Intraday Market Thoughts Archives

A powerful rally in the US dollar resulted from a broadly stronger than expected US jobs report (NFP +271K vs exp 185K, UnempRate fell to 5.0% from 5.1%, average hourly earnings rose to a 6-year high of 2.5% y/y). Job creation was robust across all industries as more workers entered the workplace even if the labour participation rate remained unchanged at 38-year low of 62.4%.

Expectations for a December Fed hike surged to 72%, especially after Fed Chair Yellen hinted earlier this week the jobs bar for a December lift-off was not necessarily high. Today's jobs report broke well above Yellen's suggested bar to the extent that the rest of US data series will only have to avoid negative shocks for rates to rise next month.

The US dollar quickly surged to levels deemed worrisome by US corporations with as much as six weeks remaining into the December FOMC announcement. Will Fed speakers be too busy cementing the case for December lift-off to the extent of overlooking excessive advances in the US dollar? Next week's release of US retails sales and an expectedly hawkish round of Fed speeches over the next few weeks will surely prop US yields higher.

Assuming US data will maintain a neutral-positive showing into mid-December, Fed speakers will want to work on communicating a One-&-done rate hike for now. ECB dynamics and the euro are a whole different story.

The Premium Video Market Analysis, focusing on FX will be released this evening.

BoE governor Carney's Guy Fawkes impersonation stormed FX markets and gilt yields with a broadly dovish inflation report, slashing growth and inflation beyond what many had expected. Carney also took a page from the Fed book when he highlighted the source of disinflationary threat was “almost exclusively” from emerging markets.

The standout downgrade was of Q4 inflation, brought down to 0.1% from 0.4% in the August report. Q4 2016 inflation was lowered to 1.2% from 1.6% and Q4 2017 CPI revised to 2.1% from 2.2%. The deepening decline of the inflation view was largely attributed to the pass-through effect from the strong pound. The BoE also downgraded 2016 GDP growth forecast to 2.5% from 2.6% in August, and 2017 GDP growth lowered to 2.6% from 2.5%.

Although several economists have made a meal out of the phraseology surrounding the way the BoE views its inflation risks within the 3-year horizon, we find it futile for to delve on what the central bank thinks 3 years out when forecasts are persistently changed-- and most of all, when the medium term matters most for currencies and gilts.  

Our Premium subscribers had already two short trades involving GBP crosses, and a third had been issued after the BoE report.

Why is the US dollar rallying as if a December rate hike is a done-deal when markets are pricing a 50-50% chance of Fed lift-off?   Part of the answer is that a 50% chance of Dec tightening is the most hawkish probability since perhaps the start of June for the June meeting. The other part of the answer is that of relative policy divergence, namely, rising market (not ours) expectations that the ECB will extend (duration) or expand (size) its monthly asset purchases.

The aforementioned certainty may have lowered the bar of requirements for the quality of US economic data to bring about a December Fed hike as judged by the recent factory orders and manufacturing ISM. The October and November releases of 1^st tier economic data will also be crucial. The current week could further escalate USD strength on the heels of prolonged expectations for a December Fed hike.

Starting with Wednesday's release of US Oct ADP 8:15 ET/13:15 London-GMT, Oct services ISM 15:00 London-GMT, New York Fed President William Dudley's speech 17:30 GMT and Federal Reserve Vice Chair Stanley Fischer's speech 19:30 GMT. Any hawkishness from these two with a fairly upbeat October jobs report will undoubtedly bolster the USD's momentum, yet it is unclear for how long.

But before all this, stay tuned for China's October Caixin services PMI due at 1:45 GMT.

Earlier on Tuesday, a new note was issued on the existing Premium NZDUSD trade.

Bitcoin is on course for posting its 8^th consecutive weekly gain (longest series of advances since late 2013) and is up 113% from its January lows. The recent break out in momentum emerged from last week's decision from the European Court of Justice to classify Bitcoin as a currency rather than a commodity, which means it will be exempt from VAT, thereby, improving its chances of being traded in an exchange. 

The ruling boosts Bitcoin's credibility as an alternative asset/investment at a time when central banks' currency devaluations (direct and indirect) as well as gold's directionless behaviour over the last 2 years despite falling inflation. Similarly, we could see banks and brokerages continue investing in crypto currencies as they market them as investable vehicles.

After Mount Gox

The burst of the Bitcoin bubble occurred last year upon the collapse of Mt. Gox exchange. But that only encouraged the creation of safer and better capitalised alternatives, with stronger technological structure and even regulation. The likes of Circle.com are acting as a digital custodian, offering secure network architecture and audited by a national cybersecurity firm. Prepare to witness a new round of similar firms multiply in the years to come to accommodate demand for crypto currencies.

Displacing gold as a safe-haven?

Over the past two years, we saw episodes when Bitcoin temporarily assumed a safe-haven role as gold was hit by disinflation concerns and the Fed added to QE and when it later stood reluctant to tighten policy.  Bitcoin surged in June-July amid surging market expectations of a Greece exit and the revelation that China held less gold in its reserves than had been anticipated. Last week's court ruling should push exchanges, brokerages and banks to launch bitcoin-related instruments such as ETFS, aimed at trading, hedging and speculation.

Bitcoin's medium of exchange will only grow from here.  Its “store of value” status may not be a consideration for today, but will become so next year.