Intraday Market Thoughts ArchivesDisplaying results for week of Sep 17, 2017
Mark Carney cast himself as a less-enthusiastic hawk on Monday while the BoC flexed its jaw muscle. The US dollar was the top performer while the Canadian dollar lagged. The RBA meeting minutes are due out later.
BoE Governor Carney had a chance to fine-tune his comments Monday, reiterateing that some tightening might be needed in the coming months. However, he also said that monetary policy may have to 'move in order to stand still' because rates are rising elsewhere.
In headline-driven markets, that's what stood out but a closer inspection showed that was just a small part of his overall justification for hiking. A bigger reason – and one that will last longer – is that he believes Brexit will be inflationary. Others may differ but the market voted for lower GBP on the overall message, perhaps more in a nod to the outsized recent gains than a genuine re-think on the path of rates. Cable fell a cent on the day.
In the bigger picture, a shakeout is emerging in markets trying to make sense of central bank policy. The BoC showed that the shift from dovish, to neutral to two rates hikes can take place in six months and we are all on the lookout for the next target. There are also signs the BOC is having second thoughts. Deputy Governor Lane said Monday that they will be “strongly” taking into account the CAD leap in upcoming decisions. That spooked loonie traders and sent USD/CAD nearly a full-cent higher.
Maybe the more-interesting comment in his speech was that rates are still relatively low compared to what they believe is the neutral level. It's another sign of how jumpy markets are right now. That means opportunities will abound in the weeks ahead.
Or even the day ahead. The RBA Minutes are up next as the market tries to sort out which way Lowe will tilt. The headlines are due at 0130 GMT.
Hurricanes will get the bulk of the blame but the latest data showed growth was slowing before Harvey and Irma. A big week ahead: Trump's UN speech on Tuesday; Fed decision & Yellen presser on Wednesday; PM Theresa May's EU speech on Friday and German Elections on Sunday. A new Premium note has been added to further our existing index trade.
A cascade of growth downgrades followed US retail sales and industrial production numbers on Friday. Retail sales fell 0.2% compared to +0.1% expected in August. The control group, which excludes autos, gas and building supplies was down 0.2% compared to +0.2% expected. In addition, July sales were revised lower.
It wasn't just consumers with bad news. August industrial production fell 0.9% compared to +0.1% expected in the worst monthly decline in five years. The Fed said Harvey reduced output by 0.75 pp so it's not as bad as it looks, but it's undoubtedly a poor reading. How poor? The NY Fed and Atlanta Fed GDP trackers were both lowered by 0.8 pp for Q3 while Q4 estimates were trimmed as well.
The market took the weak data in stride in a sign that it views Harvey as the culprit. That may be a hint on how buoyant the dollar will be in the week ahead as the market prepares for details of Trump's tax plan at the end of the month.
What was unambiguous was pound strength as cable finished the week just under 1.36. The OIS market is pricing in a 65% chance of a BOE hike on Nov 2 and 73% before year-end. What makes that probability even higher is that Carney's credibility can't afford another misstep.
CFTC Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR +86K vs +96K prior GBP -46K vs -54K prior JPY -57K vs -74K prior CHF -2K vs -2K prior CAD +50K vs +54K prior AUD +60K vs +65K prior NZD +12K vs +15K prior
Those sterling shorts are suddenly rather vulnerable and no doubt many covered since the Bank of England decision. Watch out for Carney's speech today at 11 am EST (4 pm London). Euro shorts were pared after last week hitting the most-extreme since May 2011.