Is good news bad news for the dollar? The sudden possibility that the US will be able to conclude some sort of NAFTA agreement with Mexico and perhaps Canada as well has failed to bolster the dollar against the other major currencies, probably because the trade dispute with China seems no closer to resolution.
On the other hand, USD is still gaining against many EM currencies. In particular, the Argentinian peso (ARS) plunged, falling about 20% over the last week – it suffered its steepest 24-hour fall since 2015 on Thursday as investor confidence in the government evaporated. The fall dragged down other EM currencies, including TRY, which seemed to be steadying last week, and ZAR. The fact that ARS has continued to fall despite Argentina announcing a new economic plan backed by a USD 50bn Stand-By arrangement with the IMF just two months ago shows how difficult it is to regain investor confidence – a lesson that Turkey is probably learning, too.
GBP rallied during the week after EU Brexit negotiator Michel Barnier said the EU is prepared to offer the UK an “unprecedented partnership” after it leaves the EU, but that it won’t permit anything that would weaken the single market. That’s all very well and good, and with speculators rebuilding their short positions recently it’s no surprise that it caused some short-covering.
However, it’s really no different than what he said a week ago (“an ambitious partnership that has no precedent”) and furthermore, he admitted that it was possible that they wouldn’t reach any dal at all. To back up that possibility, the German Foreign Ministry said there would be no special rules for the UK. And just in case anyone thought a compromise is likely, UK Cabinet Officer minister David Lidington said the only alternative to Britain’s Brexit plan is a no-deal Brexit. I think the likelihood of a compromise any time soon is still slim and once this short-covering is out of the way, the pound is likely to resume its decline.
The biggest gainer over the week though was CHF. The Franc’s gains vs JPY suggest that the move is due to rising risk aversion within Europe, rather than risk aversion generally (which would probably benefit JPY more than CHF).
It’s notable that for the last two years, CHF/JPY has generally fallen (i.e., CHF has weakened relative to JPY) when European bank stocks were weak. That’s probably because the market assumed weak bank stocks would keep the ECB on hold, and an ECB on hold meant the Swiss National Bank (SNB) would also probably be on hold, too. But recently, the two series have diverged, suggesting that it’s risk aversion, not monetary policy, that’s driving CHF/JPY. European banks are currently underperforming not because the European economy is weak, but rather because of fears about European banks’ exposure to Turkey.
The move may also be related to increasing concerns about Italian politics (and banks), as reflected in a plunge in the BTP Italian government bond futures.
With speculators’ positions the shortest they’ve been since 2007, there’s room for the squeeze in CHF to go a lot further.
The SNB has in the past intervened at the current level of EUR/CHF. I think if CHF starts to approach the 1.11 level, there could be some intervention again.
The schedule for this week starts off slowly, but then gets going with two central bank meetings, the US employment report, and several important bits of data from Germany.
The Reserve Bank of Australia (RBA) meets on Tuesday and the Bank of Canada meets on Wednesday. Neither is expected to change rates, but there can still be some interesting comments from them.
Not that much has happened since the last RBA meeting on 7 August except perhaps that the Statement on Monetary Policy was issued (10 August), meaning there’s even less than usual to be gleaned from this month’s statement following the meeting. The market is gradually pushing out its estimate of when the RBA will raise rates. Previously it was seen as a sure thing next year, but now it’s more like a 60-40 chance. Note from the graph how expectations fell sharply after the August meeting, when the statement following the meeting mentioned weaker growth in China, drought conditions in Australia and a modestly lower inflation outlook for 2018. With a weaker employment situation the only slight change since the last meeting, I expect a similarly cautious statement that may bring the odds of a rate hike down even further and weaken AUD somewhat.
About the only significant point might be a response to the recent decision by one major bank to raise its standard variable mortgage rate by 14bps despite no change in RBA rates. They could criticize the move, but I expect they’ll just acknowledge it.
The Bank of Canada raised rates at its last meeting in July. Accordingly, it’s highly unlikely that it will raise them again at this meeting (only 14% chance, according to the market). However, the market is pricing in a 68% likelihood of a rate hike in October, and 81% by November. The odds of a near-term rate hike have faded slightly over the last week, but still remain higher than they were right after the July Bank of Canada meeting. Expectations may have been dampened by BoC Gov. Poloz’ comments last week at the US Fed’s Jackson Hole symposium. He urged participants to “consider the possibility that we are living in a profound, global, positive expansion of aggregate supply—the product of digital disruption.” This expansion of supply due to the deployment of digital technology “means following a more gradual approach to normalizing interest rates than traditional models would advocate,” he said. That may mean a shallower path for Canadian interest rates than the market is forecasting. If the BoC statement echoes these comments, the result could be a further drop in expectations for the October meeting and a weaker CAD as a result.
The other big event of the week will of course be the US nonfarm payrolls and average hourly earnings figures.
After last month’s somewhat disappointing 157k rise in NFP, the market is looking for a slightly below-trend rise of 191k (vs the six-month moving average of 221k). Still, that would be a fantastic figure, considering it would be the 95th consecutive month of increases in payrolls.
Average hourly earnings are expected to rise a robust 0.3% month again, raising the annual pace of increase to 2.8% from 2.7%.
The combination of continued strong growth in jobs and an acceleration in wages is likely to be positive for the dollar, in my view.
Finally, Germany announces its factory orders on Thursday and industrial production and trade figures on Friday. Usually the factory orders and IP would be the more important ones, but given the political situation these days, the trade data is taking on new importance. No forecast is available yet, but the country’s trade surplus has been rising recently. A further increase might elicit howls of protest from the US, which could be beneficial for the euro.
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