Monday 12th November 2018
What's catching the eye on a Monday morning .... and a reminder about tomorrow
ref : Various in Bloomberg Markets
It's a big morning if you're a UK sterling trader (aren't they all ?) , and if you are one of those brave souls we can only say "Rather you than me", and hope that you're keeping the right side of these repeatedl vicious moves. GBP / USD is trading below $1.2850, when three trading days ago it was approaching $1.3200. It's Brexit of course, with reports that PM Theresa May is facing rebellion by cabinet ministers from both hard and soft Brexit wings of her party. But it's also about a very strong dollar, which is higher across the board .... not just against the pound. The Dollar Index, a trade-weighted measure of the dollar's value against a basket of currencies, is up 0.47% at 97.50 and making 16-month highs.
Investors are still digesting last week's comments by the Fed, which confirmed their intention to hike rates again next month, and twice more by mid-2019. That won't please Mr Trump, and nor will the stronger dollar induced by higher rates . He argues that there is no need for the Fed to continue on this course because there's little evidence of worrying inflationary pressure. At one level, he's right .... but the Fed's view is that though the evidence hasn't come through yet, with such strong economic activity and rising wage pressure it would only be a matter of time. Since their job is to be ahead of the game and not merely reactive "after the event", tightening monetary policy is appropriate.
The Chinese yuan / renmimbi is in focus again too, with USD / CNY pushing towards the pyschologically important CNY 7.0000 again (last at CNY 6.9670). Will the authorities in Beijing start to defend their currency ? Washington (or at least one key individual there) has repeatedly accused them of deliberately weakening their currency in order to gain a trade advantage. There's no evidence of that in recent years , whatever else may have been going on, and if the People's Bank of China (PBOC) acted to support the yuan one might assume that Mr Tump might have to desist from that particular avenue of attack even if making assumptions about him is fraught with danger.
The PBOC signalled that such action might be on the cards by omitting a phrase that they've been using in regular policy reports for the first time since 2013. The phrase was a pledge to allow "market supply and demand to play a bigger role in deciding the exchange rate", and it makes sense that Beijing may be close to drawing a line in the sand. Although at the simplest level a weaker currency has benefits for trade, China would not want to be accused of deliberately allowing currency weakness by the US, particularly not right now. And more to the point, any trade advantage would be outweighed by the capital outflows provoked by long-term yuan weakness.
The prospect of the PBOC reining back it's commitment to allow a larger role for market forces in deciding the exchange rate is interesting on many levels, not least its timing. Last week there were a number of commentaries on the subject of the dominance of the US dollar as a world reserve currency and as the currency of choice in so much of world trade. By now, Beijing was hoping to have made something of a challenge to the dollar in that respect, but in fact the yuan's share of global reserves has fallen of late, and the dollar's eminence as the global transactional currency is as strong as ever. Any move by the state to take a firmer hand on the value of the yuan undermines its chances of being accepted as a reserve currency of stature. The dollar's domination looks set to continue for a while yet.
In Europe, there were hopes that the Euro would also have made a stronger challenge to the greenback. Such a prospect has been dashed by repeated crises within the Eurozone. From a strictly economic point of view, the merits of the Euro are damaged by it being a currency whose participants share monetary policy, but not fiscal policy. The trouble is that the concept of sharing fiscal policy is a political minefield, particularly in the prosperous north. One trader of our acquaintance once put it : "Wealthy doctors and dentists in Hamburg are not happy at the prospect of sharing the financial burdens of olive growers in Sicily, and never will be". Unpalatable to some though it may be, and certainly over-simplistic, but for promoters of the great European project there's an uncomfortable ring of truth to it.
The crisis facing Europe at the moment is of course Italy, a case in point if ever there was one. The EU Commision has given Rome until tomorrow to come back with a revised budget proposal that will not, in Brussels' view, increase Italy already mountainous debt. Italy's first proposal planned for a 2019 budget deficit of 2.4% of GDP and not only did not qualify but it was three times the size of the one suggested by the previous government. Italy's coalition partners have so far shown no inclination to compromise on their debt-swelling plans for tax cuts, increased minimum wages and lowering of the pension age. We should know more by the end of tomorrow ....
And just quickly, oil .... about 10 days ago, we mentioned that the torrent of unremittingly bearish news that had hammered the price of crude oil had left us wondering how much further the price could go. Well, quite a bit as it turned out ! To go on top of record production levels in Russia and US , and rapidly mounting inventories, we had Saudi Arabia assuring the world that they could make up for any shortfall caused by sanctions on Iran. Then, in distinctly un-Trumplike fashion, we had the US president coming over all understanding and giving no less than eight countries time to gradually phase out their purchases of Iranian oil ..... and more anxiety that slowing global growth will reduce demand.
For the first time in a while, oil is trying to stage a bounce this morning (up about 1.0% as we write). In true "swing producer" fashion, the Saudis were talking over the weekend about reducing production by 500,000 barrels per day in the light of the new, much lower price range and those worries about demand. There's talk this morning about an OPEC / Russia cut in production of 1m bpd. Such measures seem eminently plausible to us, but since we were wondering if enough was enough about 5 bucks ago, you could argue that we would say that, wouldn't we ?