Euro, Yen and Sterling Regain Footing

(picture: jumping spider eyes 20X by Noah Fram-Schwartz)

The US dollar is trading with a heavier bias against the euro, sterling, and yen,
but is firmer against the Antipodean currencies and many of the actively traded
emerging market currencies. 
This mixed performance is the story of the week.   

The US 2-10 yr yield curve is flattening further today with the two-year
pushing above 1.70% for the first time since the financial crisis.
The 10-year yield is slipping toward the
middle of this week’s 2.32%-2.41% trading range.  

There are two big US stories being
  The progress on US tax reform and news that
the special prosecutor had subpoenaed documents from more than a dozen Trump
campaign officials several weeks ago.      

The House of Representatives passed its version of tax reform
The Republican majority in
the Senate is narrower, and only a third face voters next year compared with
the entire House.
  In its current form, it is difficult to see the current
bill pass.   It did pass the Senate Finance Committee late
yesterday.  The bill will be debated by the
entire Senate
after the Thanksgiving break.  There will be a dozen
legislative sessions between Thanksgiving and the holiday break in

The Joint Committee on Taxation, which does for taxes what the CBO does for
budgets:  official arbiter
looked at the Senate plan. It found that the Senate’s 
plan, without including the repeal of the estate
, leads to higher taxes for those households earning less than $75k a
year.  Note that the median household income in the US is around
$55k.  The JCT estimates that 65% of households will experience higher
taxes, while 24% will get a cut.  Oscar Wilde once quipped that there are
only two tragedies in life.  One is not getting what one wants, and the
other is getting it.  The Senate does not seem to know which tragedy it is

There are seven Republican Senators that have expressed some misgivings,
sometimes in contradictory ways. 
For example, Senator Paul wants
broad tax cuts, while Senators Corker, Flake, and Lankford are concerned about
adding to US indebtedness.  A couple of other Senators are concerned about
adding the repeal of the individual health care mandate.  

There are several other developments to note today, including Moody’s decision to raise India’s sovereign
debt rating (first time since 2004) to Baa2 from Baa3, with a stable outlook
(from positive).
This puts it one
notch above the other two major rating agencies, Fitch and S&P. 
Moody’s cited progress on institutional and economic reforms.   Investors
responded favorably, as one would expect
The current 10-year benchmark yield slipped nine
bp.  The rupee gained 0.25% against the US dollar,
and Indian equities rose a little more than 0.5%.  The other rating
agencies did not comment, but they are likely to wait until after next year’s
budget is passed.  There is some speculation that the upgrade will
encourage the central bank to cut rates at its next meeting on December

Meanwhile, German efforts to forge a four-party coalition government
continued to be bogged down, as the
self-imposed deadline passed. 
These are still so-called exploratory talks; the concrete coalition negotiations have
not begun.    There are some
genuine policy disagreements on immigration, climate change, fiscal policy,
internal security, and Europe.    The negotiations are further
troubled by the reported leadership challenge within the CSU, the Bavarian
sister party to Merkel’s CDU.   The talks are set to
continue.   The underlying threat is that if the talks fail, new
elections would be necessary, and many fear that the AfD would gain more

There was an informal EU head of
state meeting, and leaders indicated they
are waiting for additional concessions by the UK before proceeding.
UK Prime Minister May met with Swedish and Polish prime ministers last
night.  These prime ministers are thought to be more sympathetic to the
UK’s cause than others.  Today she meets with Ireland’s Prime Minister
Varadkar and EU President Tusk.  In recent days, some officials, including
in Germany, seemed to indicate concern that if May is pushed too hard, her position would be untenable and her
replacement would likely come from the harder Brexit camp.   That
said there are reports suggesting May is
prepared to double her initial GBP18 bln financial commitment, though other
reports deny it.  

News that Saudi Arabia is backing an extension of output cuts ahead of
the meeting in Vienna at the end of the month is helping lift crude oil prices
  Crude prices fell earlier this week on the IEA’s upgrade of
supply and paring demand forecast and an increase in US inventories. 
Brent is snapping a five-day skid, gaining 0.7%, but is still nearly 2.7% lower
on the week, and will post its first losing week since the first week of
October.  Light sweet crude for December delivery is up 1.4%, which nearly
halves this week’s decline, the first in six weeks. 

Equity markets are mixed.  Asia-Pacific rose while Europe is
The MSCI Asia Pacific Index rose 0.4% to build on
yesterday’s nearly 1% gain.  However, it was not enough to sustain the
six-week advancing streak.  European shares
are lower.
  Yesterday’s almost 0.8% gain broke a seven-session
swoon, but selling pressure reemerged today.  The Dow Jones Stoxx 600 is
off 0.33%.  The loss is broad-based,
with all sectors but energy under water.  Near midday in London, it is
nursing a 1.25% loss on the week.  MSCI Emerging Markets Index is building
on yesterday’s gains and is up 2% between
the two sessions.  It is about 0.4% better on the week, the third consecutive weekly advance.  

There is a 694 mln euro option struck at $1.1825, which expires today
that could be in play.
  Although yen option expires today do not seem
particularly relevant, we note that Monday there is a large $2.1 bln option
stuck at JPY112.30 that could be relevant.  

The US reports October housing starts and permits.  A strong
rebound is expected after a weak
September report saw a 4.7% decline in starts and a 4.5% fall in permits.
  The New York and Atlanta Fed will update their GDP trackers. 
Coming into today, the latest estimate of both is 3.2% for Q4.  There may
be scope for slightly higher figures as
the recent data is incorporated.   Canada reports October CPI
figures.  The headline pace is expected to slow to 1.4% from 1.6%. 
The Canadian dollar has been sensitive to economic data, but the central bank is seen
on hold well into next year.  

For today’ sterling appears to be near a peak against the dollar, having
tested the $1.3260 area in early European turnover. 
The euro also
found support near GBP0.8900 and appears poised to recover.   The euro is
firm against the dollar and found support near $1.1760-$1.1780.  Initial
resistance is seen near $1.1820 now and the week’s high was set near $1.1860.  The dollar fell to three-week lows
against the yen (~JPY112.40 ) in .Asia
but was confined to about a 25-pip range in  Europe. 


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