FX Markets

We know markets send messages every day. Sometimes it’s clear what it is but sometimes its noise. Either way, if only we can ask it and get the exact answer. I wish I could ask the FX market that trades about $5 Trillion notionally each day what its thinking. The euro heavy dollar index is trading at its lowest level since November 15th. Thus only 5 days separated from the day before the election that supposedly changed everything. Is it the belief that the Fed will continue to drag its feet in raising rates? After all, Yellen is still in charge. Is it over worries about tough trade talk and foreigners are selling? Could be. Is it the lingering effect from Trump’s dollar comment in the WSJ? Or maybe it’s just being driven by individual currency relationships with the dollar?

In response to that last rhetorical question, the British pound has a bid as Theresa May has finally laid out a plan. The CRB commodity index is just shy of the highest level since November 2015 and likely why the Aussie $ and Canadian $ both trade pretty well. The euro is rallying as we are two months from the flow of QE being slowed by 25%. DJ reported this on a Bundesbank report released today: “The Bundesbank said that three of the six biggest one day exchange rate drops in the history of the single currency were linked to the ECB’s bond purchases, known as QE.” The Brazilian Real is getting help from the commodity rally but also from the change in its government. The yen is higher by 3% over the past month but while I can’t pinpoint exactly why, it does come with a rise in the 40 yr JGB yield from .78% to .94% overnight which is 1 bp from the highest since March 2016. Lastly, the yuan has rallied this year after the PBOC took a whack to speculators which is evidence that at least for now, they said ‘no mas’ to the one way street of weakness.

The FX change does have implications for foreign stock markets as we know and in the Nikkei and FTSE 100 in particular as both have been trading directly inverse to their currencies and the Euro STOXX 600 has temporarily topped out as the euro bottomed. For the FTSE 100 especially, it is up 14% in pound terms since the day before the UK vote. It is down however by 3% in dollar terms since then.

For the markets this week it will be all about earnings but very relevant will be Friday’s Durable Goods report as capital investment is the key missing piece of the recovery and we’ll see how quickly, if at all, corporate decision making changed post election.