Strategic Currency Briefing

Outlook:

We got no fresh insights from the Fed minutes yesterday. The FT notes “A staff presentation discussed three areas: whether inflation below 2 per cent is as bad as above target; how it should trade off its inflation and unemployment goals when they clash; and how financial stability ties into monetary policy.” Also, “The minutes suggest the Fed may soon provide a fuller description of how it will behave when the time comes to raise interest rates. The pace of Fed rate rises after the first – expected around the middle of 2015 – will be important for financial markets. ‘With regard to the pace of interest rate increases after the start of policy normalisation, a number of participants thought that it could soon be helpful to clarify the committee’s likely approach,’ say the minutes.”

In other words, stop obsessing about when the First Rate Hike comes and worry instead about how it is raised after that—the “pace” presumably referring to “amount” as well. Traditionally we get 25 bp incre-ments but maybe the Fed will move to 10 bp. Balderdash. Of course the timing of the first hike is criti-cal. Besides, from the outside it looks like the Fed is very Ivory Towerish. The language is old-fashioned, tortured, overly formal and annoyingly unclear. And yet the Fed also declined to speak about global conditions lest it put too much focus on them and make conditions worse. So which is it—high-handed or fearful and wimpy?

Bond market analysts interviewed by Market News confirm this perspective—a wide gap between the Fed and the market. One analyst said the FOMC is relaxed and upbeat, with doves firmly in control, so that the First Rate Hike seems very far off. And yet the Committee is not offering a modification of mid-2015 as the launch date, meaning “current market pricing implies very one sided risk." We have to wait another month for a new series of dots marking members’ expectations, but it’s not clear that will close the “yawning gap between the Fed's own expectations and the markets' pricing.”

Good grief. We are not expecting another taper tantrum, but the gap is critically important and the Fed is not doing anything to close it. Well, it’s the Government, so it’s the job of the market to close it from the Fed’s point of view. And yet this high-horse stance doesn’t jibe with the Fed’s anxiety to have transparency and clear communication. So perhaps transparency as a policy goal is a ruse. Maybe the last thing the Fed wants is transparency. Who would be a bond trader today?

Today at 8:30 am ET, we get both the CPI and jobless claims, with the manufacturing PMI a half-hour later and a slew of other data an hour after that—Philly Fed, existing home sales and leading indicators. Any or all of these could be an Event that changes the FX landscape. Already analysts are saying that lowish numbers (especially in PMI and housing) could mean a revision next week of GDP from 3.5% to 3% or worse. That brings us back to the now universal theme that only the US is growing and the US can’t lead the world. Well, maybe. But the US is relatively well-insulated from the world and with recession and deflation elsewhere, that’s only good for the US consumer, and the consumer rules GDP. We are not so sure the US cannot withstand a global slowdown.

What we are sure of is that hard economic data is not ruling the FX market. The long-standing story of divergent economies and divergent central bank policies is not “working” to deliver the theoretically expected outcome—a rising dollar and/or at least a falling euro. The UK has the best growth in Europe as well as the most inflation, and yet look at the EUR/GDP chart (we’re getting a triple top). This is temporary stuff, to be sure, but as Keynes said, the long-run is just a series of short-runs (and in the long run, we are all dead). If we can’t get a meaningful dollar rally under current conditions, what would it take? Maybe there is no dollar rally out there to be had. In other words, we are feeling quite annoyed by the Fed and even more annoyed by the FX market. We know theory often fails to work, but this is getting ridiculous, and yet must be swallowed whole.

Note to Readers: Next Thursday (Nov 27) is Thanksgiving in the US, a national holiday (that pur-ports to celebrate the Indians helping out the Pilgrims with food and look how we are repaying them, a disgrace on a par with slavery). We will not publish any reports on Thursday and only the traders’ re-ports on Friday.