Hard to see anything but a return to negatives for the Bund

Outlook:

Dr aghi declined to offer any specifics about extending QE (such as how long the extension might last) and ruled out a sudden ending, as well, but we still lack information about what the ECB will do to re-jigger eligibility. He did indicate that the current policy is working, a comment that probably fell on cold, deaf German ears.

Well, one way it's working is to increase inflation expectations on the falling euro alone. This is not to say Draghi is "manipulating" the currency. If he wanted to do that, he could have been more clearly in favor of extending QE instead of telling everyone to wait until the Dec policy meeting. What does this mean for yields and for FX forecasting, the yield differential? It's hard to see anything other than a return to negatives for the Bund. The only way that can be avoided is for inflation to tick up or the ECB to re-direct QE from fixed income to equities... as long as it retains the rule that QE purchases need to be proportional to the member's relative GDP in the overall scheme of things. Market News reminds us that "Bunds saw a low yield near -0.161% Sept. 27 and, at the time, the market fretted they would retest the life-time low around -0.2059% seen July 6."

Meanwhile, perhaps because of Dudley's calm acceptance of a Dec hike the day before, the CME Fedwatch tool raised the probability of the Dec hike from 69.5% Wednesday to 73.6% yesterday. Not to throw cold water, but at the same time, the Atlanta Fed GDP Now indicator has Q3 GDP down to 2.0% as of Wednesday, up from 1.9% on Oct 14 but well under earlier forecasts at 3% and more. We get the next one on Oct 27. The GDPNow forecast doesn't invalidate the futures probability indicator, but the two are not consistent with one another.

One way we know the markets are starting to accept a rate hike in the US is the drop in gold. Early yesterday, Comex gold hit $1,275.90, the highest level since Oct. 5, but the rising dollar put the kybosh on that. The WSJ quote this morning has it at $1264.80.

As for the longer-term view, see the weekly euro chart below. It's interesting that the 40-week/200-day moving average has been tracking the linear regression line all year this year. We should also take notice that the overall channel slopes upward and the channel bottom lies at 1.0788, only about 100 points lower. That doesn't mean the line constitutes hard support. But it does mean the probability of matching the lowest low (1.0459 from March 2015) is not very good. Following the unwritten rule of no-straightlines, we will probably get a euro bounce next week.

Political Tidbit: Polls show Clinton leading Tr ump by 7-12 points. The BBC has 48.1% for Clinton, 41.0% for Trump. Trump's latest offense was crude attacks at a charity dinner that got jeers from the crowd. The probability of a Clinton win in the NYT is now 92%, yowza. Bloomberg has an editorial headlined "Trump threatens law, order, democracy." We like what Hugh Laurie told Stephen Colbert— Trump is "unspeakable." We also like "repulsive."

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	103.83	LONG USD	WEAK	10/06/16	103.50	0.32%
GBP/USD	1.2226	SHORT GBP	STRONG	09/10/16	1.3041	6.25%
EUR/USD	1.0892	SHORT EUR	STRONG	09/19/16	1.1168	2.47%
EUR/JPY	113.15	SHORT EUR	NEW*WEAK	10/21/16	113.15	0.00%
EUR/GBP	0.8914	LONG EURO	WEAK	09/19/16	0.8564	4.09%
USD/CHF	0.9946	LONG USD	STRONG	09/19/16	0.9804	1.45%
USD/CAD	1.3237	LONG USD	STRONG	09/15/16	1.3203	0.26%
NZD/USD	0.7169	SHORT NZD	STRONG	09/19/16	0.7305	1.86%
AUD/USD	0.7636	SHORT AUD	STRONG	09/24/16	0.7618	-0.24%
AUD/JPY	79.28	LONG AUD	STRONG	10/06/16	78.48	1.02%
USD/MXN	18.6214	SHORT USD	NEW*WEAK	10/21/16	18.6214	0.00%