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Trump: the new Reagan for the USD?

EUR/USD (equivalent) under Reagan 


Source: FRED

Both have been involved in the entertainment industry and both are tax cutting Republicans. Beyond that many Reagan fans would see comparisons with Trump as an insult. But can Trump have a similar influence on the economy and the USD? Reagan’s presidency saw the USD embark on a huge roller coaster rise almost doubling in value against the DEM in 4 years before falling back to its starting level by the end of his presidency. Can the same happen under Trump?

Reagan’s presidency was notable for its big tax cuts, strong growth and roller coaster move in the USD. Trump is also looking at a big tax cut and a big increase in infrastructure spending and they have the potential to mimic the impact of the Reagan years in broad brush terms. While there may be criticism of the efficiency and sustainability of his tax proposals, the markets will initially react more to the brute power of any fiscal expansion. All such efforts have a price and often end with a bad hangover, but by dint of its status as the global reserve currency and the global superpower the US is able to take fiscal actions that might be seen as reckless elsewhere without a major short-term risk.

How big an impact on the economy Trump will have will depend on how much of his proposals he can get through Congress. With a Republican House and Senate he is in a better position than Reagan was, who faced a Democrat House for his whole term, but nevertheless was able to push through some radical tax cuts. I am not going to go into too much economic detail about Trump’s proposed tax cuts and infrastructure spending, in part because his proposals are bound to change, in part because what he gets through may look more like the House Republican package than his current proposals. But it is worth noting that his election proposals involve around $7trn of tax cuts over 10 years and at least $550bn of infrastructure spending. His tax plans will likely be bargained down but even the House plan will involve a corporate tax cut to 20% and personal tax cuts. Some think that the economic impact will be modest, in part because a widening US budget deficit will push up yields and hold back private sector spending.This is possible, though in my view it will take quite a large move up in yields to have this effect, and with yields very low elsewhere rising US yields will make treasuries too attractive internationally for yields to rise too far.The infrastructure spending in any case looks to be the main agenda item for the first 100 days, and this will have a substantial direct growth impact. Tax plans will probably take longer to pass, but should also have a significant impact.

But even if the impact on growth is quite modest because of the impact on yields, the rise in yields will itself be supportive for the USD. We have already seen the start of this. It is here that the comparison with the Reagan presidency looks most apt. Not only are US yields likely to rise in response to more expansive US fiscal policy, the Fed were in any case set to embark on a steady rise in short-term rates. Meanwhile, yields elsewhere have much less potential to rise, with the BoJ locking 10 year yields to zero and the ECB debating an extension of QE rather than tightening. The Euro also looks likely to struggle under the same surge of ant-establishment political uncertainty that has helped to elect Trump, with elections in France and Germany next year and a significant referendum in Italy approaching. While these could also lead to more expansionary fiscal policies in Europe, eventually reducing EUR weakness, in the medium term the political uncertainty looks more likely to weigh on the EUR.

As a reminder of the impact of the Reagan presidency on the USD, the chart above shows the US 10 year yield spread over bunds and EUR/USD (based on USD/DEM). EUR/USD nearly halved from 1.23 in January 1981 to 0.67 in February 1985 when the Plaza accord was initiated to halt the rise of the USD.

There are a lot of questions about timing with Trump policies and the USD. Reagan didn’t really get many of his policies implemented until late 1982 after being inaugurated in January 1981, and the chart suggests this was the second leg up in yields after the first had been triggered by the policies of Volcker at the Fed. However, the USD started to rise almost from the moment Reagan was elected. Of course, some of this was down to Volcker rather than Reagan, who had come in under Carter and had raised rates sharply to bring down inflation. But anticipation of Reagan’s policies played its part. In the case of Trump, he may well get things through faster than Reagan, and with the Fed already primed to hike the USD seems likely to react immediately. It has already started.

In addition to the potential impact of fiscal policy on growth and yields, the Trump presidency offers the possibility of new Fed appointees favourable to his more hawkish preferences for monetary policy, and the intended corporate tax cuts could also lead to huge repatriation of funds held abroad by US corporations, both of which could exacerbate the USD boost.

Of course, there are aspects of the Trump presidency that may not be seen as being so USD positive. Severe restrictions on immigration could be expected to have a negative impact on growth, as would major changes in trade agreements. But it remains to be seen whether these “populist” policies will be implemented aggressively. While in theory the President can make changes to trade agreements much more easily than he can to spending decisions, Trump’s election promises may turn out to be negotiating positions. His post-election statements suggests some backtracking, but even if they don’t restriction of labour supply and restriction of imports could result in significant inflation and higher yields, possibly even boosting the USD further.

Of course, none of this represents an opinion as to whether Trump’s policies are good for the US or the world. The strength of the USD is not a barometer of good or bad policy. It’s a price, and right now it looks like it’s going up.



A crisis for UK democracy?


A bit on the markets in a minute, but first a bit of a rant.

If the Daily Mail call High Court judges “enemies of the people” simply for saying that parliament has to sanction the triggering of Article 50, what will it do if some MPs choose to vote against the wishes of their constituents?

This is a difficult issue for some MPs. After all, some are in constituencies that voted to Remain but themselves support Brexit. Others are in Leave constituencies but were in favour of Remaining. The Daily Mail would argue that the people have spoken with the referendum, but the result was close, and had more young people voted might have gone the other way. It might go the other way if it was done again today. So in my view MPs should vote in line with their own views. But they won’t. Even if they are in “Remain” constituencies, and are pro-Remain themselves, very few MPs will vote down a bill to trigger Article 50. Partly because they will be put on the front page of the Daily Mail if they do. And they remember what happened to Jo Cox. This is not a good way to govern a country, and reminiscent of some unpleasant regimes.

Unless MPs are prepared to act as responsible human beings and stand up to their party, the press and the noisy section of their constituents, they are becoming an irrelevance. They are mere ciphers. They are not being allowed to make their own decisions about anything important. It is important to have a role for personal conscience.

The further irony is that Brexit was (according to the Leave camp anyway) supposed to be about taking back control of our government from the EU. But if MPs are effectively just servants of the government, we are effectively being governed by royal prerogative. Come back Oliver Cromwell.

Anyway, rant over. The markets.

Sterling has managed a little rally in response to the High Court decision that parliament has to trigger Article 50, but this doesn’t look like it will be enough to sustain a strong rally in GBP for at least two reasons.

1) Although GBP is now a lot cheaper than it was, it is not dramatically cheap against the USD or the EUR given the big UK current account deficit and the lack of (real) yield attraction available in GBP.

2) Even if the High Court decision is upheld by the Supreme Court, it doesn’t mean no Brexit. Brexit is still extremely likely to happen. There might be some impact on the shape of the Brexit, but even this isn’t clear. If the government sticks to its guns on rejecting free movement and the EU sticks to its guns on making free movement a condition for single market access, it seems doubtful that parliament will really be able to have much real effect. What does seem likely (though not certain) is that there will be a significant delay in triggering Article 50 because of the time it is likely to take to put a bill through the Commons and Lords (average time one year). There could be a simple resolution to speed things along, but this would mean parliament would have to have its say at a later date.

So the vote has created extra uncertainty around Brexit, and has perhaps increased the chances of a softer version and a longer delay. This is mildly supportive for GBP, but some argue that the delay and uncertainty only makes things worse as firms are unable to plan for the future. I’d say this is outweighed by the increased chance of a softer Brexit, but not so much as to justify a dramatic GBP rally. EUR/GBP may manage to get back to the 0.86 area, but unless there is a lot more promise of a soft Brexit or some evidence on Eurozone weakness and/or UK strength gains beyond this are hard to justify. Still, it looks like it might be enough to stabilise GBP in the 0.86-0.91 range.

I have put this in terms of EUR/GBP rather than GBP/USD because coming into the US election the picture for the USD is obviously very uncertain. Most take the view that a Clinton victory will be USD positive, and market behaviour in the run up to the election suggests this is the case, but with a Clinton victory now priced as around an 80% chance, the market reaction may not be huge. The Fed is very likely to hike if markets respond positively – even neutrally – to the election, and that should be enough to sustain the USD against most currencies, though which currencies it gains most against will to some extent depend on the (uncertain) medium term equity market reaction to the combination of a Clinton win and higher US rates.

This is all pretty much the consensus view, and I’m not going to speculate too much on what happens if Trump wins, except to say that I’m not sure the impact will be that sustained. In the end, Washington will put fairly substantial limits on what he is able to do.

EUR weighed down by GBP not Draghi


Looking at the markets, it seems as if Draghi said that the ECB would be easing further come December, or at the very least March. The EUR has gone into a tailspin since the ECB meeting, and journalists are queuing up to blame Draghi. The trouble is, no-one seems quite sure what he said that triggered the move. One headline said “Euro close to 8-month lows vs dollar Friday after ECB chief Mario Draghi ruled out an abrupt end to QE.” Another headline “Euro wallows near March lows after Draghi quashes tapering talk”. So did he quash taper talk, or did he say the ECB would taper? Because if you don’t end abruptly, you taper (it’s one or the other). And which is better for the EUR? Because when it was suggested that the ECB would taper a month or so ago (by some unnamed committee member that Draghi emphasised had no insight) the EUR went up. So presumably if they don’t taper it goes down? Except Draghi said they would taper. Which I would have thought was sensible, and less likely to be EUR positive than an abrupt end to QE if anyone thought about it. Which all probably goes to show how silly the original “taper tantrum” was, but doesn’t really explain why the EUR has been so weak since Draghi’s press conference, especially since the effects of the initial taper tantrum were fairly short-lived in any case because on reflection most saw that the initial story didn’t mean a great deal, true or not.

In reality I don’t think the market really saw anything new in Draghi’s comments, but in the absence of anything new, the downtrend in EUR/USD remains in place. EUR/USD has been in a downtrend since the Brexit vote, and with the market expecting a Fed rate hike in December and currently seeing a probable Clinton victory as favourable (presumably because it is essentially the status quo – no nasty surprises), the burden of proof is now on those that want to oppose the EUR/USD downtrend. It is interesting that the Brexit situation appears to be the key factor that has pushed EUR/USD lower, though the UK is a small economy by comparison to the US and Eurozone giants. It is certainly the case that EUR/USD has never regained the 1.1377 high seen on June 24 and had been edging higher into the vote. It is hard to see that the economic news form the two economies since then has been particularly USD positive or EUR negative. If anything the opposite is true. Certainly since the beginning of this year the performance of the Eurozone in both growth and inflation has been broadly in line with expectations, while US growth has significantly underperformed. In fact, the OECD currently expect US GDP growth to be weaker than the Eurozone’s this year, and although many expect the Fed to raise rates in December, this is significantly less tightening than had been anticipated  at the start of the year.

So we need some change in market perceptions for the EUR to stop falling, at least until we reach the key levels in the 1.05-1.08 area in EUR/USD. A less negative view of Brexit from the perspective of both the UK and the Eurozone is the most obvious potential trigger, though that doesn’t seem imminent with the EU ruling out negotiation until the UK invokes Article 50, which most likely will be in Q1 2017. The other main possibility is a change in the perception of the Fed, though the way things have turned out this year suggests that even if the Fed don’t raise rates in December, the hit to USD strength may only be temporary unless the ECB turn out to be unexpectedly hawkish at their December meeting. The third chance of a Trump victory is one I hope we don’t have to consider.

Fed hike overpriced


The latest OECD forecast for 2016 US GDP growth is 1.4%. That would be the lowest since the recovery began – i.e the lowest since the -2.8% in 2009. It is also lower than the 1.5% forecast for the Eurozone, and lower than the 1.7% forecast for the UK. Yet the market is currently pricing a 70% probability of the FOMC raising its funds rate target by December, while all the talk is about when the UK will cut rates again and whether the ECB will ease again. Of course, current growth is not necessarily the prime determinant of the Fed’s decision. They are forward-looking, and focus on dual targets of inflation and employment, but growth is the major consideration for both these objectives, and while future growth is expected to be better, growth has disappointed all this year so forecasts of future strong growth require a degree of optimism. We have the Q3 GDP data for the US on October 28th. The consensus forecast is still around 2.7%, but the Atlanta Fed GDPNow model is currently showing a forecast of 1.9%. If we were to get another sub-2% growth number in Q3, the probability of the Fed tightening in December would surely dip sharply.

Of course, the reason most are looking for a December rate hike is not because they have done a deep assessment of the economic rationale and put a lot of trust in their forecasts of growth and inflation. It is because they think the Fed have said they will. The three dissents at the September FOMC notably included former arch-dove Eric Rosengren, and many see this as a signal that the Fed is preparing for a December move. But the latest speech from Yellen ought to cast a bit of doubt on this assessment. Yellen didn’t specifically indicate a policy intention, but she did suggest a possible willingness to try to run a faster economy in order to recover some of the lost output seen since the recession. As she put it – “If we assume that hysteresis is in fact present to some degree after deep recessions, the natural next question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a “high-pressure economy,” with robust aggregate demand and a tight labor market.” If she wants to try this, raising rates when growth hasn’t reached 2% in any of the last three quarters, as would be the case if Q3 GDP comes in sub 2%, doesn’t seem to be a sensible tactic. We certainly don’t have “robust aggregate demand” on this reading.

The tightness of the labour market is perhaps the best argument for higher rates. Traditional economics has tended to focus on the labour market as the main driver of inflation, as a tight market drives up wages and costs. However, there are three points to make on this. First, that although the US is no doubt close to full employment, the unemployment rate in the US hasn’t fallen in the last year, at least partly because of the weakness in growth. Second, average weekly earnings growth hasn’t been rising. If anything it’s been falling, with the 3 mth y/y average dipping below 2% in October for the first time since February 2014. Third, Yellen’s latest speech highlights that the labour market hasn’t really been the driver of inflation in recent years. As she notes “the influence of labor market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis.” So although the unemployment rate is quite low by historic standards, it’s not falling and doesn’t appear to be putting upward pressure on wages.

As for inflation, the Fed’s preferred measure – the PCE deflator – is steady at 1% and hasn’t been above 2% since 2012. While oil price fluctuations may move it short-term, it is not currently an issue the Fed has to worry about. If anything, the concern is still to convince the market and the public that inflation is likely to rise from here. Recent years have proved that deflation is a much harder issue to deal with.

So I find it very hard to make a case for higher rates based on the current state of growth, inflation and unemployment, and the latest speech from Yellen suggests to me that she does too. The rate hike last December was based on much stronger growth expectations and some evidence that growth is moving back above trend looks necessary to me to justify another move. Given her recent speech I suspect Yellen feels the same.

Now, there are of course other arguments for raising rates. The side-effects of holding rates very low are generally perceived to be damaging, with savers penalised and asset owners rewarded. Inequality increases as a result. But this is a reason to want rates higher in the longer run, not necessarily now.

It will take a lot to change the market’s mind on the Fed, but it seems to me that the current 70% probability priced in for a (November or) December hike is overly confident. The Q3 GDP data may change this view, but it may require a Fed comment or two to move expectations even if the GDP data do disappoint, given the market’s current tendency to need to be led by the nose. Many on the Fed who want a hike clearly aren’t really basing it on the current behaviour of the economy.


GBP weakness overdone?

Well, yes and no. I think the lows seen overnight represent a reasonable idea of the base for GBP, but we may well have another look at them before we go higher. I would argue that while the bad news about Brexit is now broadly in the market, there are few reasons to buy GBP, and levels are still not that attractive, so I would still prefer the downside for now.

The overnight moves were clearly exacerbated by poor liquidity in Asian hours, though it’s still surprising to me that liquidity is that poor. It seems that in the new algo dominated world such moves are becoming more frequent, though it is more surprising in GBP than it was in the CHF when there was a clear change in regime in the removal of a floor. Exotic options structures may have been responsible, but I am not totally convinced by the explanations I have heard.

Anyway, GBP has bounced back after the sharp dip overnight, but buyers will now be even more wary than they were and the prospects of recovery consequently that much less. Was the weakness overnight justified by events? No, in that nothing changed dramatically enough to trigger such a sharp fall. Underlying concern about a “hard” Brexit is behind the negative GBP sentiment, but does this mean GBP is weak indefinitely until the reality of the trade arrangements are realised? Surely not, as we may see no clarity for years. What we are seeing from May, Hollande, Juncker, Merkel et al. isn’t even negotiation yet. The UK hasn’t even triggered Article 50. This is just the pre-negotiation posturing – the trash talk before the big fight. I don’t know what the trade relations between the UK and the EU will look like in the end, but I suspect there won’t be the radical step change in trade that some seem to think. The bad news of a “hard” Brexit is now essentially in the market, so may be there is no more to come and GBP has hit its lows. This is certainly possible, but the problem is that the pound still isn’t particularly cheap.

There is more than one way of assessing value in FX, but I will show three charts here to illustrate why I think GBP is far from being significantly cheap. It is broadly fair against the USD, but it is still expensive against the EUR. I have published these before back in June before the Brexit vote as reasons why, even if there had been a vote to Remain, GBP was too high.

The first chart underlines that GBP is still well above PPP against the EUR. While currencies don’t necessarily trade near PPP, it is a good starting point, and it can be seen from the chart that GBP has generally traded a lot closer to PPP against the EUR than it did in recent years. There was some justification for higher GBP valuation at the height of the EUR crisis, including higher UK yields and greater perceived security, but the yield advantage has effectively vanished and GBP now also looks more risky and less secure, so the justification for trading above PPP is much reduced.

Against the USD the tendency until the mid noughties was to trade close to PPP. Subsequent GBP strength may have been a result of reserve diversification by major central banks (among other things) but current PPP is around 1.32, so we are only marginally below there.

The third chart illustrates how major currency levels versus PPP generally correlate to the size of the current account deficit/surplus in each currency. On this basis GBP looks about fair, while the EUR looks very obviously cheap and the CHF exceptionally expensive. The relatively high valuation of the NZD and AUD reflect their higher yields. The cheapness of the EUR and the high level of the CHF suggests the CHF is the proxy DEM, but sooner or later I expect this will also be corrected.


Source: OECD, FX Economics


Source: OECD, FX Economics


Source: OECD, FX Economics





Value in SEK as market blinded by yield obsession

Back in the mid-noughties when I was working at RBS as their FX strategist, a couple of geeky guys came to see me. They wanted to know what the key drivers were of the FX market. I went through the normal parade of factors – value, terms of trade, yield spreads (real and nominal), politics, current account balance, risk appetite, momentum and so on, and tried to stress that the trick was deciding what they key factor was at any one time. But they asked me to pick what the most consistent driver was, particularly in the short-term, and I said yield spreads and risk appetite. I suspect they went away and built a high frequency trading model that may have made (or lost) the bank millions – these were the days when banks (especially RBS) liked to take risk.

Nowadays, I sometimes think that the whole market is trading this way, and has lost sight of all the longer term fundamental factors. Maybe everyone has gone away and built the same model, and the market has got locked into a world created in the noughties because everyone is trading as if the ideas that made sense then will make sense for all time.  But it all looks a bit outdated in the current market. Yield spreads are generally very small, and the risk characteristics of currencies can change. For instance, the EUR was a reasonably risk positive currency back in the noughties, but the Eurozone now runs the largest current account surplus in the world and has seen huge net capital outflow over the last year to balance it. This suggests a much more risk negative characteristic, and that has to some extent been the case.

But it is the focus on infinitesimal differences in yield spreads that is the hardest to justify, especially when looked at in comparison to valuation measures. Tiny changes in central bank rates are used to justify large moves in currencies which are already misvalued. This is partly because there is no agreed way of measuring correct valuation in FX. And while FX is essentially mean reverting (in real terms) the time taken to revert to the mean can be long. But with all rates close to zero in the majors and most of the G10, valuation really ought to become a much more important driver of FX, as it will take a very long time to make any money on the carry gained from holding, say, GBP against the EUR.

While there is no agreed simple way of measuring correct valuation, history does give a reasonable guide. Real effective exchange rates do provide a good guide to value relative to history, though it is always possible that something has changed to create a deviation from historic norms.  The G10 currency that looks most obviously undervalued relative to history is the Swedish krona. It is only around 5% away from all time lows, and is an illustration of how the market is driven by tiny interest rate differences which will not compensate for misvaluation in the longer run. The Riksbank have managed to drive the SEK down by setting negative rates, but the Swedish economy looks one of the healthiest in the developed world. Growth is likely to exceed 3% this year, inflation is only modestly below target, the current account is in significant (excessive) surplus, and unemployment is back down to pre-financial crisis levels. Despite this, the SEK is second only to GBP as the weakest G10 currency this year, presumably because of the combination of low yields and its undeserved status as a barometer of European risk sentiment. This seems to relate to the fact that Sweden is a small open economy with the Eurozone as its biggest trading partner, so can be expected to suffer both negative growth and current account impacts from weakness in the Eurozone. However, the Eurozone is not that weak at the moment, and Sweden seems to be doing fine anyway. The only problem that people seem to be able to point to is excessive household debt and an inflated property market, but Sweden are hardly alone in that, and the SEK offers much better value that those in a similar boat (the UK, Canada etc.).

It may be hard to hold onto a long SEK position because gains are likely to be slow and it can be vulnerable to negative risk spikes. To guard against his it may be worth holding a basket of long SEK vs GBP and EUR, though I would probably prefer to short CHF than EUR.

Here’s a chart of the SEK real trade-weighted index compared to GBP and CHF. Why should the SEK be this weak? It won’t last.


Source: BIS


The value is in EUR

The short term focus in FX has been on central banks. The lack of BoJ action,  diminishing expectations of action from the Fed, and the ECB approaching the limits of easing have all contributed to a strong JPY and EUR and weaker USD, while today saw the RBA sucked into the anti-deflation battle once again, halting the AUD recovery. The rationale for focusing so much on minor changes in central bank policy seems to me to be very flawed, and the scale of the reactions on the face of it looks excessive. But what appears to be excessive volatility in reaction to minor news may in fact be something else. It may be a reflection of very out of line initial valuations. As the market’s love of the USD and the story of widening yield spreads fades, recent sharp moves may reflect a realisation that valuations may be a long way out of line if the focus is changing. This is important for anyone looking beyond the short term, and even short term traders should be aware that with the long term USD uptrend under threat, the dominant paradigm may be shifting.

The simplest way of looking at value in FX is to consider real trade-weighted indices. These provide a comparison of the real value of currencies over time. I have put together a chart using BIS data rebased to February 1987 – the data of the Louvre accord when the major countries tried to stabilise currencies. This is not necessarily representative of fair value for reasons I will elaborate on later, but is a reasonable place to start. On this basis, the JPY looks the cheapest of the major currencies, and the Swiss franc the most expensive. The USD went from cheap in 2013 to expensive by the end of 2014 and extended its valuation though 2015. GBP also looks expensive on this basis, albeit a little less so than it was, while the EUR is on the cheap side.


But valuation on this basis misses out two key factors. First, the possibility of structural change and second the cyclical movements in currencies that result from movements in yield spreads. Of course, the latter is by its nature a temporary phenomenon, and cyclical movements in currencies always looks excessively volatile based on yield spreads. The increased attraction of higher yields makes a currency more attractive, but currency moves typically substantially overcompensate for the increased expected return. This is why a change in market sentiment can conversely produce an apparently excessive reaction in the opposite direction, as in the recent move in the JPY.

However, structural changes can and should have a sustained impact on currency valuations. I tend to look at this in terms of movements in the current account. Currencies with big current account surpluses tend to be more highly valued than those with a deficit, as a current account surplus represents a persistent flow into the currency which needs to be offset by capital flows in the opposite direction, encouraged by a higher currency. Changes in the terms of trade are one major factor that can change the structural current account position, but other factors can also have an impact.

In the current situation, the most notable current account changes in recent years have been the rise in the Eurozone current account surplus, the rise in the UK deficit, and the decline, and more recently recovery, in the Japanese surplus. These are important changes, because the history of the real exchange rate index has to be coloured by such structural changes. So the weakness in the JPY we have seen until recently was in part justified by the deterioration in the Japanese current account position. However, the recent improvement suggests some scope for the JPY to recover, especially since the weakness had in any case overshot somewhat. Meanwhile, the big rise in the Eurozone current account surplus justifies a stronger EUR valuation, and the converse is true for the UK.

Now, movements in the current account are also cyclical, with stronger growth economies typically having bigger deficits, and cyclically improving current account positions are not normally positive for a currency, because they are usually accompanied by independent capital outflows towards higher growth economies, usually because of higher or rising yields. But when the relative growth underperformance stops, the surplus doesn’t quickly disappear, and the surplus may become the dominant factor. This is the situation now in the Eurozone. The EUR not only looks cheap on valuation, it is even cheaper when the recent current account improvement is taken into account, and currently the Eurozone is also actually growing faster than the US or the UK (at least in Q1 2016). So something of a perfect storm for the EUR.

As for the JPY, while it looks the cheapest currency compared to history, it is probably less cheap than the EUR when the recent structural changes are taken into account. This is illustrated in the chart below.



So in the longer term I would see plenty of further upside for the EUR. However, in the short to medium term, the USD and GBP could recover if relatively strong US and UK growth returns and yield spreads resume the widening trend. Nevertheless, while his could happen in the next few quarters, I see little scope for this to continue longer term as cyclically adjusted budget positions in the US, and particularly the UK, need to be reined in. In comparison, the Eurozone has potential to expand budgets being that much further below trend output and full employment.


Time approaching to sell GBP again

Three factors have combined to create a GBP recovery in recent weeks.

  1. Brexit sentiment has moved in favour of “Remain”.
  2. Positioning was extremely short GBP and has been squeezed
  3. Global risk sentiment has improved.

However, going forward, the scope for generalised GBP gains is now severely diminished. It should not be forgotten that he case for GBP weakness was not based entirely, or even primarily, on Brexit, but on the combination of overvaluation, declining growth outperformance, and a severe current account deficit problem. While GBP weakness in Q1 did reduce the overvaluation issue, it didn’t eliminate it, and after the recent recovery GBP still looks overvalued. Sluggish growth and a big current account deficit remain an issue.

Of the three factors that have helped GBP to recover, the improvement in the fortunes of “Remain” may be the most important, but has probably gone as far as it can. The FT poll of polls below illustrates that the recent uptick in the fortunes of Remain isn’t decisive, and the movement in the bookies’ odds to about 75% in favour of Remain looks like an overrreacction. There is a lot of water to flow under the Brexit bridge yet, and the Scottish referendum underlined the risk of a late swing. Even if Remain stays ahead, I don’t see the Bookies’ odds improving much from here, suggesting risks are on the GBP downside.

While the CFTC data don’t, as of last Tuesday, show any real reduction in GBP shorts, GBP/USD was below 1.44 at that point and I suspect there has now been a significant reduction in short positioning, though probably not a complete reduction. Option positioning is obviously still largely extant, but with strikes generally well below here, the tendency now will be for GBP moves down to be much more amplified that GBP moves up.

The improvement in global risk sentiment has helped GBP, and I don’t expect this to reverse, but expect GBP correlation with risk to fade. The recovery in commodity prices and producers may have helped GBP via the heavy weight of commodity companies in FTSE, but any further equity strength seems likely to be more broad based. I continue to see more value in the Eurozone.

Practically, I would look for a dip to round 0.7680 to buy EUR/GBP. For now, with Q1 US GDP likely to be quite weak, I would not favour the USD, at least until that GDP number is out of the way (released tomorrow Thursday 28th). The Atlanta Fed model is currently looking for 0.4% (annualised, so 0.1% in UK money) and the market expects 0.7%. However, anything above 1.48 would represent value to sell GBPUSD.


Cheer up Mr Draghi

The Eurozone economy is a long way from being healthy, so it’s understandable that the market remains inclined to believe in more ECB easing at the March 10 meeting. I’m not going to go too far into the details of what the market expects, but a rate cut of 10bp or more and an increase in QE both now seem pretty much expected, along with possible tiering of deposit rates to limit the impact on banks. Of course, last time  market went in with this expectation is got a bloody nose, with the ECB only producing a  10bp cut in the deposit rate in December, so positioning is likely to be a little more cautious this time around. But the ECB do seem less likely to disappoint the market this time, both because of less committed market expectations and because Mr Draghi will be very conscious of the risks of a EUR rally if he fails to produce a significant easing.

But while that may be what they will do, I’m not at all sure it’s what they should do. The ECB’s behaviour is looking to me to be increasingly overactive and is starting to look panicky, which seems to me to be creating rather than relieving concerns about the economy.  It’s true that here has been a manufacturing slowdown since the last meeting, but no more so than elsewhere – indeed rather less so than in the US. PMIs have dipped but still indicate slow growth – we are not back in recession. Inflation is a little lower than expected or desired, especially the latest February number, but inflation can be quite volatile on a month to month basis and it is rash to make major policy decisions based on one month’s number. After all, while the market was disappointed by December’s easing, it is still the case that the ECB did ease as recently as December.  Two easings in 3 monthswould suggest some need to panic, and I don’t think that’s a story the ECB should be telling. While they eased twice in 3 months in 2014, it was against the background of a very strong exchange rate. This time around, they have a weak exchange rate and inflation is being significantly subdued by a weak oil price. Core inflation dropped to 0.7% in February, but was 1% in January which was above where it was when they eased in 2014.That monetary conditions are being eased further even though the outlook looks better than in the past may reflect policy having bee too tight for too long, but this perma-easy stance with a hair trigger for further easing carries its dangers.

Firstly, there seems little reason to believe that a further ECB easing will have any significant impact. The ECB themselves indicate that loan growth is improving already and the pass through from any further exchange rate weakness is unlikely to be very large given the weakness of emerging market currencies. What the region could do with is an expansion of fiscal policy from those that can afford it (Germany). A modest deposit rate cut, especially if it is tiered to protect banks (and by implication savings rates) will have minimal impact. Secondly, the ECB seems to me to be underestimating the value of promoting confidence. A more upbeat assessment of the economy and an indication that they have some belief that the (substantial) policy measures already put in place were taking effect and would continue to take effect in the coming months would have a more positive impact. Gloom and doom and a further monetary easing both undermines confidence and takes the pressure off government to do anything on the fiscal side.

None of this means the ECB won’t ease next week. Indeed, the risk of market disappointment now means they probably need to given the expectations that have built up, in large part because of ECB rhetoric. But it would sensible if this time around Draghi emphasised some of the positives rather than indicating the potential for further action. Sensible because he is probably not going to be able to squeeze anything more out of the hawks on the committee anyway, unless there is clear evidence of a dive into recession, and even if he could it would be unlikely to have much impact. An attempt to build some confidence and perhaps encourage governments to take their share of the burden would, I think, be more effective than threats of ever more negative rates.

GBP – History repeating.

It’s all just a little bit of history repeating” The Propellerheads

“We learn from history that we do not learn from history.” Hegel

“The history book on the shelf is always repeating itself” ABBA

Instinctively, I tend to assume the human race has made progress over the last 100 years and our understanding of most things has increased dramatically. Technology has advanced enormously and clearly one thing that has changed in financial markets is the ability to access liquidity in all manner of financial instruments. But has the understanding of what drives financial markets and what is the appropriate valuation for markets improved?  I would like to say yes, but my experience tells me that the answer is no. Technology has vastly increased the amount of information available to market participants, but the understanding of the importance of various different pieces of information seems no better than it was in 1929, 1974, 2000, 2008 or times in between. In fact, the huge increase in the amount of information available may only serve to obfuscate the information of real importance, as markets react to red headlines and systematic asset managers are programmed to react in the same way as in the past or to follow the crowd. An increase in the volume of information only reduces the impact of the information that is of real importance if the market assigns some importance to every piece of information. Or in other words, the more information there is the more possible reasons there are to justify any given market valuation. Thus, the 2000 dotcom bubble found a reason for a wildly out of line valuation, and there were enough greedy investors and trend followers to send equity markets to stratospherically silly levels.

So much for philosophy. What’s the relevance to today’s markets? I wrote recently about the low valuation of European equities (see “A huge opportunity”), and I stick by that view. Some have come back to me worrying about low European growth, Italian banks, Cocos, European immigration, populist movements, but this seems to me to miss the point. There are always risks and concerns, but they have to be evaluated relative to the things that matter for value – in the case of equities this means growth prospects, the initial level of  earnings and dividends, alternative investments (interest rates), and risk premia, which is a bit of a catch all and can be used to justify almost anything, but a sensible view tells me that risks now are less serious than they were at the height of the Greek crisis.

For currencies the metrics are different, and although most of the time the markets are dominated by risk on/risk off trades, it makes little sense to think of currencies moving in this way over the long run. Real currency levels are ultimately anchored to fairly static long run valuation measures, unlike equities which rise over time with nominal growth. Relative growth rates can certainly matter for currencies, not least because they affect relative interest rates, but in the developed world there is actually relatively little long term divergence in growth rates, especially when adjusted for population growth. This isn’t really that surprising, as in the developed world technology and capital is very mobile, and it is hard for one country to show a sustained superior growth performance. Most of the time, better growth is temporary, and comes with a price, usually a bigger current account deficit, as is currently clear in the UK. Changes in the terms of trade – as can be seen with the big move in the oil price – will of course have a long term impact, but I distrust debt fuelled growth (and any growth that is generating an unsustainable current account deficit is debt fuelled from a whole country perspective) as long run reason for currency strength. Sooner or later (admittedly usually later) the positive currency impact of stronger growth and higher rates is reversed either by the need to rein back on growth to control the current account or inflation or the budget, or by others catching up.

What does this have to do with history repeating for GBP? Well it’s a roundabout way of saying that the strong pound, the growing UK current account deficit (and indeed twin UK deficits) are a repeat of a long history of similar episodes in post war UK economic history. The strength of the pound won’t last and we are headed for either a slow or a fast decline in the pound, depending on whether the UK stays in the EU (staying will hold GBP up) and whether the world economy picks up (if it does the decline in GBP will be slower). But the period of UK and GBP outperformance is hitting traditional current account buffers. Sure, UK won’t have to go cap in hand to the IMF this time as in 1976, and a fading of Brexit fears may trigger a GBP rally of sorts. But whatever the politicians agree, the risk of a vote to leave will remain, and more importantly, the underlying economics doesn’t justify a stronger pound, or even as strong a pound as we have now in the longer run. With even McCafferty accepting that UK rates aren’t going up, EUR/GBP is a buy on the dip, even if the ECB cut again as is widely expected and add to QE. Look for 0.85 this year in EUR/GBP, possibly 0.95 if things go badly on Brexit.


A huge opportunity

The EuroStoxx 50 index is now at the lowest level it’s been since 2012. It’s below the highs seen in 2009. Of course, it’s possible that we’re going to enter another major recession/depression and it continues on down to new lows. Possible, but frankly not very likely, as there is precious little evidence of slowdown, never mind recession in Europe. Sure, the US and Chinese data have been driving things, and there is no doubt that there has been some evidence of slowdown in those economies But even there, growth is positive, and we have seen plenty of uneven growth patches in the US in the quite recent past to make me doubt that the slowdown will last very long. After all, part of the cause of the slowdown is commodity -particularly oil – related, and there are positive effects from lower commodity prices on consumer demand (and on the cost base of many firms) which will take time to come through but will have a growth positive impact down the line. There are clear weaknesses in the world economy in the oil dependent economies – notably Brazil and Russia – but lower oil prices, when supply driven as most agree they primarily have been – are at worst ambiguous in their implications for global growth longer term. Now, as we all know confidence is fragile and a general loss of confidence can lead to a recession even if there is no sensible cause. But consumer confidence is not generally weak by historic standards in Europe or even the US, and as long as that is the case this has to be considered a massive buying opportunity for risky assets, and European equities look the most obvious.

For those who doubt that there is real value, consider the following.

Eurozone GDP at market prices is 8% above the peak level seen in 2008, and 13% above the trough in 2009.

Bond yields are dramatically lower than in 2009. 10 year government bond yields and 10 year EUR swaps are 2.5%-3% lower than in 2009. Most peripheral bond yields are dramatically below their highs. This means that the equity risk premium is at remarkably high levels. You’re being paid about 4% on top of capital appreciation to hold European equities.

Eurozone PMI data is showing almost no sign of slowdown. Sure, the January data was the lowest in 4 months, but 53.6 for the composite PMI is a very respectable number by recent standards, very close to the highs seen since 2011 and broadly indicative of GDP growth in the 0.4% region q/q (according to Markit).

So why are equities so weak? Well, there are some concerns about banks, though it seems  extremely unlikely that exposures to commodity producers are going to bring them down given the improved capitalisation  and reduced risk profiles. But mostly this is panic, flow related moves perhaps with some liquidation at the beginning of the year from some big players. But the economy would have to be a lot weaker than this to justify the weakness of the equity markets. Maybe it will be, but a lot is now in the price.

Of course, you have to be prepared to wear it for a bit if you’re going to make a value based call and buy European equities and other risky assets here. But it is the logical call at these levels.

From an FX perspective the risky currencies are obviously the ones that have the most potential to recover. But it’s not as simple as it used to be, as a lot of the traditionally risky currencies are justifiably lower because of commodity price weakness. And on a relative basis, the USD, which has been one of the most risk positive currencies in the last year, doesn’t have a huge amount going for it on the latest data. The most obvious victim of all this has been the SEK, which ha been sold off heavily because people had it as a risk positive play (though nowadays with negative short term yields it’s not at all clear at this ought to be the case), and I like the SEK here against the EUR and the USD. The EUR may start to worry about ECB action in March especially as we have hit the key retracement levels from the October-December decline in EUR/USD. GBP continues to worry about the referendum and possible Brexit. So FX in general is tricky. But the recovery in the CHF looks like a selling opportunity too.



Don’t get fooled again

Since my last post on here, we have had ECB and Fed communications. While Draghi managed to sound concerned enough about the recent data and weak inflation outlook to send EUR/USD down around 1.5 figures, and get about 80% of analysts looking for a deposit rate cut in March, the Fed statement was only marginally more dovish than last time, downgrading domestic demand growth to “solid” from “moderate”. Both expressed some concern about weaker energy prices and the effect on inflation and inflation expectations, and about weaker exports.

In the end, EUR/USD is back where it was before the ECB meeting, but it seems to me the economic assessments being offered here are a little topsy-turvy. Has there really been much change in the Eurozone picture since December? Sure, the January business and economic climate indicators have dipped to the lowest since August, but then December was the high of last year, so the level isn’t particularly worrying, and sentiment may well have been affected by the equity market tumble at the beginning of the year rather than anything concrete. Inflation is a little weaker than expected, but essentially because of lower oil prices, and these have now bounced a bit.

Draghi’s downbeat assessment in January “heightened uncertainties regarding developments in the global economy, as well as to broader geopolitical risks. These risks have the potential to weigh on global growth and foreign demand for euro area exports and on confidence more widely.”

Draghi’s downbeat assessment in December  “heightened uncertainties regarding developments in the global economy as well as to broader geopolitical risks. These risks have the potential to weigh on global growth and foreign demand for euro area exports and on confidence more widely.”

So these aren’t really new concerns, and while a strong majority seems to think they cut the depo rate in March, it seems a bit previous to assume this given pretty limited data, and given the fairly implacable opposition from the conservative wing of the ECB last time. cCan the market really take the same stance as last time after getting so badly burnt? Not without more convincing data would be my view.

In the US, the data has been fairly universally disappointing including today’s durable goods report, but manufacturing is especially weak. Employment is, however, holding up, though the market never seems to acknowledge that employment is typically a lagging indicator. Tomorrow’s Q4 GDP release is expected to come out at just 0.8% annualised – that’s 0.2% in q/q European terms. The Fed seems fairly immune to the weakness of the numbers, partly because they tend to get revised a lot, but on the basis of the numbers alone there really isn’t a case for thinking about another rate hike in H1. If employment growth ever catches up with this growth weakness in a real way we can forget about another hike this year.

In summary, it’s early days, but right now I can’t see why the market would want to hold long USD positions against pretty much any of the majors. If you are looking for growth we’re not seeing it in the US – you are much better looking at Sweden. The long USD position is already well held on rate expectation grounds, so there is a limit to the USD’s safe haven appeal if growth is weak everywhere. The JPY or EUR would make more sense. But EUR/USD and USD sentiment are supertankers, so we may not see immediate USD weakness, and the higher EUR/USD goes the bigger the chance that the ECB do act, so EUR upside is likely to prove a bit of a struggle. But if the oil price continues to rally, the case for more ECB easing will be hard to make. So coming into the next ECB meeting – don’t get fooled again.

Unreliable boyfriend/Inflation nutters

Carney has in the past been cast as an “unreliable boyfriend” for blowing hot and cold and not really letting people know where he stands. I have to say this is a bit more true after today, as his emphasis on the weak aspects of the economy – noting the weakness of China as a factor – rather contrasts with his performance at the Treasury Select Committee a few months ago when he played down the weakness of China as something the Bank had already factored into their forecasts. Of course, he has to represent the views of the committee, but I don’t think there’s enough real change in the news in the last few months to justify a real change in the Bank’s thinking.

The conclusion is that listening to Carney is a mug’s game. In any case, I’m a fan of the market trying to make up its own mind about things, and it had essentially already priced a fairly distant rise in UK rates. Carney’s following rather than leading, and GBP was already under pressure, the marginal rise in inflation today notwithstanding. Regular readers will know I see plenty of good reasons for GBP weakness anyway. So EUR/GBP going to 0.77+ looks fair enough to me with 0.78 my short term target. But at these levels I’d be less keen to open new GBP shorts, especially against the USD, as a lot of the bad news is now in, unless we get more clarity on the risks around the UK EU referendum. Nevertheless, longer term, I still like EUR/GBP at 0.85+

The Riksbank are inflation nutters. That looks to be the conclusion of the report by former Bank of England governor Mervyn King and economist Marvin Goodfriend commissioned by the Riksdag Finance committee and published today. King was the one who coined the term as a description of central bankers who were too closely focused on near term inflation and missed the bigger picture. The report urges more flexibility and recommends that the Riksbank’s 2% inflation target should be measured by consumer price inflation at constant interest rates or CPIF, which is not affected by changes in mortgage rates, which seems obvious to anyone thinking seriously about the issue.

The report makers say it is “striking” that the members of the Executive board devoted so much time to thinking about the future path of the repo rate and to providing guidance as to their views on how it should evolve over the following three years.

“There is something surreal about the precision of the guidance provided by individual board members as to the future path of the repo rate when contrasted with the sheer uncertainty about the future and the fact that markets took rather little notice of the published path in determining their own expectations,” the report says.

In fact, I think the market has taken more notice of the Riksbank than the authors accept, especially recently. What should be the result of this report is that there is less focus on the immediate inflation outlook and consequently less Riksbank obsession with the level of the currency. And the market should feel more freedom to ignore the Riksbank’s repo rate projections. All of which should mean there is less reason to expect them to cut rates again or intervene given the strength of the real economy. Net result should be a substantially higher SEK.

Hard to like the USD right now

Sure, big picture the idea that the Fed is going to continue to raise rates while rates stay unchanged in Europe underpins the consensus expectation of a stronger dollar in the fullness of time. But right now it’s hard to see immediate USD strength, especially against the EUR (and SEK).

1) The US data has been weak, especially on the manufacturing side. Industrial production and the Empire index on Friday underlined this. This is in part a global story, but the European numbers have been more stable, and the Swedish numbers positively strong.

2) True, the US employment data remains strong, but the lack of wage growth and the weak oil price suggest this isn’t going to be enough to translate into another near term rate hike, and there is a concern that employment is a lagging indicator.  Retail sales were also weak in December, and the Atlanta Fed GDP nowcast currently suggests 0.6% annualised for Q4 (i.e. 0.15% q/q) after Friday’s weak data.

3) Spreads have edged against the USD because of the weak data, with the T-note/bund spread at 155bp the lowest since late October, when EUR/USD was above 1.11. This has been a close correlation in the last 9 months or so.

4) Risk appetite is low, and few see real value in US equities even if we see a risk recovery. The safer havens have done well in the last few days, but the EUR is still in the middle of its recent range while risks and spreads suggests it should be pressing the top.

5)  The SEK has suffered from the general risk off tone, but it is not at all clear that it should now it is one of the lowest yielders and biggest surplus currencies. At this level of the currency, it is also clear that any rate cut or intervention threat has disappeared.

6) Positioning remains long USD despite the poor news, and to some extent the USD may be enjoying some safe haven characteristics while markets are jumpy, but it’s hard to see the fundamental value at this level against the EUR and SEK if US rates aren’t rising.

ECB? BoE? No – Swedish CPI

There will be a lot of focus on the ECB and Bank of England monetary policy meetings and press conferences and minutes on Thursday, but frankly I can’t see much of interest coming out of either. The ECB has only just announced its latest easing, so can’t really be expected to do anything or say a great deal. Inflation is a touch lower with the oil price, but not so much that it changes the long term view, and the economy continues to perform OK.

For the BoE, there isn’t much reason for anyone to change their view, though McCafferty could decide to fold short term on his rate hike call, but even if he does it doesn’t make a lot of difference. Clearly the manufacturing data has softened, and growth in general may be slowing a touch, so policy is on hold. I doubt they will say anything that significantly changes market pricing for the first UK rate hike. If they had any sense, they would try to talk GBP down a bit in the minutes. Although in reality the recent weakness of manufacturing probably has very little to do with the overvalued pound, a weaker pound wouldn’t hurt, and in bringing inflation up would allow a rate hike at some point which would be good for the balance of the economy. I’m not holding my breath expecting a GBP collapse on the minutes, but it seems to me that’s the risk if there is one.

But all this is really just hot air. Swedish CPI for December looks more interesting to me. The Riksbank have been resolutely talking down the SEK and threatening all manner of measures to stop it going up too fast, essentially because they have an inflation target and worry that a stronger SEK will kill progress towards it.Frankly, I think their stance is bonkers, as recent experience of inflation targeting has shown that trying to target it too closely is likely to be unsuccessful in the short run and counterproductive in the long run. The Swedish economy grew at about 4% in 2015 and is expected to do the same in 2016. Inflation being 1% below target (and rising) is not a big problem. The SEK will have to go up sooner or later. Best to let it go up when the economy is in shape to deal with it.

Still, rightly or wrongly the Riksbank has it’s inflation blinkers on, so a weak number on Thursday will get everyone thinking they might cut rates again. I doubt it myself, but it would probably be enough to send EUR/SEK to 9.30 or so. Conversely, a strong number would allay some of the low inflation concerns, and send it to 9.20. I doubt the Riksbank would get involved with their threatened intervention this side of 9.20, and probably not before 9.10 if inflation is stronger. Risks are probably towards a weaker than expected number rather than a stronger one, but I’m a buyer of SEK on the dip, as it’s only as low as it is because people are worried about Riksbank action, and they won’t do anything if the currency dips.


EUR/GBP rally – if not now, when?

After flirting with the 0.75 area for a few days, EUR/GBP has pushed through on this morning’s weak industrial production data and has potential to start making real ground to the upside. Technically, there are some reasons for caution. Although last week saw a strong weekly close at the highest level for a year, we have had seven consecutive up weeks and the weekly channel top at 0.7525 hasn’t broken convincingly. But, if not now, when?

GBP has been overvalued for a long time, most particularly against the EUR, it’s largest trading partner. It is also a lot more overvalued than it looks, for two reasons. Firstly, because UK inflation has been much higher than inflation in other major economies since the financial crisis. While inflation has recently been subdued, CPI in the UK has risen 10% more than CPI in the US or the Eurozone since 2008. So 0.75 now is equivalent to 0.68 in 2008 in real terms. Secondly, the UK is running a current account deficit of 6% of GDP – the largest in the developed world – while the Eurozone is running a surplus of 3% of GDP. While the UK deficit has come about mainly because of declining UK investment income rather than a rising trade deficit, it won’t be closed by improved export performance at this level of GBP. Historically, current account positions DO matter for valuation over the long run, and the widening of the UK deficit suggests to us that long run fair value for EUR/GBP is more like 0.85 or 0.90 than 0.75.

But this has been the case for some time Why should GBP suffer now?

  1. The long awaited UK rate hike still seems to be disappearing into the distance as wage growth stalls, so those looking to buy GBP on yield spread grounds have little support in the short run.
  2. GBP has already fallen a long way against the USD, and while it may fall further, yield spreads between the US and Europe have also stalled or narrowed of late as US data has slightly disappointed since the Fed rate hike, so there seems limited downside for EUR/USD from here in the short run, suggesting at least as much GBP downside potential against the EUR
  3. The EU referendum question. The possibility of Brexit is clearly negative for GBP and while I personally think there will be a strong majority in favour of staying in the EU, the foreign investment that the UK needs to funds its current account deficit is unlikely to be too enthusiastic while the question is in the air.
  4. Policy wise, there is nothing the government or the Bank of England would like more than a weaker pound. They will never try to force it, but I wouldn’t be surprised to see a little verbal encouragement of GBP weakness.
  5. A weak oil price is more supportive for the Eurozone than the UK, given the Eurozone is a much bigger net oil importer.

By the time we get to the referendum (maybe June) I expect we will already have seen the big decline in GBP, and we may see a recovery after the referendum if, as I expect, we get a vote to stay in. The recovery may start before the referendum if it looks like the “remain” campaign is going to win easily. There is no time like the present for the GBP bears to get the ball rolling.


Risk positive bias – sell CHF?

Despite another sharp fall in Chinese equities overnight, developed market equities are showing some resilience this morning, possibly suggesting the worst is over. There isn’t a lot to go on datawise today, so the equity market direction is likely to dominate.

Friday’s US employment data was very solid, and provided a reasonable basis for equity optimism, as strong employment growth was not accompanied by strong wage growth. This both makes a Fed rate hike less likely and suggests profit margins are being maintained. US yields staying low should be supportive for equities, but less so for the USD against the EUR, as spreads with the bund are towards the bottom of the recent range.  EUR/USD looks stuck in the 1.07-1.10 range for the moment, and yield spreads actually suggest a bias higher.

So from an FX perspective a more general risk positive stance makes sense if you believe in an equity recovery. The trouble is, it’s hard to find obvious FX candidates to like as risk positive vehicles. I still find it hard to like GBP, given the political backdrop, but as long as there is no real news there may be scope for GBP to recover in this scenario. The commodity currencies are still a struggle, with China concerns still likely to weigh on AUD and (to a lesser extent) NZD, and oil at its lows making CAD and NOK very hard to buy too. I’m left with liking a short CHF basket vs EUR, USD, SEK and maybe GBP.


Finally, RIP David Bowie.

I’m sinking in the quicksand of my thoughts

And I ain’t got the power, anymore.