Outlook:

We wrote yesterday that inflation is not high on the list of factors the bond gang is contemplating, higher yields notwithstanding, and that may make the current bout of near-2% rates a temporary aberration. The WSJ calls higher rates a “false dawn.” See the trading economics.com chart below. We should be getting near the 2% fed target by Q4 and Q1 next year at 1.9%, but that’s 5 months away at the earliest. The Fed is in no hurry.

U.S. Inflation Rate

In fact, some analysts foresee recessionary conditions. After all, the IMF sees slowing world growth. China is still a giant question mark. It seems more stable but the January crisis was not all that long ago and can occur again. The stock market may be overvalued and is vulnerable to a pullback if earnings are lousy. Depending on what report you read, earnings are not lousy, or only a little lousy.

Most of all, nobody knows where oil is going. We still have oversupply and the complete failure of the Doha talks due to a squirrelly Saudi prince, not to mention rising tensions on the US refusing to give up a relationship with Iran, which the Saudis seem to view as cheating on them. We got Doha completely wrong. If the Saudis had gone through with the output freeze, it would have been a game-changer of historic proportions. Now, a freeze without the Saudis would be a waste of time, so Russia and the others will probably not even try. In fact, they will likely increase production out of sheer desperation, prolonging the day when re-balancing is within grasp and driving the price down in the meanwhile.

So where is the world economy going? Sideways. That means muddling along with no more clarity than before on what the Fed is going to do. With Japan in near-crisis mode and a stay-the-hand stance in Europe, the Fed is stuck in neutral. This is even more likely if the Fed has a backroom deal with the ECB to postpone deepening policy divergence. This looks less goofy than it did last week. And the high uncertainty is making traders in every sector reluctant to take positions.

It’s also a lot less goofy than the Plaza-Accord idea examined (and rejected) by Gavyn Davies in the FT over the weekend. Davies says the FX is buzzing with talk about a closed-door deal to drive the dollar down. Really? Well, the dollar is weaker since the Feb G-20 meeting in Shanghai, to be sure. Whether it’s equivalent to the dollar’s drop after the Plaza Accord (Sept 1985) is another matter. If you want to manipulate a market, you pretty much have to tell the market. The 1985 effect was 95% “announcement effect”—governments actually did very little—and then trend-following. Only the US and Japan changed interest rates, for example.

Davies admits it. “From start to finish, the international policy shift surrounding the Plaza meeting caused a 40 per cent decline in the dollar over a period of 3 years. It was the high water mark for coordinated global macro-economic policy, and for direct central bank intervention in the currency markets. ….Could it happen again? At present, the formal agreements among G20 economies are predicated on two principles – no concerted intervention in the currency markets, and no deliberate attempts to engage in competitive devaluations. This does not seem to leave any room for a coordinated set of foreign exchange interventions to devalue the dollar.

“Furthermore, there is no agreement among the major nations that the dollar needs to be devalued. It is not widely seen to be overvalued on fundamental grounds.” What should be devalued is the Chinese renminbi, not least so we can stop worrying about a one-time devaluation. It’s possible, says Davies, the Fed decided to postpone hiking to accommodate China, but not as any kind of accord or agreement.

We have two big reasons to think the Fed is on hold until September, if not longer, no matter how it tries to prop up the idea of a hike in June in this week’s statement. First, no inflation, and if oil falls again as seems likely, inflation now expected in Q4 can get pushed further out. Secondly, “global concerns.” We are inclined to think the Fed cares more about accommodating Mr. Draghi, but perhaps Davies is right and the true focus is China.

So, “lower for longer.” No matter what else we know about low (and negative) rates, they are deflationary. They also dis-incentivize savers. Savings rates are dismal pretty much everywhere. The burst of savings (to over 8%) in the US occasioned by the Crisis of 2008 have fallen back to 5-6% or so. Maybe Goldman will ride to the rescue, offering 1.05% on old-fashioned savings accounts (vs. 0.10% at the other big banks like Citi).

Fred

We get a lot of data this week, including durables and Case-Shiller today (and UK GDP tomorrow), but arguably the most important data point is US GDP, not due until Thursday, after the Fed. As noted yesterday, it’s likely to be low, well under 1%. But if the Fed is more concerned about “global conditions” than US data, maybe GDP doesn’t much matter, especially since recent years have seen a seasonal bummer in the first quarter.

Two things: we think we are sophisticated and grasp how interconnected the world has become over the past 20-30 years. But it’s still very hard to think with a global perspective. We read about the anti-corruption campaign in China, or the president taking over the military, and we have no idea how to interpret such news in the context of whatever market we are following. We don’t even know how to interpret the little fact that Puerto Rico is forbidden by law to go into Chapter 9 bankruptcy. What is Puerto Rico, anyway? Not a state, but rather a “territory.” Why are we not up in arms over Congress’ bad treatment of Puerto Rico and why is its financial failure not a giant black mark on the US sovereign copy-book?

The known unknowns are multiplying at a rapid pace and also growing is a vague sense of dread that we have no idea of how financial market contagion really works. Which one of the awful things developing today is going to bring down the house? What about failed states like Venezuela and Nigeria? Not to mention Libya—all oil producers.

And here’s the second thing—the UK referendum in June and the US election in November. The FX market is already positioning for Brexit to be rejected, but as the day grows near, that could change. And we will get a “sell on the news” effect of unknown size. As for the US, the world is starting to accept that the Plubs might be stuck with Trump. This is not all bad. It’s a vote against an obstructionist, do-nothing Congress. It’s a vote for re-building infrastructure. It’s a vote for taxing the rich. Unfortunately, it’s also a vote for re-negotiating a trade deal with China that does not exist, i.e., a vote for false statements and outright lies. It’s a vote for religious intolerance.

Cruz is worse—far worse. He thinks it’s okay to default on the sovereign debt, the Fed should be abolished and we need to go back to the gold standard—all unbelievably stupid ideas for a guy who went to not one but two Ivy League universities. Trump may be sleazy but Cruz is slimy.

Polls indicate Clinton would beat Trump, but we are not so sure. Elections tend not to make much difference to the dollar, but this election could be the exception. We know one thing for sure—the Fed has a closing window to get in even one hike this year. The next meeting after this week is June 14-15, then July 26-27. The Sept meeting is late in the month, Sept 20-21 and the Nov meeting (Nov 1-2) is less than a week from election day (Nov 8). If we don’t get something in June or July, that leaves the Dec 13-14 meeting. It’s hard to see how the Fed can squeeze in two hikes this year, even if it wanted to.

Let’s pretend oil prices fall back to the $30’s on the oversupply story (and a price war among the big players). Let’s also say the Fed does nothing this week and the probability of a hike in June remains well under 50%. Yields fall back. The trajectory of the dollar must be downward.

CurrentSignalSignalSignal
CurrencySpotPositionWEAKDateRateGain/Loss
USD/JPY110.87LONG USDSTRONG04/22/16110.520.32%
GBP/USD1.4556LONG GBPWEAK04/12/161.43091.73%
EUR/USD1.1282LONG EUROWEAK03/11/161.10941.69%
EUR/JPY125.09LONG EUROWEAK03/29/16127.24-1.69%
EUR/GBP0.7750LONG EUROSTRONG03/11/160.7759-0.12%
USD/CHF0.9744LONG USDSTRONG04/25/160.9752-0.08%
USD/CAD1.2650SHORT USDSTRONG02/01/161.40319.84%
NZD/USD0.6884LONG NZDSTRONG02/01/160.64786.27%
AUD/USD0.7736LONG AUDSTRONG01/25/160.698010.83%
AUD/JPY85.77LONG AUDWEAK03/03/1683.572.63%
USD/MXN17.5381SHORT USDSTRONG02/23/1618.12083.22%

This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD stabilizes near 1.0800 as trading action turns subdued

EUR/USD stabilizes near 1.0800 as trading action turns subdued

EUR/USD holds steady near 1.0800 on Thursday and remains on track to end the day in negative territory following upbeat macroeconomic data releases from the US. The action in financial markets turn subdued as trading volumes thin out heading into Easter holiday.

EUR/USD News

GBP/USD extends sideways grind above 1.2600

GBP/USD extends sideways grind above 1.2600

GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth help the USD stay resilient against its rivals and limits the pair's upside.

GBP/USD News

Gold pulls away from daily highs, holds above $2,200

Gold pulls away from daily highs, holds above $2,200

Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.

Gold News

XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC

XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC

XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase. 

Read more

Portfolio rebalancing and reflation trades emerge into Q2

Portfolio rebalancing and reflation trades emerge into Q2

Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.

Read more

Majors

Cryptocurrencies

Signatures