23 / 11 / 2017 | Market News

Fundamental Analysis 23.11.2017 - Market Outlook

The dollar plunged after the Federal Open Market Committee minutes showed more Committee members concerned about the low level of inflation. As I pointed out yesterday, the minutes of the September 2017 meeting showed that “some participants” were worried that there might be a new secular trend of low inflation. This time, “…many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected…” Furthermore, “many participants” observed that “continued low readings on inflation, which had occurred even as the labor market tightened, might reflect not only transitory factors, but also the influence of developments that could prove more persistent.” Meanwhile, “some other participants were concerned about upside risks to inflation…”.

In short, more participants than ever are questioning the Fed’s long-term inflation forecast, and it looks like the members with doubts are starting to outweigh the hawks.

A December 2017 rate hike is still on the cards, but when the Committee members revise their rate forecasts next month, we could see a revision to the 2018 and 2019 forecasts. Accordingly, the implied rates on Fed funds futures dropped sharply, cutting the expected future rates by about 6 bps or one quarter of a rate hike.

JPY was the main beneficiary of USD weakness, probably because USD/JPY is the most sensitive pair to US rate forecasts. With the Bank of Japan pegging JPY yields, the US-Japan yields spread is 100% a function of US, unlike other countries, whose bond yields can be pulled by the “gravitational attraction” of US yields.

It appears to me that the new Fed Chair, Jay Powell, is not likely to be more hawkish than Janet Yellen has been. Furthermore, we still haven’t heard the last from Special Counsel Robert Mueller. In short, both the monetary and political reasons to buy USD are evaporating. That could spell long-term trouble for the currency.

CAD gained on higher oil prices after Organization of the Petroleum Exporting Countries said it may invite 20 non-members to its 30 November 2017 meeting to discuss an extension of their agreement to curb output. The fact that the North American Free Trade Agreement negotiators said “progress was made” in the negotiations has also changed the outlook for CAD a bit, although note that no specifics were given on what that progress was. 

Today is the Thanksgiving Day holiday in the US, meaning all US markets will be shut. It was also Labor Thanksgiving Day in Japan. With the Japanese and US markets on holiday, we can expect relatively thin trading today. That could mean a quiet market, or it could mean more volatile moves if something big happens.

As I mentioned yesterday, the German GDP figures, which boosted the euro when the initial estimate came out, are rarely revised – today’s data is more about revealing the components of GDP rather than revising the overall figure.

Next up are the preliminary purchasing managers’ indices (PMIs) for the major EU economies  – one of the key indicators of the week. The manufacturing PMIs are forecast to be slightly lower, which probably won’t be a concern, given their relatively high levels to start with. They still indicate a robust expansion is continuing.

Also note that the EU services PMI, the purple line below, is forecast to rise slightly. That’s enough to keep the composite EU PMI unchanged. (Markit doesn’t reveal the details, but I estimate that the composite PMI is comprised of 33% manufacturing and 67% services.) I would say then that the figures should be EUR-neutral to positive. 

Britain announces the second estimate of its 3rd quarter GDP. The market usually doesn’t forecast a revision, so the forecast in today’s table is simply the provisional figure again. As you can see from the graph, it’s unusual for the second estimate to be revised.


The European Central Bank releases the “account” of its 26 October 2017 Governing Council meeting. This should make for interesting reading. Following the meeting, European Central Bank President Mario Draghi admitted that the decision with regards to the size and the duration of the bond-purchasing plan – to cut the size but set no definite ending date – wasn’t unanimous. “There were different viewpoints,” he said. “I would characterise the discussion as ranging between consensus, broad consensus on several issues and large majority on other issues.” He said a “large majority” preferred to keep the program open-ended, but that there wasn’t “consensus” on this key point. Since then, we’ve heard from several Council members who’ve said they would’ve preferred a definite ending date. I look forward to getting more insight into this debate.

Canada’s retail sales are expected to improve, even considering that the previous month was a decline. The market usually focuses on the figure excluding autos, which is forecast to be well above trend – a good sign. This is one of the more significant indicators for CAD and so I would say this figure is likely to be CAD-positive.

Swiss National Bank (SNB) President Thomas Jordan will speak at the University of Basel on the consequences of Switzerland’s high current account surplus for the SNB’s monetary policy. This should be interesting, if not market moving.

The Swiss current account surplus is certainly one of the Seven Wonders of the Financial World. According to the Organisation for Economic Co-operation and Development, the country’s currency is about 19% overvalued vs USD and 30% vs EUR, yet the current account surplus for this year is estimated at an enormous 11.25% of GDP.  How can a country whose currency is so grossly overvalued still have such a huge current account surplus? I look forward to finding out.

Switzerland certainly shows that a weak currency is not always necessary to gain an advantage in trade, although it’s not certain that what works for a small economy (8.4mn people) would work for a larger one.  

Speaking of trade, New Zealand releases its trade data on the morning of Friday 23rd November 2017 (local time). The figures aren’t seasonally adjusted, so I think it’s more useful to look at the 12-month moving average than this one month’s figure. The consensus forecast for the trade deficit would still keep the 12-month moving average on a gentle upward slope, showing an improving trade picture. That should be positive for NZD. 

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.


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22 / 11 / 2017 | Market News

Fundamental Analysis 22.11.2017 - Market Outlook

It’s another down day for the dollar. The extremely flat US yield curve – flattest it’s been since the 2008 Global Financial Crisis – has been keeping the dollar from rallying. Does the flattening yield curve signify market fears of a recession? Or does it simply indicate that the market has confidence in the Fed and believes that it’s likely to continue to raise rates, which should keep inflation under control going forward?

There’s been no big change in inflation expectations over the last several weeks, which leads me to think that it’s the latter – confidence in the Fed. 

That’s also the signal from the Fed funds futures. The implied rate forecasts from the Fed funds futures have gradually been moving higher, implying that the market is starting to believe the Fed’s own rate forecasts more. 

Given that the flattening yield curve is a vote of confidence in the Fed and not a signal of impending recession, I think it should be a reason for the dollar to rally, not weaken.

However, the market seems to be focusing on yield differentials. That’s the only explanation I can see for why USD/JPY should have moved lower when the market is seeing a revival in risk sentiment. The correlation between USD/JPY and Tokyo stocks is near the highest it’s been in over 20 years, and yet with stock markets all around the world rallying, USD/JPY fell.

CAD was the biggest winner despite a stunningly badfigure for wholesale trade sales – down 1.2% mom instead of up 0.6% as expected (previous: +0.4%).  The Canadian Foreign Affairs Minister said there had been “good progress”. Mexico made a proposal that the US was bound to reject in response to an unacceptable US proposal. Apparently there was some progress in lower-level issues in the NAFTA talks, although the main obstacles remain.

Today’s market

A big day in Europe and in the US today. In Europe, the focus will be on UK Chancellor of the Exchequer Philip Hammond’s Autumn Statement to Parliament. This is the budget for FY2018, which will include revised economic forecasts for growth and the fiscal deficit.

This is the first budget after the snap election in June 2017. Forecasts for growth are likely to be revised down, which means that the forecasts for the deficit should widen. The fiscal situation will therefore be quite tight already. Furthermore, the Conservative Party maintains a narrow majority in Parliament only with the help of a small party from Northern Ireland, and that party has agreed only to support the government on legislation pertaining to Brexit and national security.

On the contrary, there has been considerable clamor in Britain for an “end to austerity.” One might argue that the central government is running an austerity program, since current receipts now exceed current expenditures, as the lines in the graph below show. But overall the public sector is still running a deficit (green section) so it shouldn’t be said to be imposing “austerity” – it’s more accurate to call it “less profligacy.” (Note that public sector net borrowing, the green area, is not just the difference between revenues and spending and thus doesn’t correspond exactly to the difference between the two lines).


The problem for UK Chancellor of the Exchequer Philip Hammond will be to keep the borrowing on the downtrend that the Conservatives have promised, while at the same time increasing spending – and all with revenues forecast to fall.

The budget has many macro- and micro-economic effects that will be discussed at length in the press afterwards and should, over the longer term, affect  the pound. The immediate question for the FX market though is simple:  whether the budget helps or hurts the government’s already low popularity. If it’s poorly received, it could add to the problems that the Conservatives are already facing. That would tend to embolden the rebels in the party and make a revolt more likely, which would be negative for the pound. On the other hand, if it’s well received, it could shore up Prime Minister Theresa May’s popularity and give her a stronger hand in negotiating Brexit with her own party as much as with the EU. Which will it be? We’ll have to wait and see.

In the US, the big indicator of the day is the durable goods figure. The headline figure is expected to show much less of a rise than in the previous month, because of a fall in airplane orders. Also, after three months of relatively strong growth, the key figure for core capital goods orders (specifically, “capital goods new orders non-defense ex aircraft and parts”) is also expected to be lower – but still positive. Often after a few months of growth we get a negative month, so I would rate these figures – not great, but still positive - fairly good in context and therefore judge them to be mildly positive for the dollar.

Next is the EU consumer confidence figure. Consumer confidence has been rising steadily on the back of relatively strong growth and falling unemployment rates (plus no major debt crises). The figure is expected to rise further, which could be slightly EUR-positive.

The US Department of Energy’s weekly crude oil inventory figures are expected to show a decent drawdown. But that’s already in the price after the American Petroleum Institute (API) reported an enormous drawdown. The API figures have shown wild fluctuations; up 6.5mn barrels last week, down 6.4mn barrels this week.


The minutes of the November 2017 FOMC meeting will be closely scrutinized as usual. It’s assumed that they will raise rates in December 2017. There were very few changes in the statement following the meeting from the statement following the September 2017 meeting, which implies that there were few changes in views, either.

One of the main points of contention within the FOMC is about whether wages will pick up and drive an increase in inflation. The minutes of the September 2017 meeting said that “(m)ost participants” expect wage increases to pick up as the labor market strengthens, while “a couple of participants” thought this was already starting to happen. Since then, wage growth slowed down (see graph).

There is also the crucial question of whether low inflation is temporary or a new trend due to changes in the economy. As the first graph below shows, since the Global Financial Crisis ended, lower unemployment has been associated with lower inflation, the exact opposite of what economic theory suggests. But the second graph suggests that this trend may have reversed from 2015 and that the textbooks may be right after all. Where do the Committee members stand on this debate?

While “many participants” continue to expect the tightening labor market to lead to higher inflation and “many” thought the undershoot in inflation was due to one-off factors, “(s)ome participants discussed the possibility that secular trends, such as the influence of technological innovations on competition and business pricing, also might have been muting inflationary pressures and could be intensifying.” This is another key debate that investors will be monitoring through the minutes. The more the Committee members think low inflation is a result of secular trends, the less likely they are to push for higher rates. 

Early morning on Thursday 23rd November 2017 in Europe, the final estimate of German GDP will be announced. But since it’s almost never revised, that will be more of interest for the details of the figure than for anything market-moving. 

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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21 / 11 / 2017 | Market News

Fundamental Analysis 21.11.2017 - Market Outlook

The risk-off tone didn’t last long. Global equity markets were up almost across the board.

The market was calmed by the fact that Chancellor of Germany Angela Merkel made it clear that she intends to serve her fourth term and will hold new elections in order to gain a majority rather than trying to run the country with a minority government. While this would be unusual for Germany, and might not solve anything if the voters return the same parties with the same seats, it could result in a stronger government. Or, some of the other parties could get worried about losing support and become more willing to compromise in order to fend off another election.

In any event, the German economy is in good shape and there are no acute domestic crises that need to be taken care of urgently. The same goes for Europe as a whole, where growth is recovering, unemployment is falling and the semi-annual debt or banking crises of the past few years are now just a memory. Thus the uncertainty in Germany is now less of a crisis for the region than it would have been say back in 2011, when it appeared that Greece might go bankrupt and urgent decisions had to be taken.

GBP was the surprise gainer of the day reports that Britain is preparing to double its offer for the financial settlement to €38bn. This is still below EU demands for €60bn though and it remains to be seen whether the EU will be willing to split the difference between their respective initial positions. Moreover, the Press Association reported that no exact figure has yet been set, and Britain would only be willing to pay the additional money – which is still less than what the EU wants – in exchange for further concessions from the EU. So it’s not a done deal yet by any means.

AUD weakened after the minutes from the recent Reserve Bank of Australia (RBA) meeting indicated that the RBA may keep rates low for longer than expected.

Today’s market

The European day starts out with the UK government borrowing data. This figure will form the backdrop of Thursday 23rd November 2017’s budget announcement and so will have some political importance. The figures are not seasonally adjusted, while revenues are quite seasonal, so looking at the forecast for the month is not that illuminating. I’ve calculated what the 12-month moving average would be if the figure does come in as forecast – I think that’s a more informative way of looking at it. It would show a small further fall in borrowing – i.e., a further narrowing of the deficit – which would tend to be positive for the pound. The fall in the borrowing from an average of £4.52bn a month in January 2017 to £3.56bn a month now, if the forecast is correct, could give Chancellor Philip Hammond some wiggle room in his budget.

The Confederation of British Industry (CBI) trends survey isn’t a major market-mover, but I include it here as people are struggling to make sense of the UK economy nowadays. The diffusion index for total orders is expected to shift into the positive, that is, more manufacturers are expected to say that order books are above normal than below normal – a good sign. No forecast available for the “selling prices” DI, which is arguably the more important of the two as an indicator of inflation.

US existing home sales are expected to increase only somewhat. The National Association of Realtors has said that rising prices and a lack of available inventory, especially at the lower end of the housing market, is restraining sales. That’s what rising prices would indicate too – demand outweighing supply. The figure should be supportive for the dollar because it suggests rising mortgage rates are not likely to derail the housing market. 

In contrast, new home sales (due out on 27 November 2017) are forecast to fall sharply, but that comes after a surge in the previous month. 

Fed Chair Janet Yellen will appear in conversation with former Bank of England Governor Mervyn King. Normally this would be the highlight of the day, but people want to hear what Jay Powell, the incoming Fed Chair, has to say, particularly as rumors swirl that some staff members at the Fed are agitating to change the inflation target in order to give the FOMC more leeway to adjust rates if the economy tanks again. Moreover, the one thing I was interested in finding out from her was whether she was planning on staying on after her term as Chair ends in February 2018, and she answered that question yesterday:  no. So I would expect to hear some reflective comments evaluating her time in office, but not that much on the future course of monetary policy.

At some point during the day, the fifth round of NAFTA talks will end in Mexico City. According to press reports, this round of talks largely avoided the most controversial US proposals and has produced no substantial breakthroughs. Mostly, junior negotiators have worked on updating the small details in the agreement.

The graph below shows the 12-month moving sum of the US trade position with the two countries since the NAFTA accord took effect from January 1994. The narrowing of the US trade gap with Canada since the Global Financial Crisis in 2008, due largely to a sharp drop in US imports from Canada, suggests that the US is probably focused on trade with Mexico, but the US proposals would hit both countries. 

A particular concern for both countries this time has been US proposals to increase the amount of US content necessary for cars, a large export category for both countries. Autos account for 16% of exports from Canada and an even higher 25% for Mexico, far more than petroleum (5.4%) despite MXN’s status as a petro-currency. Energy makes up an even higher 18% of Canada’s exports, which includes electricity.

Canada and Mexico have refused to make counter-offers to some of the main US proposals, such as the car content rules and dispute settlement. Canada has simply stated publicly that the US proposals are unacceptable and has refused to present any alternatives.

The three countries have extended the deadline for the talks to March 2018. On the one hand, that gives them more time to reach an agreement and more time for US businesses to lobby  US President Donald Trump's administration to relax their demands. On the other hand, by that time the talks may be complicated by a general election to be held in July 2018 in Mexico and the US mid-term elections in November 2018. The elections may make it harder for politicians on both sides to compromise. 

There will be a partial round of talks in December in Washington, and then the next full round of talks is scheduled to take place in Montreal late January 2018.

Overnight, the Westpac-Melbourne Institute leading index will be announced. No forecast is available, but the indicator does occasionally prove market-affecting. As the graph shows, the index has been fairly stable over recent months, so a sharp move in either direction would be significant for the market.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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20 / 11 / 2017 | Market News

Fundamental Analysis 20.11.2017 - Market Outlook

The focus this morning has been on European politics. German Chancellor Angela Merkel has been trying ever since the election on 24th September 2017 to form a coalition government, but the long-running coalition talks in Germany collapsed shortly before midnight local time on Sunday 19th November 2017 as one of the parties pulled out, saying its differences with one of the other parties were too great to bridge. The country may have to hold new elections again, but polls show that another round of elections would be likely to produce approximately the same result.

The news throws into question Angela Merkel’s future as Chancellor. While she will remain as Chancellor, the form of the next government is now uncertain. This casts a huge shadow of uncertainty over all Europe. Decisions on everything from Brexit to sanctions on Russia will be more difficult and harder to predict.

As usual, uncertainty is bad for a currency and EUR has fallen sharply. At the same time, the uncertainty sparked a general “risk off” mood that sent safe haven assets sharply higher. CHF and JPY rose sharply, with CHF for once moving more than JPY on a “risk off” move, probably because this time the source of the risk is Europe, not North Korea.  Gold and silver were also up sharply. Even GBP gained a bit, presumeably on people cutting long EUR/GBP positions.

The risk-off mood may continue for some time, since this problem is not likely to be resolved any time soon. CHF strength in particular and JPY strength too may continue and of course EUR weakness, but I don’t think this is likely to remain positive for GBP. On the contrary, Angela Merkel has been working on the Brexit negotiations to arrange a compromise between the EU and the UK. The uncertainty around Angela Merkel's coalition government may make it harder to corral all the EU members into reacing an agreement with Britain. I think these problems could be GBP-negative as well as EUR-negative. The difference may be that negative views on GBP are now more likely to be played out in GBP/USD rather than EUR/GBP.

Note that the weekly Commitment of Traders (COT) report out on Friday 17th November 2017 showed an extremely bullish position in EUR and extremely bearish positions in JPY and CHF. As of Tuesday 14th November 2017, speculators held almost the biggest long position in EUR and did hold the biggest short positions in JPY and CHF that they’ve held in the last five years. On the other hand, although substantially long gold and silver, they are still within the normal range of positioning in those two assets, which helps explain why positioning was no obstacle to them rallying further on the news.

Of course, positioning doesn’t always determine direction. Even though positioning in WTI is at an extreme too – the biggest long position in the past five years – that didn’t prevent WTI from jumping about 2.5% from Friday 17th November 2017 morning’s level after Saudi Arabia’s energy minister said OPEC should extend its supply cuts when it meets on 30th November 2017.

There have also been additional developments in the US. There were press reports this morning that Robert Mueller has directed the US Justice Department to turn over documents related to the firing of FBI Director James Comey, including any communications between the Justice Department and the White House. The document request suggests that Robert Mueller is progressing rapidly. Any new developments here still have the potential to disrupt the thin holiday market.

Today’s market

A relatively quiet start to a relatively quiet week. There are no major indicators out from either Europe or the US.

The major point of interest today will be the meeting of EU Ministers of Foreign and European Affairs in Brussels. They’ll be starting their preparations for the 14th-15th December 2017 European Council summit meeting, a crucial meeting that will decide whether to allow the EU and UK to move to the next stage in the Brexit negotiations and start working on a long-term trade deal. European Council President Donald Tusk said on Froday 17th November 2017 that Britain must deliver "much more progress" on the Brexit divorce bill and the Irish border by the beginning of December 2017, otherwise he would not be able to recommend moving on to that stage. Tusk will meet again with UK Prime Minister Theresa May on Friday 24th November 2017 to discuss the issues. The two sides are still quite far away and I do not expect much progress, which is likely to be negative for the pound this week.

ECB President Mario Draghi appears twice at the Committee for Economic and Monetary Affairs (ECON) at the European Parliament today. At 1400 GMT he will appear in his capacity as ECB President, and then at 1600 GMT he will appear in his capacity as the Chair of the European Systemic Risk Board (ESRB), the body responsible for regulating the European financial system.

The US leading index is a second-tier indicator in that it’s comprised of indicators that are already out, so really it contains no new information. Nonetheless it does sometimes move the market. It could do so today. The consensus forecast, +0.7% mom, would be the highest since December 2014. Of course, the 2014 figure came after a positive month whereas this figure comes the month after activity was hit by the hurricanes, but in any event this reminder of the robust bounce-back from the hurricanes could prove positive for the dollar. 

Overnight, the Reserve Bank of Australia (RBA) will release the minutes of its 7th November 2017 rate-setting meeting. The statement wasn’t much changed – the forward guidance and the section on AUD were exactly the same as in October 2017-- and furthermore, the Statement on Monetary Policy was released a few days later.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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17 / 11 / 2017 | Market News

Fundamental Analysis 17.11.2017 - Market Outlook

Whatever USD did during the European and US days yesterday, it fell suddenly around 01:30 GMT this morning during Asian trading after the Wall Street Journal reported that special counsel Robert Mueller had subpoenaed US President Donald Trump’s campaign team for documents and emails related to Russia. Robert Mueller has already filed charges against some peripheral people but this is apparently the first time that he has asked for something from the campaign, which is much closer to President Donald Trump himself. US bond yields were falling in Asian trading, adding to the downward pressure on USD.

GBP was higher vs USD but lower vs EUR on reports that the EU is likely to reject Britain’s proposal for a special arrangement on trade and instead propose a “standard FTA” (free trade agreement), similar to what the EU has with Canada. Such an arrangement would be much worse for the UK economy than what the British had hoped for in that it would restrict the ability of British service providers, including financial companies, to sell into the EU. Given that Britain has a huge trade deficit in everything except services, where it has a fairly large surplus (see graph below), such an arrangement would be devastating for Britain’s balance of payments. I think once the market fully appreciates this reality, EUR/GBP is likely to rise further. 

The different performance of the two “safe haven” currencies, JPY and CHF, was quite noticeable. JPY seems to have appreciated despite the rally in global stocks (including Tokyo) on the news of Robert Mueller’s subpoena. That’s typical of a “risk off” move, even though it seems that the “risk off” is hitting currencies but not stocks.

CHF however seems to have been affected by a speech from Swiss National Bank (SNB) Governing Board member Andrea Maechler, who reiterated the SNB’s view that the CHF is “highly valued” and that the SNB remained committed to its loose monetary policy in order to prevent the currency from appreciating. This continued commitment contrasts with that of some other central banks, particularly the ECB, which have started to normalize their extraordinary monetary policies. 

Of course, the Bank of Japan has also recently reaffirmed its commitment to keeping its policy steady too, but it appears that JPY is more sensitive to general “risk on, risk off” sentiment than CHF is. USD/JPY’s weekly correlation with the MSCI World Stock Index is a relatively high 0.322, whereas CHF’s is an inconsequential 0.097. (The highest correlation is with AUD and CAD, the commodity currencies.) 

Today’s market

After a very busy week, today it quiets down somewhat. During the European day, we only have speeches by two major – and opposing – ECB members at the Frankfurt European Banking Congress. The title of the Congress is “Europe into a New Era – How to Seize the Opportunities.” ECB President Mario Draghi gives a keynote speech at 08:30 GMT, and Bundesbank President Jens Weidmann, gives other keynote speech at 13:00 GMT. There are no titles for their speeches. In any event, we’ve heard so much from ECB Board members this week that I doubt if either gentleman will tip the market debate one way or the other.

On the data front, things are pretty quiet until the US day starts up with US housing starts and building permits for October 2017. As you can see from the graph, both are expected to rise, which isn’t surprising considering the large drop in September 2017, which was caused by the hurricanes. In that respect, the rebound is pretty small, considering how many homes were destroyed. I expect that there will have to be a lot more rebuilding and that this will be only the first of a series of higher starts & permits figures as people rebuild their homes. The only problem is that the housing industry in the US continues to suffer from supply-side bottlenecks, especially a lack of labor as well as materials. 

Canada’s CPI is expected to show a slowdown in the rate of price increases. Both the month-on-month rate of increase and the year-on-year are expected to decline (although since the series is not seasonally adjusted, the month-on-month rate of change is bound to fluctuate a lot). Bank of Canada Governor Stephen Poloz has noted that inflation remains in the lower half of their 1%-3% range, but has said most of the shortfall is due to special factors, such as a government cut in electricity prices, and therefore isn’t anything to get concerned about. Similarly, much of the expected slowing in inflation this month is due to falling gasoline prices and cheaper data plans for mobile phones, which are nothing to get concerned about. Still, I would expect such a sharp slowdown could dampen somewhat the market’s relatively hawkish rate expectations for Canada and thus could be negative for CAD. 


I don’t usually write about the Baker Hughes rig count, which comes out every Friday in the US. The figure gives the number of oil and gas rigs in operation in the US during the previous week. There’s no formal forecast for it, but Bloomberg includes it in their “whisper” page, where anyone with a Bloomberg subscription can put in their forecast. The reason I mention it this week is because the “whisper” number is for an increase, and this would be the first two consecutive increases since 23 June 2017. The US rig count may have bottomed out for now as WTI prices have been over $50/bbl for over a month now. There’s a saying in the oil market that “high prices cure high prices,” meaning when prices are high, producers increase their production, and that eventually sends prices lower. This figure may well be one indication of the start of that process. 

Early Monday in Asian time, Japan announces its trade figures.  These are now politically sensitive since the US President Donald Trump administration has taken to harping on the US trade deficit with Japan (and Germany, and China, and Mexico…). In this case, Japan’s trade surplus is expected to fall, which could relieve some of the political pressure and be negative for the yen. 

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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16 / 11 / 2017 | Market News

Fundamental Analysis 16.11.2017 - Market Outlook

GBP gained despite the first fall in the number of people employed in almost a year as wage growth (slightly) exceeded forecasts, although it remains well below the rate of inflation. Also, the Brexit bill (“The European Union Withdrawal Bill,” formally) made it through the second day of its eight-day committee stage safely. On the other hand, NZD fell as the market bought AUD/NZD following the Australia jobs data, which showed an unexpected fall in the unemployment rate. USD and EUR were little changed overall.

Today’s market

Once again the day starts off with UK data in the spotlight. Today it’s the UK retail sales. It’s expected to be the first year-on-year decline since March 2013. Part of that decline reflects very strong growth a year earlier, as you can see from the graph, but also it’s a function of pay increases well below the rate of inflation. Also, the savings rate is already low and there are more and more restrictions on consumer borrowing. 

Speculators interested in taking a position in GBP ahead of or even following this indicator should be aware that EUR/GBP is more sensitive to the data than GBP/USD. Moreover, it appears that the market follows the figure including gasoline more closely than the one excluding gasoline, and watches the month-on-month figure more closely than the year-on-year.

When the North American day begins, Canada announces its manufacturing sales. The sharp decline that’s expected is due largely to strikes in the auto sector, while demand for gasoline probably boosted output somewhat. The below-trend figure is likely to be negative for CAD, although overall, I would think that oil prices  and the NAFTA talks would be more important for the currency. 

At the same time, the payroll processing firm ADP will announce its first-ever ADP employment report for Canada. The report will be issued on the third Thursday of every month. ADP says that it processes payrolls for around 2mn people in Canada out of a total workforce of some 18.5mn, or around 11% of the workforce, so it should give a fairly good estimate of the labor market in the country.

The ADP employment report in the US usually comes out two days before the nonfarm payrolls and is widely watched as providing the best, albeit imperfect, forecast of the nonfarm payrolls each month. The problem is, Canada (like the US) has two different ways of estimating employment, but only one is well known – and that’s not the one that ADP is aiming to replicate.

Statistics Canada publishes two monthly surveys on employment:  the Labour Force Survey (LFS) and the Survey of Employment, Payrolls and Hours (SEPH). The two are analogous respectively to the US household survey, which is where the US unemployment rate comes from, and the establishment survey, which is where the nonfarm payroll figure comes from.

The US announces both series at the same time, usually the first Friday of each month for the previous month. However, that’s not the way it’s done in Canada. Statistics Canada first releases the LFS at the beginning of each month, usually on the first Friday of the month (at the same time as the US nonfarm payrolls), for the previous month. Then about six to eight weeks after the end of the month in question, it releases the SEPH data for that month.

Unfortunately, the figures that ADP will be reporting are constructed so as to be in line with the SEPH data, not the LFS data. The SEPH data are more reliable, but they’re not what everyone watches. So although ADP will release its figure well in advance of the official Canadian data, it remains to be seen how useful they are for forecasting the figures that everyone watches and thereby getting the direction in CAD right.

The Philadelphia Fed manufacturing survey is forecast to fall slightly. That would be in line with yesterday’s Empire State survey, which dropped as well.

US import prices are forecast to rise at a slower pace than in the previous month. This is a less important indicator than yesterday’s CPI, which rose at a faster-than-expected pace, but it could still have a negative impact on USD. 

Six senior Bank of England officials, starting with Governor Mark Carney, are scheduled to speak today, but the forum looks like one that is not conducive to detailed explanations of policy decisions. Basically, they’re visiting schools in Liverpool speaking to students and getting “first-hand experience of how they can share their work with more young people across the country.”

Finally, both US industrial production and capacity utilization are expected to have risen sharply. The jump is partly just a return to normal after September 2017, when output was depressed by the hurricanes, so it might not have that much impact on the FX market. Note by the way that the IP figure is what’s important here; the capacity utilization data rarely moves the market.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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15 / 11 / 2017 | Market News

Fundamental Analysis 15.11.2017 - Market Outlook

A soaring EUR and collapsing AUD were the big features of the day overnight. EUR started rallying after German Q3 GDP beat expectations (+0.8% qoq vs +0.6% expected, +0.6% previous). This was despite the fact that the second estimate of overall EU growth for Q3, announced three hours later, was unchanged from the first estimate. It demonstrates that once again, German economic statistics are more important for EUR than EU-wide statistics.

AUD’s move was in response to weaker-than-expected data on wages, which rose +0.5% qoq in Q3 vs +0.7% expected (+0.5% previous). Last time it missed expectations (16th November 2016) the currency was virtually unchanged an hour later. This time though the currency collapsed immediately after the announcement and just kept falling. Note that there was a larger-than-usual increase in the minimum wage on 1st July 2017, which suggests that wage increases for other employees were much lower than expected.

As in most other countries, the Reserve Bank of Australia (RBA) has said it is looking for wages to increase as unemployment falls and for inflation to rise as a result. The figures were yet another data point showing that the historical relationship between unemployment, wages and inflation is no longer what it used to be in another developed country. That called into question the pace of RBA tightening. With commodity prices also falling – iron ore plunged 4%, oil was down 2.8% and copper off 2.3% -- AUD is likely to continue under pressure for some time. Tonight’s Australian labor data may cause a temporary rebound though if it comes in as expected or better.

USD was generally weaker as the global rout in stock prices deepened and US Treasury yields fell further despite a much higher-than-expected US PPI. 10-year yields decline 3 bps Tuesday and were off another 2 bps this morning. Watch today’s US CPI for direction.

GBP was lower on a TWI basis probably because of the surge in EUR, but it gained against the weakening dollar – that says something about just how weak USD was, considering that the UK inflation data came out below expectations while the US PPI came out above expectations.

Oil plunged on a confluence of negative factors:  1) the International Energy Agency (IEA) said that the recent rise in prices plus milder-than-expected weather was slowing demand growth; 2) the American Petroleum Institute (API) reported that US inventories of crude oil jumped 6.51mn barrels in the latest week, as opposed to market expectations for a 2mn barrel decline; and 3) the recent indications of a slowdown in China.

Today’s market

The fifth round of NAFTA negotiations and discussions will begin today. The round is formally scheduled to take place from Friday 17th November 2017 to next Tuesday 21st November 2017 in Mexico City, but it’s been reported that some of the negotiating groups will begin meeting from today to start the talks. For CAD, one of the most contentious points is a US proposal to set minimum levels of US content for autos. That’s dangerous for Canada, because autos are Canada’s second-largest export (14% of total exports, vs 26% for #1, energy products,  and 12% for #3, minerals.).

Chicago Fed President Charles Evans and ECB Governing Council Member Ardo Hansson will both participate in a panel discussion on European monetary policy at a UBS European Conference in London.

The first indicator of the day is the UK labor market data. The market expects the unemployment rate to stay at 4.3% for the third month in a row, a level last seen in 1975, while the number of new jobs is forecast to remain positive but slowing to well below the recent trend.

Wage growth is forecast to be little changed from the previous month. Note that wages are rising less rapidly than consumer prices, which were up 3.0% yoy according to yesterday’s CPI data. The UK experience is one of the more extreme examples of the global conundrum about the relationship between the labor market and wages – here we have the unemployment rate at the lowest level in 42 years, yet wages are actually falling in real terms. 

A lower unemployment rate and faster pay growth would probably convince the Monetary Policy Committee (MPC) that inflation was well established back at normal rates due to domestic reasons and they should proceed to normalize interest rates. On the other hand, a higher unemployment rate and continued flat or below-inflation pay growth would mean little risk of inflation accelerating and probably result in them staying on hold. I expect the unemployment rate to rise and pay growth to remain sluggish as Brexit approaches and uncertainty rises. That suggests to me that the Bank of England is likely to remain on hold for the time being and GBP is likely to weaken.

ECB Executive Board member Peter Praet chairs the closing policy panel at the ECB conference on central bank communication, which began yesterday. Bank of England Chief Economist Andy Haldane will be on the panel as well.

Later in the day, Bank of England Deputy Governor Ben Broadbent speaks on “Brexit and Interest Rates” at the London School of Economics. Ben Broadbent “will discuss some aspects of the impact of EU withdrawal on UK interest rates.” This should be an important event for the markets. Following the Bank of England’s recent rate hike on 2nd November 2017, Ben Broadbent reiterated the MPC’s position in a radio interview when he said that “we anticipate we’ll need maybe a couple of more rate rises to get inflation back on track,” although he stressed that this was “not a promise.”

The US CPI is probably the key indicator out this week, even though it’s technically not the Fed’s preferred inflation gauge. The headline rate of year-on-year change is expected to decelerate, while the core inflation rate is expected to stay the same. This is not the kind of result that calls for an urgent Fed response and so it could be negative for the dollar. Furthermore, the core inflation figure has missed expectations six out of the last seven months, so there’s also the possibility of a disappointment. 

After a surge in September 2017 caused by people replacing the cars that got ruined in the floods, the headline US retail sales figure is forecast to be unchanged from the previous month – still a pretty good result after such a jump. Excluding autos and gasoline, retail sales are forecast to continue at last month’s monthly pace, which would still be good. This figure ought to be positive for the dollar.

At the same time, the Empire State manufacturing index is expected to fall somewhat. Seeing as the previous month’s level was quite high for this series – it hasn’t been higher than that for a sustained period since 2004 – I don’t think this should be considered particularly worrisome.   

These three major US indicators don’t normally come out at the same time. All three seem to have a similar impact on EUR/USD, judging from the relationship between the “surprise” on the indicator and the subsequent movement of the currency. (In technical terms, they all have a similar r2, a measure of correlation.) In the case of both the CPI and the retail sales, the headline figure seems to exert a stronger influence on the market than the core (in the case of the CPI) or any of the adjusted figures (in the case of the retail sales).

Finally, overnight Australia releases its employment data. The market expects the unemployment rate to stay at 5.5%, the lowest it’s been since 2013, and for employment to rise further. Although the forecast rise in employment shows some deceleration from the recent trend, it would still be the 13th consecutive increase in employment, the longest streak on record. The relatively healthy labor market should be a positive for the AUD. 

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.


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14 / 11 / 2017 | Market News

Fundamental Analysis 14.11.2017 - Market Outlook

The big story over the last 24 hours was clearly the collapse in NZD. There doesn’t seem to be any particular domestic trigger for the move, just a general sell-off in the commodity currencies as interest rates in New Zealand and Australia remain low while US Treasury and Bund yields moved slightly higher. The plunge in NZD was exacerbated by traders buying AUD/NZD after the NAB business conditions index for October 2017 hit a record high. General concern about the new government is probably weighing on NZD as well.

The antipodian currencies may have been hit by some disappointing news out of China recently. This morning’s data showed retail sales slowing instead of accelerating as expected, while industrial production slowed more than expected. This follows yesterday’s China monetary data, which showed M2 money supply growth falling to a record low and CNY new lending also less than expected. Slowing growth in China suggests less demand for commodities and is therefore negative for the commodity currencies.

Other currency movements were not particularly dramatic. GBP continued to weaken following news of the Conservative Party revolt against Prime Minister Theresa May. 

Today’s market

Today’s indicators start with the first estimate of Germany’s Q3 GDP. The data does seem to have an impact on EUR/USD, although I question why, since the first estimate of EU-wide GDP for Q3 is already out and the second estimate, due out later today, is rarely revised. Still, traders with positions in EUR should be waiting for the announcement.

Next up is the UK CPI. This is of course an important indicator for determining Bank of England policy, although at the moment I’d say Brexit issues and UK politics are probably more important. 

Both headline and core CPI are expected to accelerate modestly, although producer output price increases, a leading index of consumer prices, are forecast to decelerate. Although the consensus forecast for CPI is slightly below what the Bank of England forecast in its November 2017 Inflation Report, it’s still enough to push the rate into letter-writing territory – whenever inflation is more than ±1% away from the 2% target, the Governor is required to write a letter to the Chancellor of the Exchequer explaining why this happened and what the Bank intends to do about it. Normally that would be expected to support the pound in that it raises the likelihood of another Bank of England tightening, but I think politics is likely to win out for now, especially with the Conservative Party in such upheaval on top of the Brexit uncertainty. The market will also be waiting to hear Deputy Governor Jon Cunliffe’s speech tonight, which I expect will be dovish regardless of the inflation data. 

In any event, with the CPI expected to rise 3.1% yoy and 10-year gilts yielding only 1.31%, the pound has deeply negative real yields – the lowest in the G10 -- in addition to politics working against it. It’s hard to see how the country can continue to fund its large current account deficit under these conditions. 

Following the UK CPI data is a “Central Bank Communications Conference” sponsored by the ECB. The subject of the conference is “communication challenges for policy effectiveness, accountability and reputation.” And the panel discussion is on “At the heart of policy: challenges and opportunities of central bank communication.” The discussants in alphabetical order are Mark Carney, Mario Draghi, Haruhiko Kuroda, and Janet Yellen. It remains to be seen if they will say anything with regards to their policy intentions. Nonetheless, when the heads of the four major central banks all get on stage together, the market is bound to pay attention. If nothing else, they could comment on ways that they intend to improve their future communications, or ways in which the market has misunderstood their recent communications, which could be worth noting.

The second estimate of EU Q3 GDP that will be released at the same time. Since 2010, the 2nd estimate has differed from the first only three times. The likelihood is therefore that this time too will be uneventful and the data should elicit no notable market reaction.

The ZEW survey, to be released at the same time, is probably more important. Both the current situation and expectations indices are forecast to rise. Together with a strong German GDP figure and confirmation of the robust EU-wide growth in Q3, the data should be positive for the euro. 

Back in the US, St. Louis Fed President James Bullard will speak about the US economy and monetary policy. He was interviewed last Friday 10th November 2017. He said inflation remains low and doesn’t look like it will rise by year-end, something that Wednesday 15th November 2017’s CPI data is expected to confirm. Atlanta Fed President Raphael Bostic hasn’t spoken in a month, so his comments will be interesting to see if he’s changed his view. He was less dismissive of labor market slack than St. Louis Fed President James Bullard was, but he too said wants to see inflation “starting to move in the direction closer to our target…,” something that’s not likely to come about soon. In any case, neither James Bullard nor Raphael Bostic are voting members of the FOMC this year so what they think doesn’t necessarily determine what the Fed does.

Today’s US producer price index (PPI) is likely to show quite the opposite of what James Bullard and Raphael Bostic are waiting to see. The rate of increase in producer prices overall is expected to decline, not accelerate, while core prices are forecast to rise at the same year-on-year pace. The trade-weighted dollar rose last year to nearly the highest level in 15 years, and that is continuing to feed through to lower producer prices. The figure suggests less pressure on consumer prices in the future, which is negative for the dollar.


Bank of England Deputy Governor for Financial Stability Jon Cunliffe will speak at the Oxford Economics Society. He is likely to discussing monetary policy, rather than the need for clarity with regards to Brexit, which was what he was last talking about in public. If he takes a cautious tone in his comments, that could add to the negative pressure on the pound.

Finally, overnight Japan releases its third-quarter GDP figures. The nation’s GDP data are notoriously unreliable and are often revised dramatically even years afterwards, but nonetheless it’s still market-affecting. Growth is expected to have slowed significantly in Q3, but that’s just payback from the unusually strong growth in Q2. The qoq rate of expansion is expected to be at trend.

The question is of course how will that affect the yen? It isn’t clear. In theory continued solid growth should be positive for the yen in that it makes it more likely that the Bank of Japan will eventually achieve its inflation target. But as we know in Japan, good news for the Tokyo stock market often sends the yen lower because of risk-seeking behavior. I would expect that effect to dominate and for the yen to weaken as a result.  

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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13 / 11 / 2017 | Market News

Fundamental Analysis 13.11.2017: Market Outlook

FX rates were little changed in general from Friday 10th November 2017’s opening levels.

USD was slightly higher but no major movement from the morning of Friday 10th November 2017. The inexplicable surge in US Treasury yields on Friday 10th November 2017 is supporting the dollar. JPY and CHF weakness are probably the counterpart of USD strength owing to the widening yield differential – these are the two currencies with the lowest bond yields. Plus, improved risk sentiment may be weighing on the two “safe haven” currencies.

AUD was the biggest loser after another lower house member from the ruling coalition resigned due to dual citizenship. The coalition has already lost its majority. Although the members who lost their seats are likely to regain them once special elections have been held, the whole issue is a distraction that will delay anything from getting done. AUD was also pressured by comments from Reserve Bank of Australia Deputy Governor Guy Debelle, who downplayed the likelihood of a rate hike any time soon. 

GBP weakened – although not as much as one might have expected – on a press report that as many as 40 members of Parliament from the ruling Conservative Party have agreed to sign a letter of no confidence in Prime Minister Theresa May. That’s almost enough to trigger a challenge to her. The news comes after several negative developments in the Brexit negotiations last week.

GBP weakness was probably the main factor causing EUR strength.

Commodities were generally lower, with oil, silver and gold all down. Gold was pressured by the rise in Treasury yields on Friday 10th November 2017, while oil was pressured by reports that some Middle Eastern countries are discounting their oil to defend market share.

Today’s market
The European and US days will be focused on the first of this week’s dozens of Central Bank speakers. Bank of Japan Governor Haruhiko Kuroda is clearly the most important speaker, but since he just spoke – and moved the markets – a week ago, I doubt if he’ll say anything startling this time.

Overnight, China comes out with its usual monthly trio of retail sales, industrial production and fixed asset investment. And as usual, the market expects barely any change from the previous month’s year-on-year rate of change. As you can see from the graph, the year-on-year rate of change in retail sales and industrial production has been fairly steady since early 2015, although the rate of growth of investment has been declining. For this month, growth in retail sales is forecast to accelerate a bit while industrial production and investment are forecast to slow. If true, this would be a sign of the long-awaited rebalancing of the economy towards domestic demand, which would be most welcome and probably positive for CNY.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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10 / 11 / 2017 | Market News

Fundamental Analysis 10.11.2017 - Market Outlook

USD was hit as the Senate outlined its proposals for overhauling the US tax code with significant differences from the House version. In particularly, the Senate wants a one-year delay in cutting the corporate tax rate, which is a priority for the administration. The news sent US Treasury yields lower and hurt USD. EUR strength seems to be simply the counterpart of USD and GBP weakness.

NZD weakened after Finance Minister Grant Robertson said he was committed to the target inflation band of 1%-3% but that he would probably discuss with a new RBNZ governor the current focus on the midpoint of that band. That could mean allowing inflation to run higher than 2% for extended periods, which would be negative for the currency.

CAD on the other hand was the major gainer as China agreed to buy more US oil, which kept oil prices supported. The currency may face a test next week though as NAFTA talks resume on 15 November 2017. It’s being reported that the US will push for stiffer rules on car makers, which would be a major problem for Canada.

Today’s market

The main focus today will be on the conclusion of the two-day Brexit talks and Britain’s “short-term indicator day.”

The industrial production figures are forecast to accelerate somewhat on a year-on-year basis. Nonetheless they would still be a bit weaker than what the Office of National Statistics had assumed when it calculated the preliminary Q3 GDP figure, although not enough by themselves to imply a revision to the GDP figure. Nonetheless, they do not imply any upward revision to growth, and so could be considered negative for the pound. At the same time, growth in manufacturing production is forecast to slow, suggesting that the UK isn’t getting so much benefit from its narrowing trade deficit (see below). 

On the other hand, the UK trade data are forecast to show the trade deficit narrowing, both on a visible trade basis (merchandise trade alone) and total trade basis (including trade in services). While both are worse than the 12-month average, the data are seasonally adjusted and so that shouldn’t make a difference. The market would probably consider that positive for the pound.

What to do if one of the data series is positive for the pound and the other is negative? It’s hard to say. In fact, none of the four indicators – industrial production, manufacturing production, visible trade balance or overall trade balance -- have a particularly good correlation with the movement of the pound in the 30 minutes or 1 hour after the release, neither GBP/USD nor EUR/GBP. The strongest connection is between the industrial production and EUR/GBP one hour after the release, followed by manufacturing production and EUR/GBP.

The Brexit talks however are probably more important than the short-term statistics. Yesterday the talks hit a new hurdle when the EU made a new demand on Britain:  that there should be no “hard frontier” between Ireland and Northern Ireland, meaning that Northern Ireland should maintain the rules of the customs union and single market after Brexit. That would require a border between Northern Ireland and the rest of Britain, which is simply a non-starter for Britain, especially considering that the Conservative Party maintains its majority in Parliament only with the cooperation of the Democratic Unionist Party of Northern Ireland. This issue will be difficult to resolve because Ireland effectively has veto power over the Brexit process at this stage of the negotiations. Meanwhile, the Conservatives have moved to have the Brexit date enshrined in UK law in order to quell talk of slowing or even stopping Brexit.

During the US day, the University of Michigan consumer confidence index is coming out. It’s already at a level only seen temporarily in a brief spike upwards in January 2004, and before that it was 1997-2000, during the internet bubble, when we last saw confidence at these levels. It’s expected to edge higher still.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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