Sterling Toys with Three-Year Downtrend Line


Sterling has trended higher against the dollar this year, and after the euro (and its Danish shadow), sterling is the strongest of the majors, with an 8.5% gain against the greenback.   The gains have brought to to the trend line dawn off the mid-2014 high (a little below $1.72), the referendum high (~$1.50) and September 2017 high (~$1.3660).  Depending on precisely how one draws the trend line is comes in today near $1.3375.   This is depicted in the chart created on Bloomberg, that is posted here.

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Trade Tensions with China Set to Escalate

new China

The two main legislative initiatives in the US this year, the repeal of the Affordable Care Act and the tax changes, are not particularly popular.  However, the next items on the agenda appear to enjoy broader support.  The infrastructure initiative is likely to be unveiled as early as next month.  Before that, the US is poised to ratchet up the tension on China.  


Despite the unilateral thrust of the Trump Administration, in its confrontation with China, it has been wise to coordinate efforts with the EU and Japan.  Last week, the three issued a joint statement, a thinly veiled criticism of China for its policies and funding that led to excess capacity in numerous sectors.  They agreed to target market-distorting subsidies. 

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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

new gate

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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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

new united states

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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NAFTA Update: Little Low Hanging Fruit


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On the eve of the WTO meeting that started yesterday, Japan and the EU struck a free trade agreement.  The combined market is for around 600 mln people and accounts for a little more than a quarter of the world’s GDP.  When the UK leaves, ostensibly at the end of March 2019, though with a likely standstill transition period, the EU side will be reduced and the agreement will cover a little less than a quarter of the world’s GDP.  

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Dollar Posted Advancing Week Ahead of the Last Big Week of the Year

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The US dollar rose against all the major currencies last week.  It seemed primarily a function of position squaring in year-end dealings.  Elevated expectations of US tax reform, some renewed talk of an infrastructure initiative, and data that gave no reason to doubt a Fed hike next week, helped bolster the dollar, after the downside momentum eased the prior week. 

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