Early FX

October 29th, 2015 6:15 am | by John Jansen |

Via Kit Juckes at SocGen:


..then you’ll be a Fed Governor, my son?? Not sure I can take Kipling to the FOMC but there are so many ‘If’s’ im fed policy I’m stuck with then image. The FOMC left the door ajar. IF markets don’t tighten financial conditions for them. IF the US data remain firm. IF global events don’t scare them and IF the sun shines every day, the Fed will raise rates at their December meeting.                                                                                        All those caveats leave the market pricing the odds of a move at close to 50%, and the focus switches immediately to data-watching. Today that means jobless claims (exp 270k) and Q3 GDP. We expect a 2.4% gain, the forecast revised up after the trade data released yesterday, while the consensus is looking for looking for 1.6% (according to Bloomberg). Inventories will be a big, temporary drag and guesses of how big vary. The consensus forecast for personal consumption growth is at 3.3%, our forecast at 3.5%. Real domestic final sales probably grew at a similar rate, slightly slower than the 3.7% of Q1 and that’s a far better measure of the health of the US economy right now, than the GDP figure itself.

We’ll move on to PMIs and payrolls next week of course, and there’s the small matter of the BOJ overnight tonight, but it we do get a GDP increase above 2% and a final sales gain above 3%, yesterday’s move will probably stick and markets start to set themselves up for OK jobs figures, buying the dollar as well as shorting the front end of the US curve and probably re-setting shorts in commodity currencies and EMFX.

The RBNZ left rates on hold, but let expectations of a move lower intact. December Bill futures fell 1bp, June 2016 ones gained 4bp as the market priced more easing later. The contrast with the Fed is clear and NZD/USD has resumed falling. I which I could report AUD/NZD was moving up too. It should be!

As Fed gets hawkish, RBNZ stays dovish


At 165bp, the 10yr Treasury/Bund spread is 35bpo wider than it was in August (when EUR/USD was at 1.16) and 25bp from where it was in March (EUR/USD below 1.05). The size of the 1-week move in both the currency and in yields is noteworthy, though if you’re in the mood for caveats, it’s also similar to the move in the other direction in August, which was entirely reversed over the next few weeks. Our end-year EUR/USD forecast looked far too low last week so we pushed it up a bit. Now it looks too high. C’est la vie! This morning brings Euro Area economic confidence (probably fell to 104.7 from 105.1) and German unemployment and CPI data (latter probably bounced to zero y/y from -0.2).

EUR/USD targeting 1.08 again now


Today also brings UK CBI distributive trades, mortgage applications and money supply data, though I can’t see them moving sterling much; Swedish retail sales which may maintain the contrast between dovish central bank and strong economy. The Swedish Krona didn’t fall in response tom additional QE yesterday, the market focusing on the dilemma the Riksbank faces as the economy grows strongly, the housing market booms but inflation remains low as it does everywhere. At some point they are going to have to loosen their grip on the currency or exacerbate domestic imbalances caused by fuelling asset inflation. It’s not easy to trade ideas like ‘at some time’ but I like being long SEK vs. GBP and CHF.

And then, there’s Japan. Our Japan economists expect the annual pace of increase in the BOJs monetary base from Y80trn to Y85trn as they accept that the FY2016 inflation forecast 1.9%) unrealistic. I would expect a bigger FX reaction to a failure to ease (USD/JPY down) than to the move we look for, which is more likely to be equity-friendly than yen-negative. Psychologically, the key is whether the BOJ move is enough to trigger a break throughout of the USD 118-122 range that has been holding for the last two months. If the BOJ does ease, and the topside of that rate holds, we’ll look to use that to buy yen.

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