What Happened Monday

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The markets of the world’s two largest economies, the US and China were closed on Monday, May 29.    As one would expect, capital markets were mostly quiet. 

Even the launch of another ballistic missile test by North Korea, the ninth this year, which followed on the heels of the G7 pledge to increase pressure on the rogue nation to abandon its efforts, failed to have much impact.  Korea’s Kospi set a new record high before retreating into the close and losing 0.1% on the day.   The Korean won also slipped by about the same among, while most of the regional currencies fell a little more.  

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Drivers for the Week Ahead

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  • The Eurozone reports a preliminary (though reliable) the estimate for this month’s CPI
  • The US reports May employment data at the end of the week
  • The June 8 UK election is approaching, and the polls suggest a tighter race than anyone expected, including most of all Prime Minister May
  • Japanese economic data will suggest that growth has continued into Q2 Continue reading

EM Preview for the Week Ahead

blog-icons-empreview emerging markets previewEM FX closed last week on a mixed note, with markets struggling to find a compelling investment theme.  The US jobs data this week could provide some more clarity on Fed policy.  We still think markets are still underestimating political risk in the big EM countries, including Brazil (Moody’s outlook moved to negative), Mexico (election in state of Mexico), South Africa (ANC debates Zuma’s fate), and Turkey (ongoing crackdown on opposition). Continue reading

Speculators Remain Bearish the Dollar and Bullish Bonds

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In the CFTC reporting week ending May 23 speculators in the futures market continued to largely position themselves for further dollar weakness.  The gross short position in the currencies were reduced, with the exception of the Swiss franc (+0.8k contracts) and the Mexican peso (+21.7k).   The jump in gross peso shorts (almost 50%) was larger than anything that occurred during the US presidential campaign when Trump’s vitriolic comments weighed on the peso.  

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Is the Dollar Going To Turn?

Blog icons - FX Outlook dollarThe idea that the dollar bull move is over in gaining adherents.  It now seems to be the consensus view.  This is reflected in bank forecasts, futures positioning and indicative pricing in the options market.    We are not convinced.  In our view, the key driver of this, the third significant dollar rally since the end of Bretton Woods, is the divergence of monetary policy broadly understood, and that divergence does not appear to have peaked.

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  • Moody’s downgraded China’s rating from Aa3 to A1 with stable outlook
  • Reports suggest that the PBOC is changing the way it sets the daily CNY fix
  • Moody’s downgraded Hong Kong’s rating to Aa2 from Aa1 with stable outlook
  • Philippine President Duterte declared martial law on Mindanao island
  • Egypt’s central bank unexpectedly hiked rates by 200 bp
  • S&P moved the outlook on Bolivia’s BB rating from stable to negative
  • Reports suggest Brazil President Temer is losing support from his own PMDB
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Anxiety Levels Rise Ahead of Weekend

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  • The markets are unsettled
  • Reports suggest that the PBOC has informed local banks that it is changing the way it sets the daily fix
  • The US session features Q1 GDP, April durable goods orders, and the University of Michigan consumer sentiment
  • Brazil reports April consolidated budget data
  • Colombian central bank is expected to cut rates 25 bp to 6.25%

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The Opaqueness of US Economic Policy

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It is not just the fear that the investigations into Russia’s attempt to influence the US election will distract from the Trump Administration’s economic program.  It is also that the economic agenda itself seems is less clear. 

That China was not cited as a currency manipulator is no major surprise.  Bush and Obama also made the threat on the campaign trail over jettison it when the were in office.  China has not been cited since 1994.  Although we argue the designation is not as onerous as it is frequently made to be, lack of use appears to have increased its symbolic importance. 

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