Sterling and Antipodeans Trade Higher

The US dollar is mostly consolidating yesterday’s move. Sterling is
pushing back through $1.29 as the hawks on the MPC may not have been dissuaded by disappointing PMI readings
and the softer earnings growth.  The table is being set for another 5-3 vote at next month’s MPC

The Australian and New Zealand dollars are up about 0.6%, gaining nearly
twice as much as sterling.
  The risk-off sentiment, softer yields in
the US and Europe, and strong Chinese import data are among the drivers. 
The Australian dollar surged through the
$0.7700 level to challenge a 15-month down trendline that is found near $0.7725.  The high for the
year was set in March at

China reported a 17.2% year-over-year increase in imports.  The
median forecast in the Bloomberg survey was for a 14.5% pace after 14.8% in
May.   Exports rose 11.3%, up from May’s 8.7%, and stronger than
expected.  The trade surplus rose by more than a third from a year ago to
$42.8 bln.  China’s surplus with the EU is 60% larger at $11.4 bln, while
the trade surplus with the US is nearly 90% larger at $25.4 bln.  

Two elements are politically charged.  The first is China’s steel and aluminum exports. 
Steel exports slipped to 6.81 mln tons from 6.98 mln in May.  Unwrought
aluminum and aluminum product exports were unchanged at 460k tons.  The
second is a trade with North Korea. 
Chinese figures point to an 11.3% decline
in imports from North Korea in H1, which
includes the period before sanctions were
.  Chinese exports to North Korea rose by nearly 30%,
but note that not all goods are sanctioned,
and these are consumer goods, like textiles.  

Many observers looked at the decline in US bond and note yields and
concluded Yellen was dovish.
  However, we note that the best guide for
Fed policy is not the coupon curve but the short-end.  The cleanest is the
Fed funds futures.  The September contract was unchanged for the third
consecutive session.  It is unchanged since the US jobs data last Friday,
and the implied rate is half a basis point lower than it was at the end of
June.  It is also at the same level it was at from June 16 through June
29.    There has been no real change in the market’s

The December contract tells the similar story of stable expectations. 
The implied yield on the December contract finished June at 1.26%.  For
the past two sessions, it finished at 1.245%. 
It was unchanged yesterday.    The claim in the media that Yellen signaled that the Fed would not rush
to tighten policy is misdirection.  She and the Federal Reserve have never
implied anything but a gradual increase.  

Other reports said she emphasized the uncertainty over inflation. 
It did not seem emphasized to us, but in
the context of her remarks, was used as an example of the uncertainty in that
she said was always present in macroeconomic forecasts.  The FOMC minutes
were clear on this.  Most officials saw the softer core inflation readings
as temporary.    That said, of course, Fed officials would feel
more comfortable if core prices began slowly rising again, especially if
spurred by stronger wage growth. 

However, through the cycle, the Fed
has not been in a hurry.
  It can take its time now too.  It has
hiked rates twice this year and anticipated three.  There are four
meetings left in the year, and two of
them are live for all practical purposes
(Sept and Dec).  Official comments suggest a greater consensus has emerged
to begin reducing the balance sheet before hiking rates again.  We see
this most likely being announced in September, leaving a rate hike for
December.  The idea that year-end considerations deter the Fed from acting
then has been refuted over in both 2015 and 2016.

The euro has built a shelf over the last four sessions ahead of
A break of this area is needed to signify anything of
importance.  It could spur a test on $1.13.  About 600 mln euro options
struck at $1.14 are cut today and another
1.2 bln euros at $1.1445.  Softer US interest rates are offsetting the
benefit of rising stocks for the yen.  The dollar is unable to recover from yesterday’s slide against the yen. 
The JPY113.50 area offers initial resistance, with support near
JPY112.75.  There are around $700 mln in options stuck between JPY112.70
and JPY113 that expire today.  

Sterling is extending yesterday’s recovery.  The $1.2950 area
represents a 61.8% retracement of this month’s decline.  Roughly GBP215
mln $1.30 option expires today.  Sterling gains seem to be mostly a
function of the cross rate
adjustment.  Yesterday, the euro reversed lower after surging to almost
GBP0.8950.  It finished yesterday near GBP0.8860, and today is testing
GBP0.8800.  The near-term risk extends toward GBP0.8750.  The UK
government presents the Great Repeal bill that begins the process of converting
EU law into UK law.  This begins a
protracted debate, and without an
outright majority in Parliament, the government will be challenged from all sides.  

In addition to the second leg of Yellen’s testimony, investors will get
the latest weekly jobless figures and the June PPI from the US. 
reports house prices.   Tomorrow the US reports CPI and given the
larger context, are particularly important.  There is a reasonable chance
that core inflation snapped its four-month down draft.  

Lastly, we note that the Brazilian real reacted positively to the news
that former President Lula was convicted for graft and money laundering.
apparent logic is that it removes his chances of running for president
again.  The political situation in Brazil remains fluid, but emerging
markets and high yields remain very much in vogue for many investors. 


Share this post

Share on facebook
Share on google
Share on twitter
Share on linkedin
Share on pinterest
Share on print
Share on email