Central Bank Chiefs and Currencies

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President Trump’s decision on the next Fed Chair is thought to draw near, and the betting markets are very fluid.  PredictIt has Powell as the most likely nominee, with a little more a one-in-three chance.  A week ago, his chances were even-money.  The new new thing is that Taylor.  His odds improved to improved to one-in-five from one-in-ten yesterday, but have eased back to about one-in-six  It is pretty much a dead heat between Taylor and Warsh, with Yellen in second with a one-in-five chance.  

Central bankers are more broadly in the news today.  Here is a re-cap of the developments and some of the implications for investors.  

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NAFTA Worries Take Toll, Yellen’s Best Guess Supports Greenback

 

 

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In a relatively quiet week for economic data, except for the UK, we suggested that politics may trump economics.  Today, the Canadian dollar is the weakest of the major currencies, losing about 0.5%, while the Mexican peso is the poorest performer among emerging market currencies, losing closer to 1%.  The move began last week.  Over the past five sessions, the Mexican peso is the weakest currency in the world, losing 2.2% against the US dollar.  The Canadian dollar is up 0.1% over the past five sessions that make it the worst of the major currencies.  

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Will the Bullish Outlook for Treasuries Weigh on the Dollar?

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The US dollar fell against all the major currencies last week.   The downside reversal after the employment data on October 6 set the stage for the pullback.  From a fundamental perspective, we cautioned the good news for the dollar had been discounted.  With two months before the December FOMC meeting, the market had priced in a high degree of confidence (over 80% chance at its peak) of a hike and the 10-year yield reached the top end of its six-month trading range near 2.40%.  

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Political Focus Shifting in Europe

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There was a huge sigh of relief among investors when it became clear that the populist-nationalist wave that ostensibly led to Brexit and Trump’s election was not going to sweep through Europe.  The euro gapped higher on April 24, and it has not looked back.  We have suggested that with the outcome of the German election, European politics shift from tailwind to headwind.  Continue reading

China Ends Swap Lines with South Korea: A Dog that Doesn’t Bark

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China has declined to renew the $56 currency swap line with South Korea.  The swap line has been in place for eight years. Initially, it was launched at $26 bln in 2009 and expanded in 2011.  It has been extended twice since then.  

 

The swap line from China was South Korea’s largest swap line, accounting for almost half of all of its official currency swaps.  Just two days ago, news wires were reporting that officials were optimistic that the swap line would be renewed.  

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Brief Thoughts on the Euro

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The euro peaked a month ago near $1.2090.  It recorded a low near $1.1670 after the weather-skewed US jobs data seen at the end of last week.  The euro recovered from the weekend and set new session highs late US dealings.  That reversal pattern marks the end of the month-long decline.  There has been follow-through euro buying this week, and the euro is approaching the 38.2% retracement objective of the decline since early September.  It is found near $1.1830, near the 20-day moving average (~$1.1835), which the euro has not closed above since since September 22.  The 50% retracement is near $1.1880.  

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Six Things to Know about How Markets Started the Week

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Several financial centers were closed today, October 9, for different national holidays.  Markets were closed in Japan, Taiwan, Korea, and Canada, and there was a partial holiday in the US. 

1.  Chinese markets reopened after the national holiday last week.  The equities rallied in a bit of catch-up, following the cut in reserve requirements for lending to small businesses announced at the start of the holiday period.  The yuan fell 0.4% against the dollar, which had appreciated against most major and emerging market currencies while Chinese markets were closed.  

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If the Market has Discounted Dec Fed Rate Hike, Will the Focus Shift to Back to ECB?

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The US dollar turned in a good week.  It appreciated against nearly all the major and emerging market currencies. The fundamental drivers are well known.  The market now recognizes that strong likelihood (near certitude) that the Fed will hike rates one more time this year.

The rise in US 10-year Treasury yields to 2.40%, after having neared 2.0% a month ago, helped lift the dollar against the yen. Political developments in Europe, especially Spain and the UK, as investors wait to see the composition of the next German government.

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