USD bounce back, hawkish Fed vs weak US data, order update, EUR long trade
The EUR has fallen from this morning’s run higher.
The USD fell early in the US day on weak US data (Durable goods orders, Chicago Fed National Activity Index and Dallas Fed Manufacturing Index).
Dudley and Williams
Fed’s Dudley gave a speech at the BIS annual general meeting in Switzerland, timed at about an hour an a half before the US data points. The USD was hitting its strongest levels for the session around this time.
The emphasis in the speech was that the Fed is more focused on financial conditions, suggesting that a key reason for the resolve to stick with its tightening policy path in June was easing financial conditions (strong equities, narrow credit spreads, lower long-term yields). Indeed, it appears that financial conditions remain easier this year, in spite of Fed hikes and QE wind-back plans.
This was a bit of a theme in the BIS report. The FT reported that, “Global financial stability will be in jeopardy if low inflation lulls central banks into not raising interest rates when needed, the Bank for International Settlements has warned.”
This suggests that the Fed may continue to be relatively hawkish and be less responsive to evidence that the economy is losing steam. In particular, the Fed may be less influenced by inflation data than in the past. And more responsive to financial conditions and data points such as the labour market that reflect degrees of tightness in capacity.
Gold fell suddenly earlier in the day, ahead of Dudley’s speech. A lower gold price may be indicative of a Fed less responsive to inflation indicators and willing to tighten if financial conditions remain easy. BitCoin also fell sharply.
Fed’s Williams, that has tended to line up more on the hawkish side in recent years, in Sydney earlier on Monday, supported the notion that the Fed should push on with policy hikes. However, his argument was more rooted in an optimistic view on growth and inflation, similar to that outlined in the Fed’s June policy statements. Bloomberg reported that he said, “Some special transitory factors have been pulling inflation down,”….. “But with some of these factors now waning, and with the economy doing well, I expect we’ll reach our 2 percent goal sometime next year.” …. “The very strong labor market actually carries with it the risk of the economy exceeding its safe speed limit and overheating, which could eventually undermine the sustainability of the expansion,”
We have more Fed speakers this week. Yellen might weigh into the debate herself, tomorrow, although the Q&A format might not be the kind she would prefer to send nuanced policy messages.
Of course, the Fed will still need to be concerned by evidence that economic activity may be cooling. The US economy is now more influenced by the energy sector. And some softening in manufacturing and capex may follow from the recent fall in oil prices. Recent confidence measures appear to be easing. The Conference Board consumer confidence report tomorrow may speak further to this.
Healthcare bill
The Healthcare bill is big news in the US with Senate Republicans revising and debating trying to get their version of a bill through the Senate before the 4 July recess. They are hoping to vote this week. The progress on this bill will speak to the prospects of a tax reform bill later in the year. A passage may boost the USD. It is still a tough ask. The Republicans can afford only two hold-outs with their 52 to 48 hold on the Senate (and VP Pence holding the deciding vote). There are 5 opposed and 10 or so undecided to how the bill is currently written.
Equities
If the Fed does appear less responsive to economic data and more responsive to financial conditions, the equity market should start to take notice. In essence this policy tack suggests that the Fed will tighten until equities begin to fall. However, as it stands, equities are proving resilient.
Euro factors
Other reasons to like the EUR include the stronger IFO survey. The Italian bank bailout has also supported bank stock prices in Europe, and will help placate Italian voters. The Nestle interest held by Hedge Fund Third Point is also reported to helping fuel broader interest in European equities
Technically, EUR has been consolidating for over a month, positioning has been trimmed, and thus it may be better placed to rally.
Friday may be a crucial one for EUR with the flash Eurozone CPI released for June.
The US PCE deflator for May is also released on Friday. After the weak CPI report, expectations are low for the US data point. I guess the message from global policymakers is turning to less focus on inflation and more on financial conditions. However, central banks still have inflation mandates, and the ECB is a single mandate central bank.
The low point for EUR reached around the time of the Dudley speech may represent a key technical level (1.1172).
20-day EUR chart
We are still clinging to short NZD/USD. NZD/JPY short has just been stopped out.
The fall in long-term yields and resilient global equity markets are still tending to support the NZD. The more hawkish Fed stance in the face of softer data points raises the prospects of a fall in equity markets, which could undermine USD/JPY and NZD/JPY. However, the softer US data, without any fall out to equities is encouraging support for NZD/USD and NZD/JPY.
EUR and JPY have retraced earlier gains (JPY is now at its weakest point of the day). NZD, AUD, KRW, TWD, and a range of EM currencies have all held gains after the weak US data.
USD/JPY is also proving less responsive to long-term US yields, and more responsive to equities recently than it had been in earlier months.
USD/JPY vs bond yields and equities
The short NZD and long EUR position tend to cancel out the USD parts of these trades. The short NZD position was taken in part because it appeared that the more hawkish tone by the Fed would tend to strengthen the USD. The NZD/USD indeed may have held just below our stop-loss because this theme is not dead (and may have been given renewed life by Dudley/Williams comments).
The long EUR position has been taken in part because the US data has proved weak, and we are now wondering if the Fed will backtrack on their hawkish tone (in the end, if the data is weak that should see the Fed pause and trigger market concern that they are over-tightening). So they are based on views that are conflicted. We have moved from being more constructive USD to now seeing risks that it falls.
The view is evolving, but there is no point closing NZD/USD short right here, given it is close to our stop loss. (although now it has backed away, and we are left questioning the EUR/USD long taken earlier today)
There are other factors that make us more constructive on EUR and less constructive on NZD, as we have discussed in the past.
Positions
Long half unit EUR/USD at 1.1208; s/l 1.1158
Short half unit NZD/USD at 0.7243; s/l 0.7313
Mon 6/26/2017 8:25 AM MDT
Real Time AmpGFX- bought EUR
Bought half unit EUR/USD at 1.1208
US economy underperforming runs risk of forcing a pause by Fed
Will revert with orders and comment