Gaps and gimcracks

Outlook:

Let’s take note of contradictions. First, the dollar turned around against the yen from levels that made no sense in the first place and were probably a function of runaway speculation. We have no reason for the dollar/yen to rise sharply except maybe some unsourced and so far unfounded stories that the government is going to “do something.” It’s always possible the BoJ whispered in a few ears, but if so, we never hear about it.

For the reversal in dollar/yen to bleed over to all the other currencies is a common phenomenon but a little weird all the same. We had no stand-alone data or news that would justify the giant drop in the euro. The implication is that the euro will not continue to drop and can easily be hitting its low today. The next contradiction is “oil up, dollar down” and also “equities up, dollar down.” That supposed correlation is not in evidence this morning.

The biggest contradiction is US oil inventories up, oil price up, too. Granted, the prices this morning are off the highs, but Brent opened gap up at a whopping $44.69 last evening after the API inventory report showing a big build. As noted above, the WSJ goes to great lengths to show oversupply is still a big deal—naming the OPEC forecast of a drop in demand this year that will leave the oversupply still hanging over everybody, plus a Swedish analyst. But it’s OPEC, and it’s a forecast, not the Gospel truth.

Again, anything but Doha. Denial of the importance of Doha is silly. Denying the price is up because you can find an intraday drop is also silly. Having to go all the way to Sweden to find someone to say output is falling is silly.

The FT has a sane and reasonable version of the same story: “The price of Brent crude, which in January touched a 12-year trough of $27.10 a barrel, hit a four-month high of $44.58 a barrel early on Wednesday and is now seeing a spot of profit-taking with a dip to $44.04. Brent remains above its 200-day moving average, however — a positive technical signal.

“Firmer oil prices of late have lifted inflation expectations, analysts noted, and this might encourage the Federal Reserve to raise interest rates faster than the market thinks; reasoning that is lifting the dollar and bond yields. One analyst DBS) says headline CPI in the US will rise to 3.4% by Feb 2017 with oil at $38-40 and if crude goes to $45-50, inflation will rise to 3.4% by November, presumably this year’s November. He says “The Fed has been waiting for inflation to go up. In fact it has been, it’s just that low oil prices disguised the move. That veil is coming off. The Fed’s clothes may soon follow.”

This is more like it. We are not convinced US 10-year yields are high solely because oil is higher and thus US inflation expectations are rising. Oil is just one of the factors the bond gang is looking at. But it’s true that the US yield is inching back up while the Bund yield is also higher from earlier lows but seemingly capped near 0.15%. Now we have to await for updates to inflation expectations. So far it looks like a creep rather than a jump. Some say the Fed will move again only in late fall (November) and it will be a single additional move. Others still think two or even three hikes (Capital Economics) will be warranted. We are not hearing this viewpoint from FX reporters, but the uptick in commodities (and not just oil) is promising. See the FT’s chart, from Bloomberg.

We’ll take a dollar mini-rally but we do not expect it to last.

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	108.18	SHORT USD	WEAK	02/04/16	117.57	7.99%
GBP/USD	1.4237	LONG GBP	WEAK	04/12/16	1.4309	-0.50%
EUR/USD	1.1303	LONG EURO	WEAK	03/11/16	1.1094	1.88%
EUR/JPY	123.40	LONG EURO	STRONG	03/29/16	127.24	-3.02%
EUR/GBP	0.7938	LONG EURO	WEAK	03/11/16	0.7759	2.31%
USD/CHF	0.9626	SHORT USD	STRONG	03/11/16	0.9877	2.54%
USD/CAD	1.2801	SHORT USD	STRONG	02/01/16	1.4031	8.77%
NZD/USD	0.6917	LONG NZD	STRONG	02/01/16	0.6478	6.78%
AUD/USD	0.7659	LONG AUD	STRONG	01/25/16	0.6980	9.73%
AUD/JPY	83.61	LONG AUD	WEAK	03/03/16	83.57	0.05%
USD/MXN	17.5108	SHORT USD	STRONG	02/23/16	18.1208	3.37%