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Displaying results for week of Jan 08, 2017New Fed Debate, Yellen Up Next
Members of the Federal Reserve have begun speaking about when and how to trim QE holdings for the first time. The US dollar was weak leading into New York trading. The kiwi led the way while the pound lagged. Yellen is speaking later but it's not likely to be market moving. The Premium Insights issued a new JPY trade.
استراتيجية الدولار بعد صدمة ترامب
Until now the debate at the Fed had largely been about when to hike interest rates and how much, while questions about the balance sheet were unaddressed. Three separate Fed members broached the subject this week in what was surely a coordinated communication shift.
For some background, the Fed purchased a whopping $4.5 trillion in Treasuries and mortgage-backed securities in QE programs in the aftermath of the crisis. That value remains steady because when bonds mature, they buy other bonds. The general FOMC exit plan to bring its balance sheet back to normal levels is to stop reinvesting maturing bonds and let the holdings slowly run off. Another option would be to sell holdings.
The central question revolves over the start of unwinding. The Fed has long indicated it would raise interest rates first but has never been specific about how high rates would need to go before halting reinvestment. On Thursday, Philly Fed President Harker said the FOMC should consider ending bond buys when the Fed funds rate hits 1%. That would be after 2-3 more hikes.
Earlier this week, Rosengren said the Fed should consider trimming its balance sheet and on Thursday Bullard suggested the Fed could stop reinvestment after one hike. Other debates include what portion of Treasuries and MBS to hold and the duration of the portfolio.
The debate muddies the Fed picture for 2017. What's more hawkish? Three hikes or two hikes and stopping reinvestment? That's not an easy question to answer but it's increasingly clear to us that the bond market is in charge at the moment. A strong Treasury auction Wednesday was followed by one that was very close to expectations Thursday. Dollar swings followed both.
Other notes from Thursday's trade
- Whenever the market hears the word 'Brexit', the pound suffers. A report that Theresa May plans a major Brexit speech on Tuesday sent cable more than 100 pips lower Thursday.-US economic data remains strong with initial jobless claims down to 247K versus 255K expected.
-But the dollar is an issue. Lockhart said the dollar was an issue for exporters and the export/import price indexes both missed estimates in a way that suggested a larger USD factor.
-The event to watch in Asia-Pacific hours is a scheduled speech from Yellen at 0000 GMT. Unfortunately, it could be a dud. The event is a town hall with teachers so expect talk about financial education. But she will take questions so there may be some notable headlines.
Act | Exp | Prev | GMT |
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Fed Chair Yellen Speaks | |||
Jan 13 0:00 | |||
FOMC's Harker Speaks | |||
Jan 13 14:30 |
Three Reasons to Trump's USD Decline
Volatility is on the menu for the next four years and it was kicked off by Trump's first press conference since July. The US dollar fell as he spoke and was the laggard on the day; the Australian dollar led the way as it continued its strong start to the year. Japanese current account data is later. As gold extends higher, we note the metals' stabilisation relative to non-USD pairs. Will metals survive another fresh run-up in bond yields as Fed speakers respond to higher inflation? Will Donald Trump's fiscal stimulus promises be offset by confrontational international trade policies? Does any of this matter if stocks rise and miners push along with them?
Trump set off a sharp round of US dollar selling for three reasons, some of them will last and some could quickly fade.
1) It always comes back to growth
Trump's press conference was highly anticipated and that helped to stoke unrealistic expectations. People expected him to touch on everything but he was battered with questions on Russia and building a wall. US dollar bulls had hoped he would deliver something to shore up confidence that growth-inducing measures are coming. That could be fiscal stimulus, tax reform or regulatory reform but he left those areas untouched or didn't add anything new besides the regular hyperbole like saying he was going to be the greatest jobs creator in human history.2) He singled out pharma
Shares of pharmaceutical companies slumped after Trump singled out the industry as one that's leaving the US and overcharging Americans. He vowed to launch a bidding system for drugs. The pattern so far is for him to start with an industry and then begin attacking individual companies. That's what he did with automakers and if he begins to single out companies, expect more risk aversion.3) You say you like volatility
The markets will ultimately reflect the President. He's calculating in his unique way but he's also a loose cannon. The shots at pharma came out of nowhere. More broadly, the press conference was amazing viewing if only because you never knew what he would say next or how he would say it. He accosted CNN and showed that a cornerstone of his personality is defensiveness. That kind of personality can only add to volatility in the four years ahead and risk assets prefer less-stormy seas. The other dollar-negative factors will fade in the days and weeks ahead but his volatility personality won't change.The final factor that undermined the dollar was a strong 10-year bond auction. The yield was two basis points lower than markets were anticipating and that cut the knees out of USD/JPY in a quick move to 114.25 from 115.15. That was a four week low in the pair and darkens the technical picture. We wrote about the crowded bond bear trade yesterday and it appears it was a bit too crowded, at least for the day.
Looking towards Asia-Pacific trading, we will be keeping a close eye on commodity FX. The Aussie is sparkling so far this year and a rebound in oil sent USD/CAD below the critical uptrend that started last May. The calendar is light but features Japanese current account data at 2350 GMT.
Bond Bear Blueprints
The two best-known bond traders in the world squared off on Tuesday with competing visions of how and when the long-term bull market will end. The yen was the top performer while the New Zealand dollar lagged. Australian job vacancies are due next.
Bill Gross grabbed headlines Tuesday by casting aside all other markets and economic indicators and saying the future of global markets hinges on one chart – the 10-year yield. The T-note yield has been trending down for 30 years but is testing the upper limit of that channel.
Gross says a break above 2.60% would signal a new paradigm of growth and inflation that would be the start of a bear market in bonds. He didn't predict it was coming but said it would have to come with 3% real growth.
Gross' rival for the bond crown – Jeff Gundlach had a similar take but with 10-year yields at 2.37%, he allows for more leeway before declaring a new paradigm. He said it won't be a bear market in bonds until 3% yields.
What's fascinating to us is the interplay between fundamentals and technicals. Gross and Gundlach similarly based trades on fundamentals but use technicals for confirmation and timing. Their laser-focus on the 10-year yield is instructive and reminds us that it's moved 60 bps higher since election night. That kind of tightening will have effects on corporate profits and household finances that might be overlooked.
Finally, the overwhelming talk of a bear market in bonds is the kind of thing that's happened dozens of times in the past 15 years and failed to materialize. Yes, the President is different but Washington is still much the same and the demographics and secular trends in the US and global economy are little changed.
Overall in markets on Tuesday it was choppy but the majors closed less than 30 pips from opening levels. The big story this week continues to be the drop in oil. In terms of CAD, housing starts were strong but it can't get any traction until oil stabilizes, at the very least.
The top performer this year continues to be the Australian dollar. It will be in focus at 0030 GMT with job vacancies data due. Previously, openings rose 4.6% m/m.
Will Gold Reverse again?
Gold bulls may be exhaling again, while gold bears are silent. Gold and silver enter their 3rd consecutive weekly gain, the longest winning streak since the 3-week rally of Oct-Nov was brought to a violent reversal following Donald Trump's election victory. Some say the metals rally is part of a much needed corrective pullback in USD and bond yields, coinciding with the repositioning ahead of Trump's Wednesday press conference, which will shed more light on fiscal policy and trade policy. Gold and silver bulls are encouraged by the broad improvement in inflation metrics such as US average earnings and rising CPI/PPI in China, UK Canada and even the Eurozone.
But take a look at gold miners, with HUI index entering its 4th weekly gain, testing its 200-week moving average and is on the cusp of a rare golden cross as the 55-WMA crosses above the 200-WMA for the first time since 2012. The last time HUI's 55-200 golden cross took place, HUI rallied 51% (from Sep 2009 to Sep 2011). Will metals survive another fresh run-up in bond yields as Fed speakers respond to higher inflation? Will Donald Trump's fiscal stimulus promises be offset by confrontational international trade policies? Does any of this matter if stocks rise and miners push along with them? All of this is tackled in our latest Premium video, with the implications for XAUUSD, XAGUSD and HUI.
Act | Exp | Prev | GMT |
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Consumer Prce Index (y/y) | |||
2.1% | 2.2% | 2.3% | Jan 10 1:30 |
CAD Conundrum
The fundamental picture in Canada is looking increasingly rosy but the loonie is at the mercy of two factors beyond its control. The yen was the top performer on Monday while the pound lagged. Japan returns from holiday but Chinese and Australian data will be the focus. Ashraf told BNN how Canadian companies are surviving CAD strength in today's BNN interview. 1 CAD remains in progress in the Premium Insights.
The Bank of Canada released its quarter Business Outlook Survey on Monday and it was remarkable for its optimism. The slow-burning commodity bust left Canada vulnerable but the government ramped up spending and now Canada might be turning a corner.
The loonie didn't get much attention in 2016 but it was the top G10 performer after three years of sharp losses. If the optimism in the BOC survey translates into action, more of those losses could be erased in 2017. The survey showed hiring, investment intentions and optimism about future sales at the best levels since Q1 2014. Combine that with Friday's Canadian employment report that showed 54K new jobs, including 81K full time jobs and it's been a dream start to 2017 for CAD bulls.
The problem with betting on CAD is that its future depends on things beyond Canada's border. The first is oil, which fell 4% on Monday on worries about rising North American production. The fall in WTI below $52 takes out an important short-term technical support.
The other vulnerability is just South of its border where the President-elect is prone to criticizing cross-border manufacturing. Despite Canada's commodity status, it also relies heavily on manufacturing exports to the US and in the space of a 140-character tweet, Trump could squeeze NAFTA at any point.
Canada's press reports that senior officials in Trump's team, including his son-in-law have been discussing how to avert a trade war. If the US decides to re-open NAFTA, the ensuing uncertainty might be something like a mini-Brexit for Canada.
In the shorter term, Asia-Pacific traders will be focused on Australian retail sales and Chinese PPI due later. AUD/USD has gained in four of the past five days including a bullish engulfing candle Monday. Retail sales are due at 0030 GMT and forecast to rise 0.4% m/m.
Chinese CPI is due an hour later and expected to climb 2.2% y/y, down from 2.3%. That's a sweet spot for the PBOC and Chinese economy but we continue to keep a close eye on the yuan and Chinese bond market.
Act | Exp | Prev | GMT |
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Retail Sales (m/m) | |||
0.4% | 0.5% | Jan 10 0:30 | |
Consumer Prce Index (y/y) | |||
2.2% | 2.3% | Jan 10 1:30 |
Ashraf on BNN Earlier Today
Ashraf's appearance on BNN discussing the latest GBP selloff, USD vs CAD, oil & FTSE100. Watch.
2 Recurring Votes Against GBP
On the weekend, PM Theresa May once again reiterated the UK is leaving the EU. She has remained steadfast despite occasional flaps of political trouble and she is increasingly warning that it won't be easy. May said that maintaining border control was non-negotiable even if it meant losing access to the single market.
At the same time, Scotland's Sturgeon is exploiting every opportunity to promise another referendum, especially once Britain leaves the EU.
The pound had made some headway on Wednesday and Thursday of last week but it was erased Friday and in early trading today in a sign that no gains will be easy gains for sterling. Later this week, UK trade balance and industrial production may briefly shift the focus back to fundamentals.
The first week of trading in 2017 was similar to 2016 in that CAD was the leader and GBP the laggard and that continues in early-Asian trading. Japan is on holiday to start the new week.
US dollar traders finally got back to fundamentals on Friday with the release of non-farm payrolls. The headline was a touch soft but upward revisions to November filled the gap. What the market is almost-entirely focused on, however, is salaries. Wage growth rose to the highest since 2009. That set off a rip in the US dollar. And with little on the US economic calendar this week, the uptrend in USD can reassert itself.
Commitments of Traders
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.EUR -70K vs -69K prior
JPY -87K vs -57K prior
GBP -65K vs -57K prior
CHF -13K vs -10K prior
AUD -3K vs -2K prior
CAD -4K vs -2K prior
NZD -11K vs -11K prior
The rush into yen shorts in the first week of the year and throughout December showed just how vulnerable the pair was and why the drop in USD/JPY was so violent last week. But it also shows the commitment of shorts and that's why the pair has stabilized with plenty of ammunition before it gets really crowded (at -150K or more).