect. You can see here in this graph of bank stocks relative to their home markets how bank stocks have underperformed the overall stock market recently. That’s because investors worry about negative interest rates eating into banks’ profits. That might force them to charge more for loans! So it may be that the interest rates tool is no longer as effective as it was.
Now let’s discuss the central bank meetings in the order in which they’ll occur:
The ECB is the one where expectations are the highest. At their last meeting, ECB President Draghi gave a big hint that they would increase their market assistance. He said that Eurozone inflation dynamics were weaker than expected that it may be “necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March, when the new staff macroeconomic projections become available which will also cover the year 2018.”
The point about the ECB staff’s economic forecasts is quite significant. The forecasts that they have now only go out to 2017. At their next meeting, the staff will make forecasts out to 2018. These are really important for the ECB. As you can see, the ECB is forecasting that growth will recover and that inflation will move back towards the target over the next two years. But if they revise down their inflation forecast for this year and next and forecast that it’ll take three years to get back to their target, they’ll have to take some further action.
As you can see in the graplh below, inflation expectations – the blue line – haven’t been affected at all by the ECB’s actions, and instead have basically followed the oil price, the yellow line. And in fact recently inflation expectations have continued to fall even as oil prices have stabilized. So with oil remaining at extremely low levels, the ECB has to do something lest a deflationary mindset get established.
Now, we all know that they can’t really do anything. For example, the Bank of Japan has kept its short-term rates at 50 bps or less for the last 20 years, yet they’re still struggling with deflation So I’m not sure that central banks have the tools to create inflation right now. But they can’t admit that. No central banker can stand up and say, “well, really we’re powerless to do anything about it.” The former BoJ Gov. Shirakawa effectively said that, and he was forced out of his job early to make way for Gov. Kuroda, who promised to do more.
So the ECB will have to take some steps even if they don’t really think that the steps will make any difference. That’s because of the role that confidence plays in the markets.They have to appear confident even if they’re not.
The question then isn’t whether they’ll do anything. The question is what they’re likely to do, and more importantly, whether it will be enough to impress the markets.
For example, they did increase their stimulus in December. They lowered the deposit rate by 10 bps further into negative territory, and extended the length of time the bond purchases were scheduled to run by six months, as well as some other small measures. But Draghi had built up expectations so high ahead of that event that the small increase was a disappointment to the market, and this is what happened: EUR/USD jumped 4 cents in one day!
So the key point is that this time, they know they’ll have to do something really big, or else the market will once again be disappointed. And a second disappointment after such strong suggestions in January would be really really disappointing for the market. It would send the euro up sharply and stock markets down sharply. And they can’t risk that. Financial conditions in the Eurozone have already been tightening over the last few months, whereas in the US they’re actually looser despite the fact that the Fed hiked rates in December.
So what can they do? They need to make a big impression on the market. Just changing one thing probably wouldn’t be enough. That’s why I expect them to reveal several new measures. Among these, I’d expect to see the following:
- A further cut in the deposit rate. They’ve lowered it by 10 bps increments each time, maybe they’ll try 15 bps this time.
- The introduction of a tiered deposit rate, like in Japan. That will be necessary to prevent the negative interest rates from pinching bank profits.
- Raising the monthly bond purchases
- Extending the minimum duration of the bond purchases
- More miscellaneous measures
I don’t want to get into the question of whether these issues would be effective in boosting economic activity and raising inflation. That’s not what matters for us. The issue for the FX market is whether it’s enough to boost market confidence. I think these measures would demonstrate to the market that the ECB is seriously worried about the downside risks to inflation and to the economy and is going to take, as Mr. Draghi said on another subject, “whatever steps are necessary” to fight them. That should probably boost Eurozone stocks and weaken the euro, as happened when they first cut rates into negative territory.
BANK OF JAPAN
Now, the next meeting is the Bank of Japan the following week. It’s a lot harder to predict what they will do at that meeting. On the one hand, Japan’s inflation isn’t going anywhere. The BoJ even invented a new measure of inflation, one that excludes fresh foods, energy and the effect of tax hikes, in order to make it easier to meet its inflation goal, but that measure too turned down in January.
To make matters worse, inflation expectations are falling. The % of people who expect inflation to be higher next year is falling – that’s the graph on the left – and market-based inflation expectation measures show that the market expects no inflation for the next five years. So there is reason for the BoJ to act again.
On the other hand, we saw earlier how Japanese bank stocks basically collapsed following the move to negative interest rates. That’s the yellow line in this graph. Furthermore, the BoJ board only voted 5-4 in favor of going to negative rates. That’s a very close vote, which doesn’t inspire much confidence in such a radical move.
One of the four people who voted against negative rates – Ms. Shirai – will be leaving the BoJ board on March 31st, and another, Mr. Ishida, will be leaving on June 29th. BoJ board members serve 5-year terms so both of them were appointed before Mr. Abe came into office. If I were Mr. Kuroda, I’d wait until Mr. Abe had replaced these folks with more sympathetic board members before taking action again, rather than risk having the vote go against me. So I think they’ll wait at least until April, after Ms. Shirai leaves, and probably until July before changing rates, unless something big happens. That would suggest the yen is likely to strengthen further after the upcoming BoJ meeting.
After that, it’s a lot to do with the general global risk environment. I still believe that Japanese investors have more money to put offshore and that those capital flows are likely to weaken the yen further, but risk aversion may interfere.
Finally, there’s the Fed meeting the next day. I don’t think anyone expects them to raise rates at this meeting. Nonetheless, I think the market is underestimating the likelihood of another rate rise.
This graph shows the FOMC’s forecasts for the Fed funds rate over time, taken from the materials that they publish every quarter, vs the market expectations as derived from the Fed funds futures. As you can see, there’s a huge gap. The FOMC is assuming at least 3 more rate hikes this year, while the market is only pricing in about a 50-50 chance of even one more. (Note: the probability has increased somewhat since the webinar.) But does the Committee really need to hold off so much?
They have a dual mandate: they have to aim for price stability, which they define as a 2% rise in the core personal consumption expenditure, and full employment, which they estimate to be a 4.9% unemployment rate. As you can see, they’re pretty close to reaching both those targets.
So why didn’t they move in January? They explained that they are “closely monitoring global economic and financial developments and assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.” Note that they said “global economic and financial developments,” not just “domestic economic and financial developments.” So apparently a lot depends on whether global growth recovers and markets around the world stabilize. You can see here from this graph of the implied volatility of various instruments that volatility is still pretty high, but it’s coming down. If that continues, I think they’ll still plan on hiking later this year.
The important thing will be to see the dot plot. This is the dot plot from the December FOMC meeting. Each dot represents the forecasts of a member of the Committee for the Fed funds rate at the end of each year. You can see from this the distribution of forecasts on the Committee. This is where I got the average weighted forecast that I used in the earlier graph. I think if the Committee is still forecasting at least two rate hikes this year, the market will have to adjust its rate expectations upwards. That is likely to strengthen the dollar. If on the other hand the Committee capitulates to the market’s view and forecasts only one hike this year, then I think the dollar will weaken.
In any event, many of the US economic indicators are starting to come in better than expected. The mood in the US is improving. Against this background, I wouldn’t be surprised to see some further downward revision to the Committee’s forecasts, but I don’t think they’re likely to change that much. I expect that the market will be surprised on this account and the dollar will strengthen after the FOMC meeting.
This is Marshall Gittler, head of investment research at FXPRIMUS. Get more market insights on our education pages and turn your trading ideas into action with FXPRIMUS, The Safest Place To Trade.
Brexit – the question of whether the UK will leave the European Union – is on everyone’s mind nowadays, after UK PM David Cameron called a referendum for June 23rd. Will they or won’t they? That’s not necessarily the right question, at least not for now. The proper question for the FX market is, might they? And the answer to that one is a definite “maybe.” So long as it’s “maybe” and not “no,” I think the pound is likely to be under pressure.
Fears of a Brexit have made the pound the worst performing major currency over the last week, even worse than the Argentinian Peso, the habitual resident in the FX basement. Of course, at some point it may mean revert – markets tend to overshoot in one direction then overshoot in the other – but I’m not sure it’s overshot to the downside quite yet.
At the end of the day I don’t think the British public will vote to leave the EU, but the market has to price in the chance that they might, and if that chance increases, then the risk premium associated with British assets and with the pound should increase too. That means a weaker pound.
The problem is that I don’t see things getting better rapidly on the Continent, and therefore I think the risk of higher poll numbers for the “out” vote may increase. In particular, the refugee issue is heating up again and is likely to get even warmer along with the weather as more people decide to leave their shattered homes. Immigration is one of the main concerns of those British who are dissatisfied with the EU. PM Cameron’s modest renegotiation of the UK’s status within the EU will probably fail to mollify these folks.
We can take some lead from the Scottish referendum on independence that was held in September 2014. While in the end the vote went against independence, it was noticeable that support for leaving rose as time went on, while declared support for staying in fell. In the event the vote to stay in was higher than the polls had suggested, but so too was the vote for leaving, as the “I don’t knows” made up their minds. The latest polls show some 46% want to remain in and 38% want to leave, but that’s almost exactly where we were with the Scottish referendum four months before it took place (48% “no” vs 35% “yes”) and it tightened up considerably after that.
Investors who want to take a position on the possibility that the UK leaves should do so by selling GBP/USD or, even better, GBP/JPY. That’s because if something with such wide-ranging and unpredictable implications does actually happen, the safe-haven JPY is likely to appreciate overall. It might also be worth considering buying gold in GBP terms, because gold too could benefit.
On the other hand, I think EUR would also be negatively affected in case of a vote to exit, although obviously not as much as GBP. That’s because not only would a vote to leave the EU be a leap into the unknown for the UK, it would also be a leap into the unknown for the EU itself, too. All sorts of questions arise, such as what will the people in Catalonia or the Basque region do? How would this affect the chances of anti-EUR parties, such as the National Front in France? Etc. Looking at the difference between the 6M risk reversals (which now include the referendum period) and the 3M risk reversals (which don’t encompass that event), it’s clear that the GBP options market is already concerned about the referendum while the EUR options market isn’t. That suggests the issue could put downward pressure on the EUR over the coming months as investors begin to think through the impact of a Brexit vote on other currencies besides GBP.
The year started out pretty badly, with the S&P 500 index down nearly 11% at one point. But since then it’s recovered about 40% of its losses in just five business days. Are we seeing a return of risk-seeking?
Certainly, many of the factors that were weighing on the market earlier in the year have stopped or even reversed. Foremost of these is China, where the authorities offered more measures to support the economy and boosted the currency. The fact that lending soared in January was also significant as it holds out the promise of a stable economy – although one wonders if prolonging a debt-fuelled expansion is really in the country’s best interest over the longer term. A slight rise in inflation there in January is also positive.
Meanwhile, in Europe, ECB President Draghi has reassured the markets that the ECB will do more in March, and even Bank of England uber-hawk Ian McCafferty has turned into a dove. Recent comments by (most) Fed officials give the impression too that they’re in no rush to hike any time soon, either.
The impact has already been felt in the bellwether commodity sector, where prices of many growth-sensitive commodities have risen slightly or at least stabilized after a prolonged period of declines. Brent for example is 25% off its recent lows, while copper is up 5.7% from the bottom.
Against this background, FX traders may want to put on some carry trades, taking advantage of the low interest rates among the buyers of commodities and the higher interest rates among the sellers. Going long ZAR, MXN, NZD or AUD and financing it with the safe-haven JPY or CHF, or the low-interest-rate EUR would seem to be one way to take advantage of this trend, if you think it’s likely to persist.TRY has the highest deposit rates among the readily available currencies, but given the geopolitical problems surrounding Turkey, its currency is likely to be subject to other forces. RUB is a strong oil playthat also has high rates; market participants who expect that oil will even stabilize should consider that currency too.
The Bank of Japan: Propping open Pandora’s box
The Bank of Japan’s introduction of negative interest rates is one of the most significant events to hit the FX market recently. By taking this action, the BoJ has basically said that its bond-buying operations have reached their limit and they need to find other ways to support the economy. The likely channel is through the exchange rate: by depressing interest rates across the yield curve and (one hopes) raising inflation, the BoJ is aiming to lower real interest rates. This won’t benefit companies that much, because they can already borrow at extraordinarily low rates, so the aim must be to push down the yen by making overseas investment more attractive and at the same time implicitly guaranteeing Japanese investors that the authorities will prevent the yen from strengthening.
Looking away from the yen, how might this move affect other countries? There are two ways: through trade and through policy. On the trade front, countries that compete with Japan are not likely to give up without a fight. I would expect to see other trading countries, such as South Korea, allow their currencies to weaken, too.
The big question will be whether or how China responds. If China responds by letting its currency weaken too, then that could set off a repeat of the round of risk aversion that we saw last August. Note that China has changed its way of managing the CNY and is now managing it against a basket of currencies, rather than just against the dollar, so it may move to offset a weaker yen. On the other hand, the country’s exports to Japan are relatively low compared to its imports from Japan, so it may decide to let the move slide as a wash.
The policy implications may be even more important. Simply put, now that two major central banks have instituted negative rates, the policy is no longer experimental but rather is a “standard policy tool.” Thus the BoJ has in effect validated it for other central banks. This had an immediate impact on the UK, where the market is now pricing in more of a chance of a cut this year. Sweden, Denmark and Switzerland, which all have negative rates now, may be emboldened to lower them further. It may also help ECB President Draghi to overcome opposition on the ECB Governing Council to lowering rates further into negative territory. (Note that the BoJ specifically said it would buy bonds at yields below its deposit rate, contrary to ECB policy.)
The BoJ said it “will cut the interest rate further into negative territory if judged as necessary.” And if other central banks cut in response to Japan, and then it cuts again, and then they follow again…it looks like the currency war is in full swing. The loser of this war – and hence the strongest currency -- is likely to be the dollar, as the Fed will probably at least keep rates steady if not hike further.
Special report: Today’s US nonfarm payrolls report for January
1330 GMT: US nonfarm payrolls (Jan) Today will be spent waiting for the US nonfarm payrolls report, the big indicator of the month. Strong employment data should encourage the Fed to keep hiking while any weakness might convince them to stand pat for longer. The market is looking for a relatively robust rise in payrolls of 190k, but after the stronger-than-expected ADP report of 205k, some people may have upped their forecasts. That would be a bit below the recent trend (229k a month over the last six months) but that would be quite reasonable after the enormous December (292k) and October (307k) increases. The market will also pay attention to any revisions to those earlier strong figures.
To be really supportive of the dollar, the figure would also have to show a rise in earnings and a rise in the participation rate, which are announced at the same time.
The reason is, the Fed wants to see a healthy job market. One part of that is that demand for labor should be rising and therefore the cost of labor should be rising. This has been happening; the rate of growth in earnings has accelerated from an average of 2.0% yoy in 2014 to 2.2% in 2015, and it was 2.5% yoy in December. However, the market is forecasting that the rate of growth in average earnings fell back to 2.2% yoy in January. That could be a negative for the dollar.
Another aspect of a healthy labor market should be more people coming off the unemployment rolls and into the work force. That would mean a continued rise in the participation rate. The participation rate hit a bottom of 62.4 in September and has since crept up to 62.6. That’s still low but at least the trend is upwards. No forecast is available for this indicator.
The unemployment rate is expected to stay at 5.0%. Only an extreme NFP number would be likely to change that.
It will be interesting to see how the market reacts to the data. On one hand there could be some relief if the data is weak, as it would discourage the Fed from hiking again any time soon. That could help risk-sensitive assets, such as the AUD and stock markets. On the other hand, more weak US data just adds to the evidence that the Fed shouldn't have hiked in December in the first place! One expects that the dollar would weaken in case of a miss or strengthen in case of a beat.
However, it’s not always like that. This graph shows how EUR/USD moved in the hour following the NFP the last six times that it missed its forecast. Curiously, the dollar strengthened three times and weakened three times.
On the other hand, the dollar gained for at least the first 30 minutes when it beat expectations. So it seems to me that its movement has more to do with the market’s view on the dollar than with what the number is. In today’s case, the market seems to be negative about the dollar for the moment, so unless it’s a pretty strong beat, the dollar could move lower.
13:30 - Canada – Unemployment rate and employment Change (Jan) At the same time, Canada releases its employment data for January as well. The market expects the unemployment rate to stay at 7.1% and for the economy to add 6k jobs, down from 22.8k in December. As the Canadian economy is increasingly affected by the weak oil price, there is a danger that unemployment may tick higher and job gains lower.
The Delphic Fed
The Fed’s January statement has replaced “Forward Guidance” with Delphic commentary that investors can interpret in line with their own biases. Some market participants believed that the Committee was still hawkish, because they did not rule out another rate hike in March (hence the fall in stocks). At the same time, those so disposed could interpret several key changes in the statement as dovish (hence the fall in bond yields). It’s as if they are now taking lessons in market communication from former Fed Chairman Alan Greenspan, who once told a senator that “if you understand me, I must have misspoke.”
They no longer say that they are “reasonably confident” that inflation will rise back to its target, but they did not say they think it won’t rise back to the target. They also removed the sentence about the risks to economic activity and the labor market being balanced, but they didn’t explain which way they do see the risks tipping. And they said they are “closely monitoring” global economic and financial developments, effectively a euphemism for China, oil and stock prices. “Closely monitoring” is a catchphrase for the Fed, much like the ECB saying it is “vigilant” the month before it takes some policy action. “Closely monitoring” means they’re worried about some issue that may affect policy, but it allows them to remain vague about what they intend to do about it. So at the end of the day investors are probably more confused than ever about the FOMC’s intentions.
There may be a reason for this ambiguity: it could be because the Committee isn’t sure what’s going on, either. The Fed is notoriously poor at forecasting the economy and the current mixed bag of indicators doesn’t make it any easier, especially if you start off by ruling out forecasting a downturn. A study by researchers at the San Francisco Fed showed that since 2007, the FOMC has been “persistently too optimistic about future U.S. economic growth.”[i] The previous year’s most recent annualized quarterly growth rate accounts for 62% of the variance in the FOMC’s forecasts even though there is little correlation between the quarterly growth rate at the end of one year and the actual growth rate over the next year, according to this study. In other words, despite the dozens and dozens of PhD economists at the Fed slogging away at forecasting the economy, the group responsible for steering the world’s largest economy basically makes policy using the rule of thumb that the future will be pretty much like the recent past.
In fact, it seems that the market is better at forecasting what the FOMC will do than the FOMC itself is! Note how much higher the Committee’s forecasts for rates at the end of 2015 were than the market’s.
The bottom line is that whether they hike again in March depends on the data, as usual. We now look to Fed Chair Yellen’s testimony to Congress on Feb. 10th for some clarity, but I doubt if we will get clarity then either, because I doubt if she has any clarity to give. This is only realistic, because in fact the economic signs are indeed mixed at the moment.
Is this ambiguity good or bad for the dollar? I believe that as long as they don’t rule out further rate hikes or change their forecasts, it should be dollar-positive in that the Fed remains more hawkish than the market. Moreover, the monetary policy divergence theme remains intact on the ECB’s side, if not the Fed’s. Nonetheless, that is all in the price already and so should not be much of a factor for the dollar’s future direction. We’ll have to see how the dots fall in March.
[i] Lansing, Kevin and Benjamin Pyle. 2015. “Persistent Overoptimism about Economic Growth.” FRBSF Economic Letter 2015-03. Available on the web at https://www.frbsf.org/economic-research/publications/economic-letter/2015/february/economic-growth-projections-optimism-federal-reserve/
Facing the same problems, central banks decide to wait and see
Both the ECB and the Bank of Canada remained on hold this week, but they both showed a bias for easing. The common point from their analysis was how both economies are being buffeted by the crisis in emerging markets and the collapse of oil prices. ECB President Draghi listed “uncertainty about emerging market economies’ growth prospects” and “volatility in financial and commodity markets” as two of the biggest factors causing heightened uncertainty, while BoC Gov. Poloz was more specific in mentioning “recent developments in China.” Of course falling oil prices hit the two areas in opposite ways: Draghi noted that lower oil prices should help consumers and companies, while Poloz said the BoC Governing Council focused its discussions on the implications of oil for the Canadian economy – one assumes not on how beneficial these implications would be.
One other notable difference is that the fall in oil prices has recently had a different impact on Canadian inflation than on Eurozone inflation. In past years, higher oil prices have meant higher inflation in Canada as they boosted the Canadian economy, while lower prices naturally meant lower energy costs and lower inflation – just like in Europe. But recently, the collapse in oil prices has been enough to send the currency plunging, and that has pushed up the price of imports, including food. The result is that Canadian inflation has actually been rising recently (watch Friday’s CI for December).
This creates somewhat of a policy dilemma for Canada. On the one hand, the economy is slowing and lower rates may be necessary to support business. On the other hand, that would probably weaken the currency further and push inflation up more (although at 1.4% it still has some way to go before it breaks out of the 1%-3% target range). My guess is that they will probably stand pat for some time further while they wait to see what kind of fiscal plan the new government comes up with. Meanwhile though I expect the market to do their work for them by continuing to weaken their currency as oil prices fall.
In the Eurozone I don’t see any such dilemma. So far the ECB’s QE program seems to be boosting bank lending without causing any harm to the average individual, as retail bank deposits have yet to go negative. Oil prices are now far below what the ECB staff assumed when they made their forecasts in December, and the International Energy Agency Tuesday warned that the market “could drown in oversupply” as Iran resumes supplying world markets. It’s quite likely that they will have to lower their 2016 inflation forecast of 1.0% at the March meeting, and probably the 1.6% forecast for 2017 too. Can they assume that oil prices recover by 2018? Nobody can assume anything nowadays. Draghi himself said that “the credibility of the ECB would be harmed if we weren’t ready to revise the monetary policy stance.” Of course, he also hinted that there would be more of a move in December than there actually was, but it will be hard to ignore yet another round of cuts in the inflation forecast within the time horizon of the ECB’s monetary policy. Further easing from the ECB should reaffirm and reinforce the “monetary policy divergence” theme that has been pushing EUR/USD down for some time.
Next week there are two more central bank meetings: the Fed on Wednesday and the Bank of Japan on Friday. The Fed is likely to stand pat, as not enough time nor data has gone by since the last meeting to conclude that further tightening is warranted. The Bank of Japan though faces a dilemma, though the opposite one from Canada’s: its currency is strengthening even while inflation is slowing. They too may choose to stand and wait at this meeting, but I think eventually they will have to take further action to prevent the safe-haven yen from becoming a danger to themselves.
Please help me welcome Marshall Gittler, Head of Investment Research at FXPRIMUS, welcome Marshall, and thank you for joining us this morning.
Thanks for inviting me, Kirsten!
Good to have you back. Folks, if you have any FX-related questions for Marshall, do post them up and don't be shy.
But to start with, it all feels a little bit better out there this morning after the Chinese trade data. What's your take, are we just pausing for breath, or is it time for a reversal of some of the moves we saw last week?
I was surprised by the data -- not only did it run counter to the market's expectations, but it also differed from what other countries are seeing. South Korea for example showed exports falling at an accelerating pace in December.
The US is also reporting weaker imports. And the Baltic freight index has been down every day this year and is moving further and further into record low territory, indicating no pick-up in demand for freight.
I would hesitate to make a big change in my investment outlook based on one print of data from China.
So does that mean you see more carnage ahead?
Yes, indeed. I think the slowdown in China will continue, with all the concomitant effects that we've been seeing around the world.
The weaker yuan may boost exports slightly, but where is the increased demand coming from? Few countries are reporting any great increase in retail sales.
You mentioned your investment outlook.... what currencies are you liking at the moment?
Macy's announced on January 6 it will be shuttering stores and laying off staff.
Yes...it's easy to find things to sell. What to buy in this environment?
The dollar is my #1 choice, although that may just be confirmation bias.
After that, I think it's relative trades -- buy SEK vs EUR, buy MXN vs CAD.
I think the market is looking for a turnaround in oil prices by the end of the year, which of course is possible -- it probably won't go to zero so it can't go down indefinitely!
There was a forecast of $10 yesterday...
But I think that will take some time, it's not a 1H event maybe a Q4 event, so for now I"m bearish the oil commodities.
$10/bbl...getting back to 1970s levels!
Leaving aside the enthusiasm for catchy headlines, we laughed at GS' $20 forecast not so long ago but it's not looking so ridiculous at the moment
Not impossible as the world starts running out of storage space. I think there are some problems shutting down oil supply and so we may see a "Sorcerers' Apprentice" event.
What's that then?
Personally, I laughed at their $200 forecast in 2008.
Hi Marshall what's the outlook for european equity markets
Ah, I'm showing my age...and the fact that I have two girls. The Sorcerers' Apprentice is a Disney cartoon about Mickey Mouse as a sorcerers' apprentice who gets the brooms to fetch water from the well for him, but doesn't know the spell to get the brooms to stop. As a result his house gets flooded with water until the sorcerer comes home.
European equity markets: seem to be underpinned by QE, but I think there could be problems ahead.
ah, of course! I was thinking of the most excellent book by that name
these aren't problems now re equities?
I wonder just how long Germany, one of the world's greatest exporters, can stay apart from this decline in global trade that's hitting Asian countries now.
Marc posted a chart earlier re the size of trade links with China, and Germany certainly stood out from the European countries
Germany exports just under 50% of GDP.
If China and Korea are suffering from slowing trade, why shouldn't Germany?
That's why they need the euro at 0.95 cents
Hi Marshall, what are your views on EUR/USD for 2016 ?
Marshall, where you see CNY going? Can it go beyond 6.8 as well?
Also while the surveys, such as PMIs, have been pretty good for Europe, a lot of the hard data, such as manufacturing & IP, have been weak.
ok, a couple of questions from the floor there..
EUR/USD: I'm bearish, like most of the market. I think ECB will have to increase its QE at some point, while I think the market is underestimating the FOMC's tightening moves.l
maybe we don't get the 4 rate hikes that the FOMC is forecasting, but I think we'll get three -- which is one more than the market looks for now.
Meanwhile, I think the disinflationary trend around the world is set to stay, and the ECB will be required to lean against that.
Oddly enough, the BIS is saying that deflation might not be that bad, and that it might be caused by global & not local factors as well as demographic trends, so central banks really can't do that much about it. But it will take a long time before central banks admit to anything like that.
Won't we see inflation start to head back towards target *if* we start to see the oil price rise?
Thanks for that. Though I agree with you .. it is not something that the central banks will buy any time soon
As for USD/CNY, I think it's headed higher. I don't have a target but I think all the signals are that the PBoC is preparing to let CNY float more vs USD.
And what would be your view on the cable for 3/6/12 months Marshall ?
Yes, if we see the oil price rise...but when will that be?
Sorry one second, I just want to continue on CNY
The PBoC's new focus on a basket of currencies for its target instead of just USD/CNY is its way of signalling that it will allow USD/CNY to move higher in order to keep the trade-weighted value of the currency more stable. This makes a lot of sense, as China does slightly more trade with Europe than with the US
So I think they have prepared the market to accept a higher USD/CNY and are going to allow that in order to keep exports from collapsing. Makes sense from their point of view. They can't stimulate domestic demand enough to take up the slack from falling overseas demand.
Sorry, now onto cable: a perfect storm for what was one of the FX market's favorite currencies just a few months ago!
How likely is 1.35?
No prob - this is little while ago - Credit Suisse cut its 12-M GBP/USD forecast to 1.33 from 1.45. Cut 3-M forecast to 1.40 from 1.48 (from DR)
Hemendra I would buy at 1.40.
The biggest fiscal tightening of any G10 country this year, record current account deficits, slowing manufacturing, slowing gains in wages, no inflation, and a referendum coming up just when free movement of people -- a major fear of UK voters -- has become a big issue on teh continent.
There's a lot of talk now about the 30-year support line.
Thinking back about it, many years ago when I was a journalist I wrote an article about planning for a "parity party" in the UK -- I think that was 1984. But cable only got down to 1.03 and then jumped 3 cents in one day...never reached that level again.
I think the 30-year trendline is around 1.4380 now. It briefly broke through that level yesterday.
How much are Brexit risks priced in?
Good question -- not much, I don't think. That may be because the date for the referendum hasn't been set yet.
The pattern we saw with the Scottish vote was that people really didn't pay much attention until a few weeks before. Then they paid a lot of attention. I think this is more on the radar screen now, though.
The thing is, it's hard to buy options without knowing an expiry date.
One thing I would stress here is just how unreliable polls have been recently.
Hmm, good point re the options
The Scottish vote poll, the UK election poll, the Greek referendum poll...they've all been bad.
Marshall, how time flies, it's 1030 and that means it's time to let you go
Thank you for joining us here this morning in GMF and hopefully we see you soon
So if the polls show only a narrow victory for remaining in the EU, I'd pay the premium -- remember that EVERY poll showed nobody winning the last UK election.
Yes I hear my lunch calling to me...thank you very much for inviting me and for your questions!
I look forward to visiting with everyone again.
How Did Pundits Do in 2015? Not Very Well, As Usual
This first comment of the year is always the most fun one for me. I’m going to compare what the market was forecasting for 2015 with what actually happened. The result, as usual, was that the pundits did poorly. Flipping a coin would have resulted in a pretty similar result and only cost you whatever the coin was worth.
For “market forecast,” I’m using the median consensus forecast from Bloomberg on 31 December 2014.
To start with, here’s a graph comparing what the market forecast the spot return would be for each of 31 major currencies against the dollar (the Y axis) vs what the spot return actually was (the X axis). (Spot return is just the change in the price of the currency.) If the market forecast was exactly correct, then the dot would fall on the yellow line.
The results were not particularly inspiring. The market only got the direction against the dollar of 17 of the 31 currencies correct or 55%. This about what one would expect by flipping a coin.
The biggest errors were BRL (expected: -1.7%%; actual: -33%), ZAR (+0.6% vs -25%), COP (+2.6% vs -25%), RUB (+16.5% vs -20%), MXN (+9.3% vs -14%) and TRY (-0.6% vs -20%). Clearly the market underestimated the decline in commodity prices, particularly oil, and the sell-off in EM currencies, not to mention the political turmoil in Turkey. What this suggests is that the slowdown in China and the sharp fall in oil prices were major surprises to the FX market.
Also note that almost all the currencies are either on or above the yellow line, meaning that they either met or were weaker than the market consensus. Only CHF (which abandoned its peg vs EUR) and JPY performed better than expected. That shows how the market underestimated the dollar’s rally in general.
If we look at total return (spot return plus interest income), the picture is even worse. In this case, the market got only 13 of 30 currencies correct, or 43%. Apparently the errors in forecasting interest were added onto the errors in forecasting currency rates, rather than cancelling each other out.
RUB was the major outlier; the market expected a total return of 45% but in fact it lost 8.5%. Many of the other commodity currencies also did much worse than expected on a total return basis.
One interesting point: ARS had the worst spot return (-35%) but the best total return (13%) of any of the currencies. It happened in 2013 as well that ARS was both the worst-performing and best-performing major currency in the world at the same time.
This analysis could be depressing for retail investors. You might think, if the highly paid experts working at the big investment banks who spend all their time thinking about FX can’t do any better than flipping a coin, how on earth can you? But I look at it the other way. This analysis suggests that even an amateur has a fighting chance against the experts, because the experts (and I include myself in this group) don’t really know for sure what will happen, either!
When will be the Fed’s next move?
Now that the Fed has started its process of “normalizing” interest rates, the question the market is focusing on is: when will be the Fed’s next move? I expect that there will be a period of waiting and watching while the FOMC members assess whether inflation is going to reach their target. If they decide it is, then they will tighten further and USD will appreciate; if not, then we may have reached almost the maximum for “policy divergence” and USD could weaken. But while they are waiting and watching, the dollar is likely to trade in a range.
Fed Chair Yellen spelled out in broad terms the conditions necessary for further tightening in her opening remarks at the press conference following the recent FOMC meeting. She said that “the process of normalizing interest rates is likely to proceed gradually, although future policy actions will obviously depend on how the economy evolves.” In other words, we are not to expect a rate hike at each meeting, as happened in the 2004 tightening cycle; each meeting is “live,” i.e. they will have to make a fresh decision at each meeting.
Under the Fed’s dual mandate, it is required to pursue “maximum employment” and “stable prices.” The former they define as 4.8% to 5.0%, which means that with the unemployment rate currently at 5.0%, they’ve met their goal. The latter they define as “inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures.” They’re not there yet by any means. That means progress on inflation will determine whether they hike or not. Inflation data may therefore supplant the monthly nonfarm payrolls as the key indicator for the markets.
With inflation taking the spotlight, the monthly personal consumption expenditure (PCE) deflator, the Fed’s main target, becomes an even more important indicator than before. The figure for November, which was released Wednesday, showed the overall deflator rising 0.4% yoy – a welcome acceleration from +0.2% yoy in October but still close to zero -- while the core index, which excludes volatile food and energy costs, remained at 1.3%, well below the 2% target.
While their target is defined as the PCE, the market assumes they look more at core PCE. The recent movements of this indicator are not encouraging. The three-month change annualized hit the target earlier this year, but has since declined and is now bouncing around 1.2% -- exactly where the yoy rate of change is.
Given the relatively stable inflation rate, I would expect a period of stability on the FOMC too. I don’t see much chance of another rate hike at the January meeting; I think the earliest would be the next meeting after that, in March. That means we may be in for a period of range trading on the dollar, at least against the major currencies.
I still believe that the Committee wants to raise rates further in order to normalize their monetary policy, but they need to move within the context of their mandate. That means they will be watching the inflation numbers carefully – and so should we.
South African Rand: stay away!
There’s been a lot of attention focused on the commodity currencies recently as commodity prices dive. I took a look at the South African Rand (ZAR) to see how it behaves relative to various commodities, stock market indices and interest-rate spreads and found out the following:
- 1) The strongest correlation is clearly with stock markets, notably the MSCI Emerging Market stock market index but also the S&P 500. As such, it appears that ZAR is a typical growth-sensitive EM currency.
- 2) It is more sensitive to movements in industrial metals than precious metals, even though the latter are a much bigger share of the country’s export basket. That probably ties in with metals as an indicator of global growth
- 3) The spread between official interest rates in the US and South Africa is little use in determining the exchange rate. On the contrary, the two-year spread actually works in reverse: that is, ZAR tends to weaken against the USD when the spread widens. That suggests that the causality runs the other way, i.e. the spread is driven by the FX rate rather than the FX rate being influenced by the spread. Note though that I only looked at nominal interest rate differentials. Other research found that real interest rate differentials (that is, after adjusting for inflation and default risk) are a significant determinant of the exchange rate.
The one thing that these sorts of studies don’t pick up is politics. Emerging markets have been described as "those countries where politics matter at least as much as economics for market outcomes,” and that certainly holds true for ZAR. (RUB and MXN are also EM currencies, but they are more closely correlated with oil than ZAR is.) For example, we saw barely a ripple in CAD recently when the Liberal Party ousted the Conservatives after nine years in office. On the other hand, on Wednesday USD/ZAR jumped after the well-respected Finance Minister was replaced, reportedly in part because of his opposition to a transaction involving a friend of the PM. ZAR is now at a record low.
My conclusion from this analysis is that when the commodity currencies are weak, ZAR is likely to be particularly weak. That’s because of second-round effects of commodity prices on local politics: low tax revenues and falling employment in the mining sector are likely to increase political instability. That’s why even though ZAR offers relatively high interest rates, I would not recommend carry trades using it at the moment.
Thinking about the direction of currencies in 2016, we have to start with the question: what will be the main themes likely to persist throughout the year? The past year was dominated by fears about global growth, particularly China; the decline in commodity prices, particularly oil; and the dénouement of policy divergence between the US and the rest of the world, particularly the EU.
The global economy doesn’t hit a reset button on 1 January and so I expect these trends to continue at least into the first half of the year and probably longer. Specifically, I expect Chinese growth to slow further as the government continues its multi-year effort to restructure the economy. That means the price of commodities used for capital investment, such as iron ore and copper, are likely to remain under pressure for longer than those for day-to-day use, such as oil. The oil-sensitive currencies (CAD, NOK, MXN, RUB) may therefore recover vis-à-vis the AUD, CLP and ZAR.
One side-effect is that EM countries, particularly China and the oil producers, may continue to run down their FX reserves. Their sale of US bonds should keep US interest rates well above those of other countries and support the dollar.
Slower Chinese growth and weak commodity prices also imply no quick return to inflation. The ECB and BoJ are therefore likely to ease further. I expect the BoJ to follow the lead of the ECB and SNB and to lower rates into negative territory for the first time in that country. That would probably propel USD/JPY higher still.
At the same time, the FOMC thinks rates will rise much more quickly than the market does. Assuming the Committee is even only half correct, that means further monetary policy divergence and a lower EUR/USD.
As for new trends, watch the refugee crisis in Europe. This issue will add to the pressure on the EUR as the institutional foundations of the EU starts to crumble: first the Shengen Agreement, then the debt limits, and then what? Furthermore, political disarray and high levels of immigration on the continent increase the possibility that the UK votes for a Brexit – another big uncertainty for the market, and one that is liable to weigh on the pound.
The US would seem to be an island of stability in this uncertain world. However, the impact of higher US rates and the Presidential election in November is likely to add to the global uncertainty. Still, the economics and the politics favor the dollar in 2016, in my view.