Friday, March 31, 2017

Brexit talks and poor data keeping U.S. Dollar afloat this week

USD
The U.S. Dollar sustained most of its gains overnight and is looking to perhaps improve this morning based on solid economic data that once more signals inflation growing and consumption being steady. The Bloomberg Dollar Spot Index grew by 1.0% thus far this week, but the “buck” may be under pressure. Investigations over Russian ties to President Trump have taken a turn since last night when former U.S. National Security Adviser Mike Flynn said that he’d be willing to speak to interested authorities if promised immunity in the case. Political meddling between nations is a serious matter and that may keep the U.S. Dollar subdued.
Personal Income and Spending data this morning showed consistency as expected. Inflationary growth continues to rise as Personal Economic Expenditures grew 1.8% over the expected 1.7% estimate while also being revised upward from the prior month. Other Fed members will speak today, but we’ll keep close eyes mostly on headlines over Brexit negotiations, which might get ugly quick and the potential for scandal in the world’s highest office.

GBP
The Pound fell this morning based on underwhelming data revealing that fourth quarter GDP in 2016 negatively affected consumer spending as inflation rose quickly. Trade as a result of a weakened Pound benefitted, but this means only the bigger players in the economy saw growth. Although prices may be on the rise for some products, they are falling where it matters most.
Housing prices in the UK fell for the first time in two years, a worrisome figure considering that the housing and property industry suffered the most after the Brexit referendum. In terms of Brexit talks, the European Union now looks committed to holding a united front against any UK perks, saying that Britain will not decide its fate when it comes to how the full separation will take place. Friction is in the air, certainly not love.

EUR

The Euro fell 1.8% this week, based on European Central Bank dovish commentary and now deflationary pressures. The Euro-zone’s inflation slowed to 1.5% last month, way below expectations of 1.8%, a figure closer to the desired 2.0% target set by the ECB. Although the political risk of France going rightist is fading according to polls that show Emmanuel Macron, the pro-further-globalization candidate, could win with a comfortable margin, there are growing doubts over Brexit talks and the future of the EU.
The Portuguese government is saying that Brexit shows the EU needs to be reformed, echoing the sentiment of other troubled nations that feel squeezed by austerity measures placed on them to prevent defaulting on debt.  The struggles are very real with an economic recovery that may need further help from the ECB next year and political uncertainty across the continent. EUR could have room for losses in the next week, maybe beyond.

U.S. Dollar prospects improve as data elsewhere underperforms

USD
The U.S. Dollar strengthened following a day of choppy trading as market participants looked for guidance from Fed speakers and digested the reality of the first day of Brexit negotiations. The developments overnight improved the “buck” as European economic confidence is down and insider sources from the European Central Bank informed that officials are not in any way determined to abandon their accommodative approach to monetary policy.
Meanwhile in the U.S., Boston Fed President Eric Rosengren went beyond the call of duty by exclaiming that three more rate hikes would be appropriate this year, being way more optimistic than the rest of his peers who have still vowed to produce two more increments in 2017. The Federal Funds Rate is now at 1.0% and chances of it closing above 1.5% by December are at 20.0% based on traders’ bets.
Gross Domestic Product for Q4 registered at 2.1%, revised upwardly from 2.0% originally and Personal Consumption surprised with a reading of 3.5% over the estimated 3.0%. Additionally, the Fed’s preferred measure of inflation, Core Personal Consumption Expenditures (CPE) rose 1.3% beating its 1.2% expectation. As always, Jobless Claims remain near a four-decade low. Clearly, things look great on paper and with so much rising on political upheaval in Europe the greenback is on the rise at the moment. Other Fed members will speak today, we’ll watch mainly for New York Fed’s William Dudley at 10:30AM.

GBP
Sterling remained stagnant despite the historic and momentous occasion that was invoking Article 50 to start the divorce proceedings with the EU. The United Kingdom has a lot to lose as trade with the EU represents close to 15.0% of British GDP. More importantly, as proud as Brexiteers may have felt, a letter by the UK with the intent to promote a trade deal tied to security was immediately rejected by European lawmakers. Prime Minister Theresa May already is getting a taste of what negotiations will be like: lots of No’s to her proposals and a firm stance by EU officials to foment a sense of regret. We maintain a dovish forecast for GBP in 2017.

EUR

The Euro is down; falling sharply as deflationary pressures seems to be back on the table as the European Central Bank considers its policy options. For years, the economic recovery in Europe has necessitated multiple injections of intervention by the ECB, but quantitative easing will come to an end this year. Nevertheless, German and Spanish Consumer Prices registered lower than most analysts predicted which puts pressure on the central bank to maintain its current loose approach. If there is a chance of hiking rates, it would be left for next year, especially with the downside risks at play politically.  

Wednesday, March 29, 2017

Fed rate-hike outlook boosts U.S. Dollar, Brexit now real

USD
The U.S. Dollar has improved by over half a percent overall since yesterday’s session following positive economic indicators, optimistic commentary from Fed officials, and a surprising call for Scottish Independence. Another surprise on our side of the pond was stellar Consumer Confidence, which registered at its highest level in sixteen years. Market participants seem to have moved past the fiasco over healthcare overhaul, although many remain doubtful over the administration’s ability to negotiate more effectively towards tax reform and higher fiscal expenditures on infrastructure as well as border control.
Now that the United Kingdom has officially started their divorce from the European Union, we will monitor the GBP/USD and EUR/USD pairs closely as this event is indeed unprecedented. Today marks a historic day, but it may go relatively quiet as markets prepare for statements from EU officials and gauge the initial bets placed by traders. We also will hear from Boston Fed President Eric Rosengren at 11:30AM and San Francisco Fed President John Williams at 1:15PM.

GBP
The Pound was moving in tight ranges, but fell slightly as the North American morning began. Across the board, stock exchanges are muted as investors take in the reality of invoking Article 50. As we have explained before, we feel the UK may face tremendous challenges moving forward as the EU will negotiate with a heavy hand in order to not promote or foment any separatist sentiment in any of the 27 nations left as members. This may prove to be a difficult prospect because of a rise in populism in the continent and a wish for independence in Scotland from the crown.  
Since World War II, cooperation between the British and the rest of Europe has been a key factor to maintaining a much desired peace and opportunities flourished commercially with the ease of flow of people and business. For the first time in a long while, disagreement is the modus operandi and we hope that a mutually beneficial relationship can remain. The devil will be in the details.

JPY

The Yen has appreciated by 3.5% since the middle of March, benefiting from the nature of uncertain markets and a quick turn to risk-aversion. The Japanese are trying to push for inflationary growth and the government is working on a stimulus package to rebuild much of its infrastructure, possibly revamp its military capabilities as well. We see the Yen improving if negotiations for Brexit start going sour early and if further mishaps occur in the U.S. as it relates to policymaking. For now, expect dollar to stay afloat on policy divergence and potentially as another safe-haven hedge to European chaos. 

Tuesday, March 28, 2017

U.S. Dollar no longer sinking as investors re-examine possibilities

USD
The U.S. Dollar is trading in slightly improved ranges this morning following a crushing blow after Friday’s failure to repeal and replace former President Obama’s signature health legislation. The past two weeks witnessed the greenback depreciating by 2.5% against major peers according to the Bloomberg Dollar Spot Index. Today’s main event that could aid in turning the tide for the “buck” is Janet Yellen’s speech at 12:45PM regarding workforce developing.
Data-wise, earlier we saw the release of better than expected Wholesale Inventories, which grew 0.4%, but were revised downward for the month prior when they contracted. Some inconsistencies with indicators may be cause for delaying hikes as seen with Durable Goods Orders. We see the dollar’s chances for a surge later on as developments in Europe unravel and focus stays on a more economic-driven agenda that includes tax reform, a plus for Wall Street, and infrastructure, a plus for America.
Commodity-based currencies are still under pressure because of swings in the prices of oil and raw materials. Iron Ore prices dwindling have negatively impacted AUD and NZD. Additionally, South African Rand is steeply declining, mainly as a result of political turmoil. President Jacob Zuma is ready to fire Finance Minister Pravin Gordhan based on mismanagement of state funds and industries. However, the two have been known to clash based on ideology as the President has seek “radical economic transformation” while Gordhan kept spending in check. ZAR is 4.0% down for the week and it’s only Tuesday.

GBP
The Pound is trading near its best levels in a month and half as the world prepares for the official Brexit process to start tomorrow. Good news for Sterling came in the way of compromise yesterday as UK officials agreed to maintain some rules and laws in place even as they negotiate a separation from the European Union. The idea is to soften the effects of Brexit, both speculative and tangible, since many economists fear that the next two years could lead to hardship.
Clearly, British leadership will not back down from demanding sustainable trade terms and will minimize any financial costs. Some member countries are already demanding an amount of EUR 60-70 Billion in fees, a point of major disagreement. We will not know until it happens, but we believe there will be pushback from both sides from the beginning and there will be attempts to make an example out of the UK by the more hardline pro-Union leaders. The Brits also need more people involved in the talks as their numbers of individuals with expertise in EU matters are the low.   

EUR

The Euro remains around its highest point since November, staying strong after improved odds of a victory by Emmanuel Macron in the upcoming Presidential election. Currently, Macron has a 69.0% chance to win, a dramatic improvement from the start of the year when rightist Marine Le Pen dominated headlines. Polls and survey skeptics have reason to be concerned after the surprises of 2016, but the loss of excitement that pumped alternative candidates and parties across the continent seems to be fading.
The AfD, alternative for Germany, a radical anti-establishment party looking to defeat the democratic socialists and deviate from international agreements, has also lost popularity. A poll at the start of 2017 showed that 15.0% of the population agreed with AfD on matters of refugees and economic stagnation. Elections in the Saarland region showed their weakening appeal with just 6.0% of the votes.   

Monday, March 27, 2017

Concerns over U.S. growth and politics taking out U.S. Dollar gains

USD
The U.S. Dollar is weak and markets across the globe are following suit following a devastating week for the White House and the Republican-led Congress. Much of the excitement that brought along gains for stock indexes and appreciation for the greenback the past four months, was based on President Trump’s promise to use his mandate to fix healthcare, deregulate, reform taxes and spend massively on infrastructure. Faith in the administration’s approach to governing thus far is going down big league. Meanwhile, the political uncertainty that clouds the European continent is now a reality for the United States in terms of gridlock.
This week will be another busy one with events potentially affecting the “buck” further. Fourteen officials from the Fed, including Janet Yellen, will speak throughout the week and Purchasing Managers Index as well as Gross Domestic Product data are slated for release. The spotlight now more than ever will be on American economic sustainability as well as the government’s ability to coordinate its efforts efficiently. Friday’s vote cancellation casts doubt on the administration, Republican leadership, and the future of implementing the agenda set out during a wild campaign. USD is near its worst levels since October.

GBP
The Pound had a strong surge ahead of its pivotal date with destiny as the UK prepares to officially separate from the European Union by invoking Article 50 of the Lisbon Treaty on Wednesday, March 29th. This is no small thing, but investors and traders seem ready, having priced in the move and I assume looking forward to the separation. We strongly believe the Pound will be under pressure as negotiations with the European leadership begin.
Germans, as well as other lawmakers, are readying to bring their views to the table, which may not agree with UK exit plans or trade hopes. The UK could face tremendous fees to the EU as it also struggles to keep companies from feeing its shores. Furthermore, the Bank of England believes the Brexit is a huge financial risk and wants to gauge lending banks’ abilities to withstand worst-case scenarios. They expect negotiations and change in dynamics will test contingency plans across the board.  

EUR

The Euro is revived after good news for German Chancellor Angela Merkel’s political party during the weekend. The Social Democratic Party achieved an important victory in the Saarland region, a nice start to the election year for the party and their biggest win in that left-leaning region in the last thirteen years. Martin Schulz, the former EU president and current main candidate to follow Merkel, has energized the centrists and reduced concerns that German elections would hand power to alternative newcomers or rightists with an anti-trade as well as anti-immigrant campaign agenda. EUR is at a four-month best.  

Wednesday, March 22, 2017

U.S. Dollar weakness continues. Risk-aversion resuscitated 

USD
The U.S. Dollar is trading in mostly weak ranges after a day in which the gains seen since the Presidential election were reversed. The “Trump Rally,” a positive correlation between stock exchanges and the greenback is fading. Equities are 2.0% away from their record highs and the U.S. Dollar is at its weakest point in four months. The theme of risk-aversion is reviving the Yen, which happens to be at its strongest in just as long.
Wall Street seems concerned that the infrastructure spending and tax reform in the President’s agenda may fall short and not materialize especially after seeing the tumultuous nature in congress’s attempts to repeal “Obamacare.” The political drama is casting doubt on economic growth outlooks based on fiscal expenditures that now seem less realistic.
USD may no longer be driven by Fed expectations or economic indicators, but rather over solutions to ongoing gridlock in Washington. Problems elsewhere remain, which will keep dollar afloat, but there is now a focus on how good a job the government can do to sustain the economic advancements seen lately.

GBP
The Pound erased some of its gains from yesterday’s impressive inflation figures following dovish commentary from Bank of England’s Mark Carney. The governor stated that the UK cannot overreact to one piece of data, particularly one that makes sense when considering that a prolonged weak Pound since last June increased demand for British exports and naturally brought the level of prices higher.
Sterling may not rejoice for very long as economists expect very strong and negative reactions from the Euro-bloc nations once Prime Minister Theresa May invokes Article 50, basically demanding the divorce next week.  There is news of UK talks with the World Trade Organization (WTO) to coordinate trade agreements with other countries. Many fear the exodus of companies when the official Brexit starts will leave many sectors unemployed and add recessionary pressures to the UK.  

EUR

The Euro is still fluctuating around its best levels since November with a sense of relief amongst the establishment in Europe after good polling figures from Emmanuel Macron after his Presidential debate. There is no data to propel or undermine the Euro’s strength, which is now mostly based on optimism that politics will not break down the Union.
We expect the Brexit to have an impact on the currency, but it is difficult to gauge what the scenes of negotiations will look like and if the effects will be felt right away. Studies have highlighted that the UK is more likely to be affected once it has no access to the single market, but Europe may miss its largest military partner. We feel Euro will be under some pressure since election uncertainty in France and Germany will not go away, but the Brexit process will test FX in unprecedented ways.

Tuesday, March 21, 2017

European currencies rally as U.S. Dollar continues losing streak

USD
The U.S. Dollar weakened against its European counterparts as we slept and developments in Europe caused markets to flourish. Although the U.S. economy is steadily growing and the Fed has acted in hiking the interest rate while planning on more increments, current market sentiment is focused on the likelihood of these possibilities in the Euro-zone and the United Kingdom despite downside risks. Surprisingly, the determination by the UK government to separate officially from the EU is a Dollar-negative event. The Bloomberg Dollar Spot Index is at its lowest point since November 10th.
Politics have been problematic for the ancient continent, but the U.S. does not seem to be spared. The uncertainty over fiscal policy, the controversial travel ban, and ongoing investigations regarding Russian ties as well as wire-tapping do not necessarily make things look attractive on our side. Markets welcome clarity and stability, but there seems to be too much of a show going on at times.
Oil picked up a little bit of steam, but CAD and Peso are up primarily on good data and central bank intervention respectively. Canada had the best Wholesale Sales growth in thirteen years at a pace of 3.3%. In Mexico, Banxico has successfully sold bonds and exercised swaps to manage the supply of MXN.

GBP
The Pound is better this morning based on better-than-expected inflationary data. UK Consumer Prices increased 2.3% in February, above estimates and the Bank of England’s target of 2.0%. It is the first time the inflation figure exceeded the BOE’s desired level.
Along with other fundamentals, the UK’s progress is influencing some economists to believe the central bank may be ready to hike interest rates, an event that did not seem plausible after the referendum last year. In fact, the bank felt accommodative policy needed to remain and lowered rates. Sterling is enjoying some appreciation now, but we shall see what happens after March 29th with the EU likely to not bend over backwards for the UK government’s liking.

EUR

The Euro is trading at its strongest level since November 11th mainly as a result of a good performance by Emmanuel Macron during the first French presidential debate. In the field of alternative and scandalous candidates, Mr. Macron triumphed by seeming poised, experienced, and skillful. A centrist with big eyes towards more globalization, Macron is the antithesis to rightist populism that has stolen headlines in the Euro-bloc.
His success means prosperity and the existence of a European Union since Marine Le Pen, his closest rival in the presidential race, has vowed to separate, which would crumble the single market. We expect the Euro to continue rising as fears of new alternative leadership in Euro fade, but it’s tough to believe polls and debate performances are not always indicative of a path to victory in an election. Doubt remains. 

Monday, March 20, 2017

U.S. Dollar had a tough week, now looking at less volatility

USD
The U.S. Dollar weakened throughout last week and is on a negative trend as prospects for tighter monetary policy increased in the United Kingdom and Europe. It is safe to say that the rally that started after President Trump’s election has come to an end, with stagnant equity markets and FX hedging losing its volatility. We expect the dollar to react to headlines related to the remaining socio-political struggles in Europe such as elections and the Brexit, which is now slated to officially start on March 29th.
The end of this week will have economic data that could improve Fed hike chances, but the path to two more increments will be long. Durable Goods Orders and PMI will close out the week, but statements from Fed officials could add fuel to the fire, just not sure if that’ll mean dollar will be hot or its chances of short-term appreciation will be up in smoke.  
After such a turbulent and busy week, there’s clarity that other major currencies were uplifted while resource-based ones suffer, especially with the inconsistency in oil and commodities. However, there is some uncertainty and a spike in volatility could be caused by anything in the current atmosphere.

GBP
The Pound gained last week, strengthening off of a hawkish BOE and as Prime Minister Theresa succeeded in establishing a timeline for the official Brexit process. March 29th we expect the invocation of Article 50 of the Lisbon Treaty which will begin a tentative 2-year negotiation of terms of trade and other ties. This has no precedent, thus why it is difficult to gauge what the effects exactly will be.
What is indeed known, especially after the Brits got somehow hold of an internal German government document, is that the European leadership plans to make the divorce feel exactly like that: an ugly separation where both parties will be losing something and trust is damaged. 
The notes highlighted a commitment to make the British regret life outside of the single market with no benefits of social mobility within the 27 member nations. An ongoing fight with Scotland over an independence referendum date will likely affect the GBP, which is why we still feel Sterling will have downward pressure in the next three months.

EUR

The Euro is trading at its strongest level on over month a half as the Euro-bloc prepares to see monetary policy normalization. After years of heavy QE, it seems like officials are ready to allow other forces to stimulate the economy. The European Central Bank will monitor the last batch of sovereign bond purchases in 2017 while hoping that inflationary growth and lowering unemployment remains.
In France, Marine Le Pen won further support according to polls and we expect her message to become broader and more engaging since populist Geert’s attempt at taking power in the Netherlands left a sour taste in the mouths of alternative movements focused on major change. Euro may have been due for some appreciation, but we think worrisome scenarios are still to come.   

Friday, March 17, 2017

The bleeding stops for the U.S. Dollar. Volatility fading 

USD
The U.S. Dollar is trading in mixed ranges, mostly negative throughout the week after a more dovish outlook from the Fed and political developments in Europe that eased volatility. It is clear now that the Fed believes the economy is steady and that there are some uncertainties it wants to monitor such as sustainable wage increases and improved consumer spending.
Meanwhile in Europe, indicators have also kept the Euro-bloc on recovery, to a point where the European Central Bank can ease off the gas pedal when it comes to maintaining an accommodative approach. The greenback has weakened and the Bloomberg Dollar Spot Index is now at its lowest level since November 11th.
Treasury Secretary Steve Mnuchin is attending his first G-20 finance ministers meeting where he has already made headlines by working closely with his German counterpart Wolfgang Schaeuble and stating that the U.S. has no intentions of starting a trade war, but will not tolerate manipulation of currency fluctuations for unfair advantage. In terms of data, we’ll see if Industrial Production does anything to aid the “buck” when it’s released at 9:45AM. A 0.2% expansion is expected after it contracted last month.

GBP
The Pound has rallied almost 2.0% this week bringing it to its strongest level against the dollar since the month started. Prime Minister Theresa May does have the power to invoke Article 50 to initiate the Brexit and polls in Scotland indicate a call for independence from the UK would not be welcome by an overwhelming majority. It would be a very tight race.
However, her determination and confidence could be tested once the process starts because the European side of the equation may not be so easy to solve. Scottish National Party leader and first minister Nicola Sturgeon warns that economic concerns in her nation are only going to be exacerbated if there is no access to the single market. She truly believes Scotland is ready for freedom.
On the monetary policy side of things, the Bank of England surprised us with lack of full consensus on their decision to keep rates unchanged. Kristin Forbes, who is leaving soon, dissented with her vote to hike. Although she may not influence any other meeting again, it looks like tightening is in the minds of more central bank officials than just in the U.S.

EUR

The Euro strengthened by 1.3% throughout the week and it’s now at its best level in five weeks. The European Central Bank looks ready to step away from additional quantitative easing and some members are expressing optimism in their ability to hike the benchmark rate before the year ends. At 0.0% for main refinancing and negative overnight deposit rates, the central bank has exhausted its instruments in hopes of consistent growth.
Now that Spain is on the rise and inflation finally arrived, ECB member and governor of the National Bank of Austria Ewald Nowotny has spoken in favor of an end to loose monetary policy. He thinks the right time is now before prices go up too high. There are downside risks in the horizon, politically especially, but the EUR may stay around current levels with some upside if data continues to impress in the next few months. 

Wednesday, March 15, 2017

U.S. Dollar staying put until Fed meeting at 2PM. Dutch election today 

USD
The U.S. Dollar is range-bound, sticking to levels that have been stagnant as investors and traders keep eyes on the Fed decision and elections in the Netherlands. Today’s economic data met expectations as Consumer Price Index and Retail Sales expanded by 0.1% each. We expect the Fed to not only hike the Federal Funds Rate, but also to sound the trumpet of optimism after data has shown the economy is on good pace for growth in many aspects such as inflation and even wages. The “buck” may not gain a ton since the hike is priced in, but the tone at press time could have a surprising impact one way or the other.
Markets rose overnight, helping some resource-based currencies that had been sliding for days. Oil prices declining hurt the commercial value of other commodities, but a report of lower than estimated inventories of shale oil in the U.S. put a stop to the bleeding. The neighboring CAD and MXN are improving as well as the oceanic NZD and AUD.

GBP
The Pound erased some of its early week losses because it seems not a majority of Scots are feeling the whole separation from the UK as much as their fearless leader. Although Nicola Sturgeon diligently started the legal process to establish a referendum asking Scotland if it wants to be independent, a few polls showed that 57.0% of those surveyed would like to stay British.
It seems like Euro-skepticism is not just a far-right phenomenon, but a growing sentiment amongst many across the continent that the Union may no longer be the best system for economic or social cooperation between nations. GBP is still on an almost 4.0% slide since the start of February. The instability will keep downward pressure on the “quid.”

EUR

The Euro, a currency chained by the shackles of political uncertainty, will likely trade around current ranges until we get a clearer picture of results in the Netherlands. Twenty eight parties are on the race for power so a coalition is expected to form in order to have a government. Geert Welders, the rightist politician who could shake things up in regards to trade and immigration, has lost some steam recently and his Freedom Party members may not be able to gain much support from other parties unless their numbers are impressive. A lot is up in the air, but all we can do now is to wait for the chips to fall.