Archive for 2017

Dec. 10, 2017 (Goldman Sachs FX Research Team) - Our traders are biased to fade NFP related USD moves on both sides and remain long GBP. Looking at GBP we had some good news on the Brexit front with a deal reached overnight, however, markets were seemingly disappointed with the vagueness in the language (likely necessary to keep all parties onboard) which has led to a selloff in cable as New York’s walked in.

-          EUR: USD demand over the week has been noted most particularly in EURUSD as we traded towards 1.1720 support overnight. Ahead of payrolls we do not like chasing EURUSD lower through 1.1720 on a strong report , but would sell a rally on a weaker number, barring flat wage growth, towards 1.1780, 1.1810.  on a break below 1.1700, we expect EURUSD to be well support near 1.1665.

-          CAD: Views are mostly the same in CAD after Wednesday’s position squeeze triggered by a still-dovish BoC on the margin. Much of the idiosyncratic CAD weakness has  played out in the desk’s view as we look for the upcoming data calendar for guidance from here.  Broader dollar price action will likely dictate price action over the coming sessions with NFP today and the FOMC announcement next week being the main catalysts to look out for. USDCAD remains a buy on dips over the short  term technically and given that the recent USD demand across the FX complex is showing little signs of abating – a duration selloff over the past 24 hours adding to the most recent leg. 1.2820 then 1.2785 the levels to watch below with resistance at the cycle highs at 1.2910/30.

-          SEK: SEK is in play. There’s been a well flagged seasonal characteristic that EURSEK goes higher a few days after PPM (Annual payment by The Swedish Pension Agency to various mutual funds. A large share of savings is invested in foreign assets. This disbursement puts downward pressure on SEK). Some estimates put this to be SEK 39-40bn this year of which ~60% is expected to be invested abroad. If we assume half of that is hedged, then the flow effect would be around 12bn. Looking at the last 5 years, we find that this flow effect extends for about 5-6 days afterwards. Payment this year is expected to be on Monday Dec 11th, hence we are biased to be long EURSEK here. Support comes in at 9.89, and resistance at 10 and 10.09.

 


USA 

Dec. 8, 2017 (Tempus Inc.) - The U.S. Dollar improved once again this week based on positive global market sentiment and the passing of a two-week agreement that avoids a government shutdown.

USD

The outlook of congressional consensus on a spending bill remains a concern, but investors welcomed the relief. Per the Bloomberg Dollar Spot Index, the “buck” has gained for a fifth consecutive day, its best appreciating streak since March.

Non-Farm Payroll figures revealed an expansion of 228K jobs, exceeding expectations of 195K. Nevertheless, the overall bag of data this morning came in mixed as Average Hourly Earnings managed to grow by just 0.2% instead of the estimated 0.3%. Wage growth is imperative for an optimistic economic outlook and revised October numbers surprised with a contraction. Unemployment stayed put at 4.1%. The greenback is seesawing as markets react.

EUR

The Euro is trading in lower ranges as good news overnight for the U.S. hurt the shared currency. Equity markets rallying also diminished the Euro’s role as a safe-haven.

Additionally, Industrial Production numbers in Germany came in much lower than predicted with 0.9% growth when economists calculated 1.4%. It is likely the currency will stay quite sensitive to changes in other regions with data already a negative factor leading towards depreciation last seen in over two weeks.

GBP

The Pound saw a lot of up-then-down action overnight with a Brexit breakthrough which now points to advancements in the historic negotiations. Prime Minister Theresa May achieved a deal with European Union officials that puts to rest concerns over an Irish border, a final bill, and the protection of rights of EU citizens within Britain. Basically, the PM decided the best route to end deadlock in talks was to follow a path towards a very soft Brexit.

“Leave” campaign political heads seemed highly dissatisfied while stock markets flourished. It seems like the domestic political instability remains a downside risk for Sterling as well as the unknowns regarding a future with less access to European markets. Progress in talks originally boosted GBP, but the doubts and uncertainties that cloud the situation prevented further gains.

Dec. 3, 2017 (by Ozerov/Suwanapruti at Goldman Sachs Research) - As we wind down 2017, analysts at GS Research see the potential for stronger global growth in 2018 that could boost emerging market currencies and could create USD, SGD and JPY short opportunities against the BRL, INR, and IDR.

“One of our core macro views for next year is for the strong and synchronous global expansion to continue, surprising consensus expectations to the upside. Healthy global growth and trade generally favours emerging market assets — and EM currencies often push beyond ‘fair value’. Two of our Top Trade recommendations capture the currency implications of stronger global and EM growth using baskets in two regions: Asia and Latin America. Top Trade #6 (long INR, IDR, KRW vs. short SGD and JPY) aims to benefit from the ‘equity-centricity’ of Asian currencies, and some country-specific catalysts in India, Indonesia and South Korea. Funding out of SGD and JPY should help mitigate rate risk given the elevated sensitivity of JPY to increases in global interest rates. Top Trade #7 (long BRL, CLP, PEN vs. short USD) is predicated on the expected upside in metals prices, undervalued currencies and still early innings in the Latin America growth recovery.”

 

European Economics Analyst: When regions fail

“At the international level, Europe’s productivity performance has disappointed. Consider the evolution of average output per worker since 1990. The United States started higher and grew faster. At the national level, there is evidence of catch-up convergence among countries within Europe. Less productive countries have tended to exhibit faster post-war productivity growth than their more productive peers. But the degree of dispersion in productivity across European countries has increased over the past decade, despite having fallen for fifty years in the run-up to EMU. At the sub-national level, there is some evidence of productivity divergence between regions within countries. In France and Sweden, for example, regions in which labour productivity was low in 2000 tended to exhibit slower productivity growth between 2000 and 2015 than regions in which labour productivity was high.”

 

US Economics Analyst: Losing My Deduction

“The Tax Cuts and Jobs Act (TCJA) now making its way through Congress is likely to restrict the federal deductibility of state and local taxes. We now expect a repeal of the federal deductibility of state and local (S&L) income taxes as well as a $10k cap on the property tax deduction. Under current law, the ability to deduct taxes paid from taxable income lowers the effective S&L tax rate. While eliminating this deduction would raise substantial federal revenues, the sharper regional differences in effective tax rates would also make it harder for S&L governments to raise income and property taxes.”

Dec. 1, 2017 (Tempus Inc.) - The U.S. Dollar has been swinging within tight ranges and closed the week in similar fashion as markets awaited the chance of tax reform legislation passing the Senate.

USD

Senator Bob Corker of Tennessee is said to be an obstacle towards voting and maintaining confidence of necessary support. Any headlines that provide guidance into proceedings will drive markets one way or the other.

Additionally, market participants are paying attention to news of a potential exit by Secretary of State Rex Tillerson, who is said to be threading on thin ice with the White House. In terms of data, manufacturing gauges like PMI and New Orders will be released at 9:45AM while Construction Spending at 10AM. We think positivity could help recover some of this week’s losses.

EUR

The Euro is trending in favorable ranges as focus remained on U.S. political developments. However, this may change in upcoming weeks as Chancellor Angela Merkel continues to run into problems as she negotiates building a coalition. Nevertheless, the balance for the shared currency came in as news of slightly than expected Manufacturing Purchasing Managers Index figures.

Economics are keeping the Euro afloat, but the potential unstable situation in the largest economy of the Euro-bloc is cause for concern. Italy also faces the prospect of new anti-establishment leadership going into 2018.

CAD

The Canadian Dollar improved by over 1.0% meriting appreciation on the basis of solid Gross Domestic Product Growth during the month of September. Data showed a 0.2% expansion over the estimated 0.1%, bringing the yearly average to 3.3%, a level that satisfies the Bank of Canada’s outlook. Oil prices also being on the way up as winter sets in and OPEC extends production cuts could result in further gains before the year ends.

Nov. 24, 2017 (Tempus Inc.) - The greenback has been unable to shrug off its turkey-induced malaise this morning, falling versus most of its major peers. The Bloomberg Dollar Spot Index is set for its third weekly loss, its longest losing streak since July. The Index is down 1.6% so far in the month of November.

There is no major data set for release today. We expect trading conditions to be light and likely boring, especially when European traders head out for the weekend.

EUR

The Euro looks to build on its gains from yesterday’s session. The common currency received a boost following strong German GDP yesterday which showed the economy expanded 0.8% in the third quarter.

The good news continued for Europe’s largest economy. A separate report showed that business optimism climbed to a record high. In addition, the largest German opposition party indicated it is willing to form and back an administration led by Angela Merkel.

The Euro is at its strongest level in 6 weeks versus the U.S. dollar.

GBP

The British pound was modestly stronger against the U.S. dollar, mostly on greenback weakness. News was light out of the United Kingdom, but a comment by a Bank of England official has been creating headlines. Silvano Tenreyro reiterated recent BoE sentiment by saying that two more interest rate hikes will probably be needed to get inflation back to target.

However, Brexit will be the real determinant of where policy goes next. The comments again highlight how the central bank is being hamstrung from political uncertainty.

Nov. 24, 2017 (by Zach Pandl & KT Trivedi, Goldman Sachs) - The Goldman Sachs co-heads of FX Research Zach Pandl & KT Trivedi outline their views as we head into year end. In short: they believe that EUR weakness can continue and UK political risks may still weigh on GBP while NZD pessimism is overdone. Here is their latest research note:

1. Counter-trend Euro weakness can continue a bit longer. Over the past two months, EUR/USD has declined about 3.5%, from a high of just over 1.20 to 1.16 today. We see three main drivers behind the move: (1) open-ended bond purchases by the ECB, which look likely to continue longer than investors had expected, (2) the nomination of Governor Powell for Fed Chair, a candidate likely supportive of continued funds rate increases, in contrast to expectations in late summer that the White House would opt for a more dovish choice, and (3) further progress in the US Congress on tax reform. While the first two catalysts have played out, we expect that Congressional Republicans will continue to move the tax reform ball down the legislative field over the next month. Moreover, investor positioning still appears long EUR. In futures, for example, aggregate USD positioning has swung from a short of $20bn in late September to a short of $4bn as of last week. However, much of this move was against currencies other than the Euro: futures length in EUR has declined by just $3bn over this period, and net length of +$10bn remains close to multi-year highs. Over the medium term, the Euro probably has more upside than downside, but we think the near-term trajectory is still lower, and are sticking with our year-end target of 1.15.

 

2. A sharper bout of political pressure in MXN, ZAR and TRY than we anticipated. The drawdown in FX and local rates in these high-yielding markets over the past few weeks has been sharper than the bumpier ride we expected, even taking into account the well-flagged risks from a core-rates selloff. In effect, idiosyncratic political risks have returned with a vengeance in each case, overshadowing any improving macro developments: renewed noises of a US pull-out of NAFTA, in turn giving further impetus to local populism, has pushed $/MXN back above 19; the continued divisions within the ruling ANC and the resultant fiscal slippage and potential for rating downgrades have sent $/ZAR back above 14; and $/TRY is above 3.80 as tensions between Turkey and the US, as well as Germany, show few signs of de-escalating quickly. At these levels, each of these currencies is significantly undervalued again on our GSDEER and GSFEER metrics (roughly by more than 15%), and this is reflected in our constructive 12-month forecasts. But unlocking that value typically requires a long investment horizon and some resolution, or at least de-escalation, in these political risks. The upcoming ANC party election in December is at least a concrete binary or potentially ternary event that could provide some clarity on political and economic direction in South Africa, whereas in the other two cases, we are unlikely to have much clarity until well into next year.

 

3. But, over the longer run, macro adjustments supporting EM FX continue and the risk-reward looks attractive for the BRL. The broader case for EM FX is still solid in our view – most EMs have significantly improved external balances and cyclical macro fundamentals, and this is an asset class with undemanding valuations, a generous level of real carry and exposure to the synchronised growth recovery across the EM world. Even in the three economies – South Africa, Mexico and Turkey – that have lagged other EM high-yielders in correcting external imbalances and raising real rates to bring inflation under control, some adjustments, warts and all, have been taking place. In South Africa, core inflation peaked at the start of the year, and the subsequent declines allowed the SARB to cut rates for the first time in July since 2012. In Mexico as well, core inflation looks to have peaked in August, and the non-oil trade balance is in surplus. Turkey has seen a much more moderate correction of its external imbalance relative to Mexico and South Africa, and still has core inflation moving higher, although our economists expect it to peak in the next couple of months. But the tension between improving macro and political uncertainty is most acute in the BRL as the currency has sold off on the back of falling expectations of pension reform. While that is clearly a setback for the fiscal picture, the external balance and inflation profile in Brazil are unquestionably better – in 2017Q2 Brazil recorded its first current account surplus since 2007Q2 and core inflation was comfortably below the 4.5% target. So, with $/BRL back above 3.25, the risk-reward of owning BRL looks attractive as long as there is at least some prospect of modest progress on fiscal reform.

 

4. Bank recapitalisation an additional positive argument for INR. Just as this latest bout of pressure on EM FX was getting underway, we argued that INR and IDR were good candidates to fade any selloff even if the eventual upside was more limited because the fundamental backdrop was still solid, and the revealed aversion of the RBI and BI to large spikes in the respective currencies and ample reserves meant that the bumpier path in these currencies would be less bumpy than other high-yielding alternatives (see EM FX viewsPressure now, value beyond, 29 Sept 2017). Since then, the announced bank recapitalisation in India has bolstered the supportive case for the INR further. Whereas much of the market focus has been on the negative fiscal implications of the recapitalisation effort, our economists have highlighted that the impact on economic growth from a re-energised public sector bank credit impulse could easily exceed a few percentage points. With that type of growth upside, flows into Indian equities and the INR should remain well-supported in the medium term, and we see risks to our 3-month $/INR forecast of 64 tilted towards further INR strength. In the case of IDR, the heavy positioning of foreign investors in local bonds is often a source of vulnerability, but as Danny Suwanaprutihas argued, if Indonesia is included in the Global Aggregate Index, which looks likely, it could catalyse further capital inflow in 2018.

 

5. PEN: A positive carry mid-yielder for volatile times in EM FX. We have described CLP and PEN as the hare and the tortoise of Andean FX. Both are attractive currencies among EM mid-yielders with supportive macro fundamentals. But, whereas CLP has rallied hard in recent months (even taking into account the recent selloff), the PEN has lagged. From current levels CLP is becoming a less obvious “value” story. Still, there is potential for positive surprises in the cyclical picture and a market-friendly outcome in the upcoming elections could be a positive catalyst. So there is some scope for modest spot appreciation, although with copper prices already having risen so much, the move towards our 12-month forecast for $/CLP of 615 is likely to be choppier. The PEN looks more compelling from a valuation standpoint, has a higher nominal carry (of around 2%) and we are optimistic on the medium-term growth outlook as cyclical headwinds fade. Given the heavy intervention in FX market, we expect any move towards our 12-month $/PEN forecast of 3.15 to be slow and steady, but then in volatile times for EM FX, that is an attractive feature rather than a bug.

 

6. Monetary policy is unlikely to pressure the Pound, but politics might. Markets saw a relatively dovish signal in the BoE’s rate decision last week, as the Bank no longer said that policy needs to be tightened “by a somewhat greater extent over the forecast period than current market expectations”. However, we read the accompanying Inflation Report (IR) as saying the Bank remains in tightening mode (albeit at a very slow pace). Conditional on current market pricing, CPI inflation in the IR does not converge fully back to the Bank’s 2% target even by the end of 2020 (it sits just above at 2.15%)—which, taken literally, means that a higher policy rate path would be desirable. This point also came across in Governor Carney’s press conference, where he noted: “…we, in fact, need those two additional rate increases in order to get that return of inflation to target. In fact, if you look closely at the forecast, inflation approaches the target, it doesn’t quite get there, and the economy is likely to be in a position of excess demand, in other words, running a little hot at that point”. So we do not think the BoE gave an all clear for going long EUR/GBP. We ultimately expect more Sterling weakness, but surprises from the increasingly messy political environment are more likely catalysts than new dovish signals from the BoE.

 

7. Lastly, we still see downside to AUD/NZD. In our view, election-related pessimism around NZD looks overdone. First, in our view, yesterday’s announced Review of the RBNZ Act recommending a shift to a dual mandate (inclusive of “full employment”) is more of a reinforcement of the existing “flexible inflation targeting” status quo rather than a material regime shift. Second, most forecasters—including ourselves and the RBNZ—already assume a slowing in net migration, so policy changes under the new coalition government may not introduce much more downside risk. Third, politics aside, the New Zealand economy is in solid shape: last week we learned that labour market activity was firm in Q3, and the level of output already looks to close to its potential. Rate increases still look some way off, but the NZD is unlikely to remain depressed given the economy’s healthy cyclical backdrop.

Nov. 22, 2017 (Tempus Inc.) –  The U.S. Dollar remains quiet ahead of the Thanksgiving holiday, even after the release of Durable Goods Orders.

USD

The figures surprised as the indicator was expected to show a 0.3% expansion, instead contracting by (-1.2%). When transportation costs are excluded, a 0.4% increase was registered, but this still fell below expectations of 0.5% for October.

The saving grace may be the revision of September’s numbers where the expansion was thought of being at 0.7%, but came in upgraded at 1.1% Overall; this piece of data has lacked consistency over the year and may not be as influential as we close the year.

The FOMC Minutes are scheduled for 2PM, but we see little if any reaction as the Fed’s move towards hiking is very much determined and priced-in. Tempus will be closed Thursday in observance of Thanksgiving and will be open again on Friday.

EUR

The Euro continues to swim in relatively calm waters after Monday’s half-percent decline based on worries in German political stability. At the moment, Chancellor Angela Merkel would not refuse to have another snap election in order to gain seats and have an easier time forming an alliance.

However, headlines overnight saw the prospect of another vote as worrisome, but welcomed the idea of forming a “grand coalition” with the Social Democrats, a party usually aligned with Merkel’s goals, but that suffered bigly on election day and blamed her platform for the failure. We shall see if downside risks manifest themselves into further depreciation, but for now Euro is not paying any heavy tolls.

GBP

The Pound’s recent gains have been subdued slightly due to concerns over Brexit and its symptoms affecting the economic outlook. Later today, the Chancellor of the Exchequer, Philip Hammond, will present a new budget and his remarks may provide guidance the state of affairs. PM Theresa May is just hoping that the EU embraces new talks and the idea of being paid an agreed final bill amount.

Orders in the UK are up to their best level in 30 years per a survey by the Confederation of British Industry. This mix of good economic data and bad news on the Brexit front are likely to dominate the Sterling environment for what’s left of the year and beyond.

 

Aug. 6, 2017 (Commerzbank AG) -

In the short term, the euro should continue to
trend stronger, due to the political chaos in
the US and the ECB passing off a reduction
of bond purchases as a success in
September. EUR/USD will not probably be
able to decrease before the market prices in
more aggressive Fed rate hikes towards the
beginning of 2018.

• Regarding Brexit negotiations, our working
assumption is that ultimately there will be an
amicable agreement. However, uncertainty
will remain high for a long period so that
sterling will not recover for the time being.

• CNY seems set to further depreciate against
the dollar over the coming quarters.

                  3.8.2017     Q3 17   Q4 17   Q1 18   Q2 18   Q3 18

EUR/USD     1.18            1.22       1.19       1.16        1.14        1.15
USD/JPY       110             110         112        115         110        108
EUR/CHF     1.15            1.17        1.16       1.14        1.12       1.13
EUR/GBP     0.90          0.90      0.91       0.90      0.89      0.91
AUD/USD     0.79          0.80      0.80      0.81       0.82      0.83
USD/CAD      1.26          1.27        1.27       1.26       1.25       1.24
USD/CNY      6.72         6.68       6.76       6.83       6.84      6.83

Aug. 4, 2017 (Tempus, Inc.) – The U.S. looked to today’s economic docket to help stop its recent bleeding.  The Bloomberg Dollar Index fell for its fifth conservative month in July, its longest losing streak since 2011.  The same index is set for its 4th straight weekly decline as political risks have weighed on the greenback.  Yesterday, the news broke that Special Counsel Robert Mueller has convened a grand jury in Washington DC as the Russian tampering investigation continues to ramp up.  The dollar fell sharply as the headline hit the wire but quickly regained most of those losses.

The dollar is indeed rallying in early trading after jobs data impressed. Employers added 209K workers in the month of July, beating expectations of a 180K.  Last month’s print was also upwardly revised by 9K. The unemployment rate held at 4.3%.  A further breakdown of the data showed that average hourly earnings rose 0.3% month over month, after a 0.2% gain in June.  The uptick in earnings could help spur consumption, which is 70% of the American economy, and sustain growth.

The average jobs pace since January this year is 179K a month, still under that average of 187K a month last year.

EUR

The Euro remains elevated and within striking distance of it 20-month high against the U.S. dollar.  A day after German PMI gave traders cause for concern over the health of Europe’s largest economy, today’s data shows the PMI scare may be a one-off.  German factory orders for June rose 1.0% month over month, doubling expectations.

GBP

The British pound floated in no-man’s land overnight as traders continue to digest yesterday’s Bank of England meeting.  The central bank held its benchmark interest rate unchanged, which was widely expected.  However, they did downgrade their economic outlook for the remainder of the year and next in the face of Brexit challenges.  The sterling sold-off during yesterday’s session and looks to do the same today following better-than-expected U.S. jobs data.

 

July 28, 2017 (Tempus, Inc.) – The U.S. Dollar weakness continued following the release of Gross Domestic Product and Personal Consumption figures. GDP quarter-over-quarter growth for Q2 came in at 2.6%, just under the estimated 2.7% while Personal Consumption grew at its forecast 2.8% pace.

However, only Personal Consumption numbers in the first quarter were revised upward while the opposite occurred for GDP. Also worth noting is that Core PCE (Personal Consumption Expenditures), the Fed’s favored way to gauge inflation, improved to 0.9% over the expected 0.7%, however, worse in Q1 than thought. Overall, the slate of statistics signals that economic progress is just barely around the forecast and may not be good enough to surge the greenback against most counterparts, especially a much appreciated Euro.

We’ll see if the University of Michigan Sentiment index helps at 10AM or further sinks the buck. Chances of a hike in September are as low as 4.1% and December is not guaranteed at 41.8%. Will the economy be able to handle further monetary tightening? Stay tuned next week as Fed officials give us plenty of opportunities to explain their thoughts throughout.

EUR

The Euro remains on a path to similar appreciation as the dollar experienced in 2014 based on excellent numbers out of France and Spain. GDP in France grew 1.8% over the expected 1.6% annual pace, its longest streak of improvement since 2011. Additionally, Spain is growing at 3.1% yearly pace, the fastest since 2015.

There seems to be little resistance to Euro strengthening now that the value is based on real prosperity, the result of a more disciplined fiscal structure and easing methods from the European Central Bank that may soon be retrieved, only guaranteeing that the Euro stays afloat long-term. The Euro crushed the dollar in July, improving by 3.3%.

GBP

The Pound remains steady as it has an imbalance in the economy. Housing sector is struggling, companies are making plans to leave London’s financial center, but Retail Sales are great as revealed yesterday.
Overnight, however, we learned that GfK Consumer Confidence fell to its lowest reading since the Brexit referendum, once again showing that there is anxiety within the confines of the United Kingdom. Although GBP is up 2.1% for the month, these poor indicators could mount enough pressure to reverse these gains in the upcoming months.