Many observers saw Canada as one of the canaries in the coal mine, warning that the divergence theme was over. The Bank of Canada did hike rates twice in Q3. The Federal Reserve did not hike at all. Isn’t that the definition of convergence?
- Spain’s reassertion of its authority over the secessionist-minded Catalonia will draw attention
- Investors will digest the results of the Japanese national elections
- The BOC and ECB meetings could have broad implications
- US tax reform is in the spotlight
- EM FX likely to remain under pressure
The US dollar is enjoying modest gains against most currencies as prospects of both tax reform and additional monetary tightening by the Fed carry over from last week. The strong showing of the Liberal Democrats in Japan, where the governing coalition has maintained its super-majority is seen as confirmation of continuity. This helped lift Japanese shares and weighed on the yen. The Nikkei advanced 1.1%, the most in a month, and extends the advancing streak to a record 15 sessions. The Nikkei is at 20-year highs.
EM FX ended the week on a soft note. Indeed, nearly every EM currency was down for the entire week, led by ZAR, BRL, and TRY. While higher US rates will pressure EM FX as a whole, we think heightend political risk will continue to hit these three currencies particularlly hard, plus perhaps MXN too. Continue reading
The prospect of tax reform and a Fed hike in December, with expectations of more next year, helped lift the dollar broadly last week. Although the Japanese election and ECB meeting lie ahead, the fundamental backdrop for dollar looks constructive. The technical condition is also favorable, especially on the weekly charts.
- Ideas that the US Senate budget approval brings tax reform closer is helping lift the dollar across the board
- Spanish equities are underperforming as Catalonia tries economic pressure
- A second MPC member raises questions of timing of anticipated BOE rate hike
- Hong Kong stocks bounce back strongly after yesterday’s drop
Japan’s Abe’s gamble to call snap elections shortly after the stunning defeat in the Tokyo elections appears likely to pay-off. He called the bluff of his former defense minister and now Governor of Tokyo Koike who is leading the main opposition party now, the Party of Hope. The Party of Hope may have over-reached and now appears to be stumbling. The polls suggest that the LDP may secure more seats in the lower chamber than it a current hold.
- Labour and New Zealand First coalition sees the Kiwi tumble
- Poor retail sales weighs on Sterling
- Foreign investors continue to buy Japanese shares
- SKorea’s central bank leaves rates on hold, but decision is not unanimous
This chart depicts the top the euro is carving. We suggest that several fundamental developments lie behind the price action. Interest rate differentials are widening interest rate differentials favoring the US. Speculative market positioning is leaning heavily long euros. European politics no longer the tailwind that it was, it is not surprising that the euro appears to be carving out a top.