We like the dollar

Outlook:

We have only two things on the agenda today—leading indicators and how Alibaba will trade, if you believe the WSJ. Oh, yes, and some new i-phones. And maybe some news about the Catalan parliament demanding a referendum in Nov on separation from Spain (which Madrid says is not constitutional). Plus, New Zealand holds an election this weekend, and the Ex-Im Bank got refunded along with funding arming and training Syrian fighters (what can possibly go wrong?).

This collection of factors seems decidedly second-tier, but what about that $1.02 billion that exited UK shares in the 7 days before the referendum? This came on top of an outflow of $672 million the week before, according to the FT. “Overall, European equity funds saw outflows of $4.6bn, the largest since August 2011.” A new inflow back to sterling and the euro could be a disruptive force. The problem is, we don’t know where the outflows got parked. Cash? Which currency?

The conventional wisdom has it that the UK will be the first to raise rates, probably in Q1, while the US comes second at the end of Q2 (= “summer”). If so, sterling should benefit but given the primary move down, it’s going to be a tough slog. This is going to make trading the pound a hairy exercise until mo-mentum swings in its favor. It’s not true that the way forward for the BoE is now clear. Very little is clear. Granted, the UK has the best growth among G7 and inflation has been tamed, but the BoE has some major hurdles to overcome, not the least of which is laggardly wage growth, recession in Europe, and whatever the official statistics offices comes up with for major revisions at month-end. Besides, Car-ney is not the most reliable guy. Sometimes he seems to support the Q1 rate hike theory and other times he does not.

The other great currency move is the yen. This is a bit-in-the-teeth moment to which the yen is particu-larly susceptible. It looks like some group has targeted 110 and won’t relent until it gets it. Forget “normal” pullbacks and the usual ebb-and-flow of currency trading—this is a one-way street, apparently funded by real capital flows. We wish we had some hard data. To attribute yen moves to economic data or even statements by officials is a waste of time. Something Big is going on behind the scenes and it doesn’t have anything to do with trade deficits, the tax regime or plans for additional stimulus. The weakening yen is the best medicine for what ails Japan, unless you are in importer, and any talk about “excess volatility” is just smoke.

Can we now expect big-picture economic and rate analysis to return the FX market to normalcy? Proba-bly not. We see that irrational impulses—buy euros!—can easily get a grip. But aside from nonsense like this, we like the dollar.