A big “risk off” day that sent the safe-haven CHF and JPY higher along with USD, while the risk-sensitive commodity currencies fell.
The risk-off sentiment was more evident in the fixed income markets than in equity markets. It started from emerging markets, particularly Brazil, where the stock market crashed 3% yesterday (it had been down over 6%), bond market trading was halted as the benchmark three-year bond yield soared past 10%, and the currency fell to a two-year low. Turkey meanwhile stopped its currency collapse by tightening policy for the third time in less than two months. The dollar gained on this risk aversion even though 10-year US Treasury yields fell 5 bps on a “flight to safety.”
There was also some nervousness in Italy, where spreads vs Germany widened out further, but this doesn’t seem to have impacted EUR significantly.
It’s noticable that CHF was the best-performing currency even though the country faces the “Soveriegn Money” Initiative over the weekend. Apparently the market doesn’t think it will pass, which is probably correct (I hope). See below for details.
The big event today is the start of the G7 Leaders’ Summit in Charlevoix, Canada. It’s likely to feature heated arguments about trade. Last weekend, the G7 finance ministers (actually, the G6, because obviously the US didn’t participate) expressed their “unanimous concern and disappointment” about the tariffs on metal imports that the US imposed recently. The six issued a statement calling for “decisive action” to resolve the issue at this weekend’s meeting. The US sanctions on Iran are also likely to be a topic of conversation.
Far from trying to sooth ruffled feathers and smooth relations, Trump is planning to use the summit to confront other world leaders “over what he believes is a global economic system tilted against the United States,” according to the Washington Post. Trump will hold bilateral meetings with his French and Canadian counterparts during the summit, but I don’t expect them to lead to any agreements.
We may get some comments today, but the focus will probably be on the communique and press conferences after the meeting ends Saturday. Usually the leaders make an effort to “paper over the cracks.” In the case of a disagreement, they usually issue some anodyne statement that allows each country to put whatever spin they think is necessary on it. This time however that’s doubtful. The others are too upset. Indeed, officials are reportedly considering whether to have Trump refuse to sign the communique “as a signal that the old ways of doing business are over.”
White House economic adviser Larry Kudlow sought to play down the trade tensions as “a family quarrel” – I guess it depends on what your family is like. My aunt once said, “I’ve heard a lot about dysfunctional families, but I’ve never heard of a functional family.” If that’s the case, then yes, Kudlow might be right.
Increasing trade tensions and the increasing isolation of the US are likely to be negative for the dollar, in my view.
On Sunday, Switzerland will hold a referendum on the “Sovereign Money” Initiative. First off, you have to understand that under Switzerland’s direct democracy, anyone can start a petition to change the laws. If their proposal gets enough signatures, it has to be put up for a national vote, and if it gets enough votes, then the government has to implement it.
Some bright souls decided that they didn’t like the way banks were operating and decided to propose a change in the monetary system via national vote. Given the complexity of the proposal – I mean, how many voters really understand how money is created and how a financial system works? – this is madness, in my view. Nonetheless, it’s happening. The initiative would replace the fractional banking system that’s used universally, as far as I know, with a 100% reserve system – banks could only give loans using money from long-term customer deposits, the Swiss National Bank (SNB), or money markets. Under this system, the money supply would expand only if the SNB supplied the banks with more money and thereby allowed them to make more loans. In other words, only the SNB could create money, not the banks.
The reason for the proposal is that many people think the banks have too much power, that they were reckless and had to be bailed out after the Global Financial Crisis, and that making this change would curb their reckless activities. People may also be upset about how the country has had extraordinarily low interest rates for quite some time – in fact, the SNB’s policy rate is the lowest in human history, -0.75%.
The Swiss government and the SNB oppose the idea. The SNB has described the plan as an “unnecessary and dangerous experiment.”
Apparently the vote has only something like 34% support so it is not likely to pass. If it does though it will create a lot of risk around CHF and probably cause the currency to plunge. The government would have around three years before it would be required to implement the proposal, so there would not be any immediate change in the monetary system, but the hit to sentiment would be immediate, in my view.
As for the indicators, early in the European day Friday, perhaps before I get this comment out, Germany announces its trade data too. The German trade surplus jumped in March but is expected to fall back to trend, which could be negative for EUR if investors feel that takes some pressure off of Germany to cut back exports.
Germany’s industrial production, which will be released at the same time, is forecast to show only a small mom increase and a slowdown in the yoy rate of growth. Although a modest change, that would still be better than yesterday’s disastrous factory orders number, which fell 2.5% mom (+0.8% expected). EUR-positive.
Canada’s housing starts are expected to slow somewhat to 220k. That’s exactly the same as the forecast last month. Perhaps people are just coming out with estimates suggesting a slight slowing from the 6m moving average, which is fairly steady around 225k.
In any event, I don’t think the housing starts figure will have all that much impact, because fifteen minutes later the far-more-important Canada employment datacomes out. In this, the net change in employment is more significant than the unemployment rate. That’s expected to be slightly below last month’s rise but above the six-month trend, indicating some stabilization. As usual, the mix of jobs is important – more full-time workers, fewer part-time workers can turn a disappointing headline figure into a positive number for the currency.
The unemployment rate is forecast to be 5.8% for the fourth consecutive month.
My guess is that a rise in employment of this size would be considered decent and should therefore be positive for CAD.
A word about Brexit
TruePublica http://truepublica.org.uk reported on The Times of London’s report on Britain’s “Doomsday Brexit plan.” According to the report, the port of Dover will collapse “on day one” if Britain crashes out of the EU without a settlement. This will lead to critical shortages of supplies, such as medicine. By the end of the second week, the country would be running out of gasoline. And this is the middle of three possible scenarios. The third –the worst case – isn’t even described, apparently for good reason.
The report makes the point that the UK is entirely dependent on the EU reciprocating its pledge to not impede the flow of goods. “If for whatever reason, Europe decides to slow that supply down, then we’re screwed,” said one minister.
Furthermore, the report says UK officials emphasized that the 28 June EU summit is heading for a “car crash” because “no progress has been made since March” to devise plans for a long-term deal.
This is why I remain long-term bearish on GBP.
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