The Fed becoming laggardly is momentarily back-burnered

Outlook:

Last week we had ECB chief Draghi saying essentially “whatever it takes” to goose the eurozone economy. Over the weekend we had a regional Fed President saying a strong case can be made for raising rates. This is divergent-policy at its finest. The idea that either central bank will back out at the last minute has to be discarded.

The Fed becoming laggardly, a factor that hurt the dollar late last week, is momentarily back-burnered. It will, however, come back. We are likely to get Fed funds at a measly 2% by year-end next year, not the 4.25% at the high end of the dot plot.

We wrote Friday “We will not know the gradualism story has been beaten unless and until we see a lower low than 1.0615 from Wednesday noon.” We got it, with the euro putting in a low of 1.0599 last evening before the midnight hour.

One thing to keep in mind: Switzerland is on the edge of a cliff. The FT emphasizes that with the ECB cutting and the US hiking, the SNB faces some hard choices. “The SNB fears the franc is seriously over-valued, but already has the world’s lowest official borrowing costs, with an interest rate of minus 0.75 per cent on sight deposits. ‘They should really be nervous about what might come next,’ says Daniel Kalt, UBS’s chief economist in Switzerland. The safe-haven status of the Swissie never really goes away, strong dollar or not, and the ECB adds to the story. The most likely outcome, according to experts, is more rates cuts into even deeper negative territory. And there is always more intervention.

Looming over markets but not yet having an immediate effect is the question of what happens next in the war on terror. French Pres Hollande is visiting Washington tomorrow, presumably to push and prod the US into “leading” a new coalition that will include Russia. All the bombast in the world can’t get over that US military advisors say the West cannot win a ground war in the Middle East, only the locals can. We can supply, coordinate, and give air support, but boots on the ground will has already failed, twice.

The other big sticking point is Assad. Russia wants to keep him, so how can Hollande forge a coalition with the US and Russia? The seemingly Milquetoast Hollande (but consider those girlfriends) has impressed with strong assertions of principle—France will continue to take all the Syrian refugees promised, unlike the dunderheads in the US presidential race. They fail to see that we have more than enough gun-toting fruitcakes in the US (vide New Orleans last night) and only three of the previous wave of refugees (from Iraq) had to be deported. The US has a long history of turning back refugees—from China, from Hitler—and France puts us to shame for it.

Tomorrow the BoE offers testimony to the UK Treasury Select Committee on the inflation report. This could be critical for sterling. In the US, we get some useful data this week, including the Chicago Fed survey and existing home sales today and GDP tomorrow (second estimate), but it’s a holiday week in the US and that can screw up markets. Thursday is a national holiday (Thanksgiving) and one that is actually honored—no partly open banks. Traders start closing down early on Wednesday and many take Friday off to get a 4-day weekend. We hardly ever get a surprise in FX at this time of year—unlike end-May or July 4th or year-end, but you still want to go square into Thursday.

Note to Readers: In case you missed it, Thursday is a national holiday in the US. Banks are closed. We will not publish any reports.