Dollar Recoups FOMC-Sparked Losses

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The US dollar turned in a mixed performance last week, but the gains before the weekend, perhaps partly in anticipation of a tax bill, helped it finish well.   Still, in the face of the Fed’s rate hike, the continued signal of three more in 2018, underscores the frustration for dollar bulls.  Nor did the yawning premium required to secure dollars through the cross-currency swap market over the turn of the year lend the greenback much support, though against the euro, the premium was the most since the European crisis nearly six years ago. 

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ECB Says Little and Does Less

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To the surprise of no one, the ECB left it monetary policy and its forward guidance unchanged from its last meeting.   Then it announced that its asset purchases would be halved starting in January to 30 bln euros a month through September 2018.  

 

The ECB reiterated that official rates will be remain at their present level well past the end of the net asset purchases.   It also continued to shy away from giving a hard end date, which some of the creditors reportedly previously advocated.  It indicated that QE would continue until the end of September, but will “run until the inflation path is sustainably adjusted. The ECB statement shows that the majority want to underscore the link between QE and economic conditions (inflation) rather than time specific that a pre-announced end date would imply.

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Yellen’s Swan Song: Few Surprises

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The Federal Reserve hiked the Fed funds target by 25 bp for the third time this year, as was widely expected.   Both the Chicago and Minneapolis Fed presidents dissented.  Next year, they will not vote, and this will give the Fed a slightly more hawkish bias among voting members in 2018.   Although it remains a bit of a mystery for Fed officials, Yellen was clear that the recent softness is thought to be transitory. 

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Prospect of Italian Election Crushes Italian Bonds

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News that an agreement has been struck that will allow for national elections in Italy in March spurred a large rise in Italian bonds, and likely signals the underperformance of Italian assets.  

 

Reports suggests that Italy’s president likely dissolve parliament in the last week of December in preparation of elections that will be held in early March.  March 4 seems to be the favored date, but March 11 is also possible.   Elections need to be held by May 20.    In recent weeks, speculation of this has mounted as the prerequisite preparation of the new laws and electoral college have been agreed by the relevant bodies.  The leading political parties also apparently have reached an agreement.  

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US Monetary and Fiscal Policies

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US monetary and fiscal policies are moving.  While the Federal Reserve is widely expected to raise the Fed funds target range by 25 bp, for the third time this year, Congress is trying to reconcile the House and Senate tax bills.    Treasury Secretary Mnuchin released a one page statement that explained how the proposed tax cuts pay for themselves, a claim often heard by the proponents. Mnuchin clearly indicated that they don’t.  He was explicit: only when the tax cuts are considered in conjunction with other actions, will the growth rate be lifted and where the revenues will offset the tax cuts.

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