Category: US Markets

US Macro

Watching the close of the financial markets early Saturday morning (Sydney time), we were thinking that this FX UPDATE would be discussing a change in leadership in Turkey and how that would impact the rest of the Eurozone economics…….tanks in Istanbul, helicopters strafing government buildings; it all sounded pretty grim for Mr Ergodan’s government.   

As it turned out, the coup failed and order has been restored in Turkey, for now.

However, there are several other data points in the Eurozone this week which will drive trade flow in the Euro and other G-7 currency pairs. The three events that FX traders will be following are; the German ZEW data on Tuesday, the German PPI report on Wednesday and the ECB meeting and rate decision on Thursday.

The preliminary forecast for the ZEW is for a sharp fall in business sentiment from 19 to 8. This is one of the first post-Brexit readings and would represent the weakest number of the year. Wednesday’s German PPI data is expected to fall from .4% to .2%. With this series, it’s not so much the actually number but the direction of the trend. German inflation was in negative territory earlier this year and turn back to a negative trajectory is worrisome for the ECB.

US Macro

In the days following the June 23rd UK referendum, many FX market forecasters suggested the Sterling would fall sharply, perhaps even breaking below the 1.2000 handle against the USD. While these predictions may turn out to be correct, the GBP/USD has pretty much gone vertical since posting a 1.2850 low on Monday.  

And even though the consensus for the Bank of England (BoE) to cut rates yesterday was just slightly above 50/50, the GBP/USD traded sharply higher after the after the BoE voted 9 to 0 to leave rates unchanged. However, with most policymakers seeing a rate cut in August, the Sterling remains a sell into this recent reversion.

The Sterling’s reaction to yesterday’s BoE pause at .50% was an illustration of misplaced Central Bank expectations. The financial media was calling for a cut down to .25%, many FX traders believed them and when the BoE kept rates unchanged, the GBP/USD soared from 1.3250 to 1.3475 in less than five minutes……and then faded as the session progressed.

According to the minutes from the meeting, the BoE has been satisfied with how UK financial markets have functioned  post-referendum but there are some indications that businesses are delaying investment and hiring so economic aggregates are likely to be depressed in the near term. It’s worth noting that in addition to cutting rates, the BoE minutes discussed  a “range of possible stimulus measures.” We interpret this to mean a possible increase to Quantitative Easing in August.

US Macro

It’s often said that the time to worry about the US Dollar is when everyone is optimistic. With the FED seemingly on hold until 2017 and rumors of an impending US recession capping the Greenback over the last quarter, committed USD bulls have been few in numbers.

However, from both a technical and fundamental perspective, the USD had a very good week last week. The economic data points were helpful with Service Sector ISM printing its highest number of the year; including forward looking gains in export orders. The Headline Non-Farm Payroll (NFP) numbers snapped back by 287,000 new jobs, which was the strongest employment gain in eight months.

Looking ahead, we expect the US inflation data later in the week to reflect the firmer tone of the growth aggregates as the Atlanta FED GDP tracker is now showing the Q2 rebound could reach 3%. This is at a time when EU data is well and truly rolling over, the fallout from the UK “Brexit” vote is still be calibrated and Japanese officials are scrambling for solutions for rising deflation and falling economic growth.

US Macro

Due to the July 4th holiday last week, the June US Non-farm Payroll Data (NFP) will be released at 8:30 NY Time today. For FX investors, the delay was probably a good thing since the market has now had another five trading sessions to rebuild its technical indicators which were stretched to extremes during the fallout of the June 23rd UK “Brexit” vote.

However, looking back to last month’s surprisingly weak 38,000 new jobs posted on the May headline report, A solid rebound in June, combined with a positive revision, could push the major FX pairs back into the “Brexit” price ranges……..with the exception of USD/JPY.

Most economists and forecasters expect a strong recovery in in the overall NFP report with headline growth estimated between 160k and 180K. These estimates are supported by a sharp rise in the employment component of the ISM Non-Manufacturing Index (from 49.7 to 52.7) and weekly jobless claims at a four-month low. And while last month’s ADP private employment report didn’t give any indication of the horrible headline data, yesterday’s print of 172k outpaced last month’s posting of 168k.

With such a firm outlook for some “payback” from last month’s employment weakness, we expected to see the USD trading higher against the JPY. Instead, the pair has dropped for the last five sessions in a row and at 100.30 is over 450 points below the 30 day moving average at 105.00. It’s widely accepted that the strong JPY is a source of pain for Japanese industry; especially in light of the recent Chinese Yuan devaluation. In addition, the Nikkei 225 Index is down over 20% this year while most other G-7 bourses are within range of yearly highs.

The Bank of Japan meets at the end of the month and are under growing pressure to stimulate the economy further. Knowing that easing rates further into negative territory will have a limited impact on the economy (and perhaps a negative effect on USD/JPY), we wouldn’t be surprised to see a combination of policy levers announced including both monetary and fiscal measures.

US Macro

A week after UK voters chose to leave the EU, a growing number of market commentators are arguing that the media, politicians and some economists exaggerated the impact that a “Brexit” vote would have on the UK economy and British assets. The frequent stream of reports about a second referendum, Scotland vetoing the decision to leave the EU, political infighting and UK never planning to invoke Article 50, suggest the financial media were firmly biased to the “remain” camp.  

In addition, caustic comments from EU officials about how to renegotiate trade and security agreements with the UK suggests that many well pensioned bureaucrats on the continent are very angry that: 1) a majority of UK voters were willing to fight the EU status quo. And 2) The UK Government is willing to honor the will of the UK voters. It’s clear that this type of pure democratic process doesn’t sit well with the unelected policymakers in Brussels.  

Social Media, on the other hand, has largely celebrated the “Brexit” vote as a revolution of grassroots politics and consolidating objections about wage stagnation, immigration politics and the lack of self-governance. This rebellious timbre of the referendum has reverberated into other regions of the world where similar anti-status quo movements are gaining popularity. 

US Macro

The widespread reaction to the United Kingdom’s decision to leave the European Union (EU) has dramatically changed the technical conditions across the Foreign Exchange market. While the “Brexit” was clearly a political event, it has acutely altered the market’s “group psychology”; which is the cornerstone of technical analysis. 

For example, the GBP/USD traded from a new yearly high, at just above 1.5000, to its lowest level in 30 years in less than 8 hours; the widest trading range in the history of the pair. From a technical perspective, it’s reasonable to believe that stop levels and option positioning were all wiped out on Friday. In this sense, if price support is where buyers are enticed, and price resistance is where sellers offer supply, then technical levels of the GBP will have to be rebuilt over time.   

As a result of the breakdown of many technical components, volatility looks to be the name of the game for the short to mid-term. Fears that the UK’s exit will inspire other nations to do the same are not unwarranted, and FX investors should be cognizant that Brexit is not an uniquely European problem. All global financial markets have been propped up by central bank policy makers; especially from the ECB, FED and the BoJ.   

As such, the FX market may show a blithe response to most of the economic releases on this week’s schedule. However, now that the FED FUNDS futures market has entirely priced out any rate normalization for 2016, Tuesday’s US GDP report could get a rate adjustment back on the radar. The final reading for Q2 GDP is forecast to print at 1%, which is twice as strong as the last GDP data. In addition, US Consumer Confidence is due early Wednesday morning and is expected to show a sharp rebound to 93.1%.

US Macro

In less than a week, citizens of the UK will make their biggest decision in more than a generation when they go the polls to vote on whether to stay in the European Union (EU), or to leave it. It’s conceivable that the political and economic future of the entire 28 member EU could be reshaped by the June 23rd referendum. 

Those in favor of leaving the EU, known as the “Brexit” option, say EU elitist rules restrict UK companies and leaving would boost the UK economy. They also say that leaving the EU would give Britons control of their borders and limit immigration. Those campaigning to stay (including the PM David Cameron) paint a very grim picture of life outside the EU.  

The result of the vote could have acute and far reaching consequences not just for the British and EU economies, but also for global FX markets and G-7 stock markets in particular. At this point, the polls suggest that UK voters are spilt down the middle without an outright majority on either side. Further, it seems the only clear consensus is that a win for the Brexit camp would reshape the future of the UK and EU for decades to come……….the problem is that nobody knows exactly how.  

Over the last few months, it’s become evident that FED Chair Janet Yellen, along with other voting FOMC members, have placed more emphasis on the wages and unemployment components of the labor matrix, and less emphasis on the new jobs in reference to their “data dependent” analysis of the overall US economy.

However, after last Friday’s shocking 38,000 new jobs on the headline Non-Farm Payroll (NFP) number, it’s likely that Ms Yellen will make some direct reference to the data miss when she speaks at the World Affairs Council today in Philadelphia at 12:30 NY time.

After Friday’s steep sell off in the USDX, FX investors will be listening for comments which clarify whether the FED chief is looking at Friday’s report as an outlier, and not consistent with the vast majority of economic indicators, or as a signal that Q2 growth will not rebound as briskly as expected.

Our base case has been that a June rate adjustment was not particularly likely given the proximity to the UK referendum and the fact that FED officials have very little stomach for taking controversial positions. However, given the broader economic information set, we are reluctant to rule out a July rate hike and see no compelling reason not to expect the weakness in the May report to be a statistical fluke; which is not uncommon from the Bureau of Labor Statistics.

For example, In March of 2015 the headline NFP number was 84k, in December, 2013, there were 45k jobs created and in April 2012 job growth fell to 75k. In none of these cases did the disappointing headline number signal the end of the economic or labor cycle. In fact, in two of the four examples given, the following month’s headline NFP jobs growth was over 200k.

As a labor economist and experienced FED Governor, Ms Yellen will likely look past the noise of high frequency data and focus on the underlying positive growth signals. From that perspective, very little changed last Friday. Less than two weeks ago, Ms Yellen acknowledged that it might be appropriate to raise rates again in coming months. Without being too specific, if she simply maintains that type general assessment, it would be sufficient to keep the July FOMC meeting alive.

As such, with the ECB still expanding their QE and the Japanese economy still contracting, once the dust settles from last week’s terrible NFP report we expect the USD to re-emerge as the cleanest shirt in a dirty pile and recover last week’s losses.