Dollar Breaks Out Against Yen

yen

The dollar is at new lows for the year against the euro and Swiss franc.  Draghi’s comments earlier that transitory forces are dampening price pressures were seen as broadly similar to the Fed’s leadership’s assessment about US prices.  The implication is that the ECB will announce tapering its purchases as it extends them into next year.  

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And Yet it Moves: Understanding Why Italy’s Threat is Exaggerated

new businessToward the end of 2015, Portugal bailed in some senior creditors in addressing a failed bank.  Many observers were aghast.  This was thought to be horrific and uncivilized by some of the very same people who are critical of the EU and Italy’s decision not to bail in senior creditors in the two failed regional banks in Italy.    

They were wrong about Portugal.  It was not a watershed event that spurred capital flight from Europe.  And they are wrong about Italy.  This does not end banking union, and if Europe moves to two-speed, as some proposal for EU reform post-Brexit suggested, it will not be because of Italy and the EU’s decisions regarding Veneto Banca and Banca Popolare di Vicenza.

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Italian Markets Shrug off Banking Morass and Local Election Results

new businessThe US dollar is mostly slightly firmer as North American dealers return to their posts.  Ideas that the UK Tories are getting close to a deal with the DUP appears to be lending sterling a modicum of support, as it tries to extend its uptrend into a fourth session.  The Japanese yen is the weakest of the majors, rising equities, and yields, spurs the dollar to re-challenge last week’s high near JPY111.80.  

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Surge in Positioning amid Currency Contract Roll

new business

The expiration of the June contracts and the roll into September positions appears to have boosted activity in the currency futures, and may obscure the signaling effect.  Of the 16 gross positions we track, speculators add to exposure in all but four positions.  There speculators covered gross short Swiss franc, Canadian, Australian, and New Zealand dollar positions.  

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Dollar Upticks Fragile Without Interest Rate Support

Blog icons - FX Outlook dollarThe US dollar edged higher against most of the major currencies over the past week. However, the fundamental backing is still not solid, and it makes as wary of these upticks, even though we think a bottom is being carved. Specifically, the US interest rates still not finding much traction, and President Trump’s legislative agenda still is encountering significant resistance within the Republican Party.  

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Short Summary Weekly MOF Portfolio Flows

New Japan

Japan’s Ministry of Finance reports portfolio flows on a week weekly basis.  It provide more timely, even if less detailed information than contained in the monthly balance of payments data.  

 

In the first few months of the year, Japanese investors were net sellers of foreign stocks and bonds. However, this has changed in the second quarter.   Japanese investors were net buyers of foreign bonds for seven of the past eight weeks.  Last week, they bought JPY1.09 trillion of foreign bonds, which is the third highest of the year.   Ironically, it appears they sold the when bonds were weak and are returning to the buy side when bonds are firm.  Japanese investors bought an of JPY403 bln of foreign bonds a week last year, but despite the recent buying, have been net sellers of JPY80.4 bln on average a week this year.  

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Bond Yields, Inflation, and More

new sign

It all seems so reasonable.  US Treasury yields have fallen around 50 bp since the March rate hike.  Market-based measures of inflation, like the 10-year breakeven and the five-year/five years forward, have fallen around 35 bp over the same period.  That is to say that the decline in market-based measures of inflation expectations can account for nearly three-quarters of the decline in nominal yields. 

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Fed, ECB, and BOJ Balance Sheets

balance sheetsThis chart composed on Bloomberg shows the balance sheets of the Federal Reserve, the European Central Bank, and the Bank of Japan as a proportion of GDP.  

 

The Federal Reserve ‘s balance sheet (as a fraction of GDP) is depicted in the green line.  The primary reason it has drifted lower in the past few years is that the denominator, that is GDP has grown.  Going forward, we suspect starting in October (announcement in September) the balance sheet itself will begin slowly shrinking in absolute terms not just as proportion of GDP.  That means that the slight downtrend in the green line will become more pronounced.  

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Selected GDP Performance since 2008 and Policy

GDP

This chart comes from Oxford Economics. It shows the relative economic growth since 2008 for the US, UK, Japan, and EMU. It will not surprise many to learn that US contraction was not as deep as in the areas. It also would not be surprising to learn that the US economy has grown the most since 2008. This is part of the material basis for the divergence of monetary policy and the third significant dollar rally since the end of Bretton Woods.

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