Currency market analysis, hedge-ratio research and practical guidance for treasury teams and portfolio managers running FX exposure.
In our note from April of 2020, which now feels like half a lifetime ago rather than less than 5 years (it’s not the years but the miles?), we wrote about how COVID and the related crises had “made it clear that in many ways, reality is more like Calvinball” than an orderly system: one where “the rules of the game around the world appear to be in flux”. This week has provided yet more evidence, if any more was needed, for this view.
Given that it’s Valentine’s Day, some of you may be feeling warm and fuzzy courtesy of a significant other. Of course, others might be married. But for those of you who are following the latest economic data, the warm fuzzy feeling may apply doubly. Consumer spending data could definitely give the impression all is right with the world if BofA’s Moynihan’s data applies across the board, “The bank’s retail customers are spending about 6% more money in the first 40 days of this year compared with the same period in 2024”. (Let’s go ahead and blame the weather/fires for the latest retail sales reading.)
Our FX systems started the year with ashort USD bias (against the general consensus for a stronger USD). For the first three weeks this bias worked well as fears of blanket US tariffs did not materialize, however, in the final week of January, tariffs were announced on Mexico, Canada and China leading to some renewed USD strength. Nevertheless, so far, the measures that have been taken (with some already suspended for now) have not been as bad as feared. Looking forward to this month, we note the signals are more mixed for the USD though our hedge ratios remain negative USD for the largest currencies: EUR, GBP and JPY.
Another week into Trump 2.0 and you’d be forgiven for starting to tune out some of the news around the administration. After all, nothing screams kabuki more than touting “yuge” concessions from the Canadian and Mexican governments that were already in the works… Admittedly it’s two birds with one stone (that was going to be thrown anyway) for the US’s neighbors, but it does make it hard to take the threat of tariffs seriously. That being said, while some of the spectacle is certainly theater, like a bullfight it does come with horns as markets and political actors react to the latest news.
If you’re wondering what the crashing sound is in the background, it’s the bull in the China shop discussed last week as the Trump Administration works up a full head of steam. Will it go through with 25% tariffs on the US’s neighbors? Is there going to be a giant sucking sound in some parts of the economy courtesy of a potential funding freeze on federal grants and loans? Will there be a squeeze in citrus prices due to missing workers in California? The age-old shoulder shrug of “time will tell” certainly applies, but some people aren’t taking the uncertainty sitting down.
Trying to understand the Global Economic Impacts of Trump’s Second Term. So far, he has signed more executive orders on his first day than the last ten presidents combined. As of this writing in the middle of the Friday trading day, US markets initially seem impressed, with the S&P reaching an all-time high earlier this week and the Nasdaq 100 and Solactive 200 both higher. There is a bit of pullback today, but we are higher for the week overall. And US markets aren’t alone, Japanese and European equities have had their best performance this year. Maybe Japan and Europe aren’t going to be affected by the Trump tariffs? Last time we looked, they made a whole lot of automobiles, but what do we know?
Our FX models for USD against EUR, GBP, AUD, NZD and NOK, which were largely USD positive last year, reversed in January. In particular, our reversion models are suggesting some strength in these currencies against USD in the near term. Nevertheless, the continued outperformance of the US economy, alongside sluggish growth in Europe, suggests that any USD reversal will not be sustained.
It may be only January, but this week, both markets and data appear to be running with the Mardi Gras slogan, “laissez les bons temps rouler!”. While they haven’t broken out the beads and the hurricanes/Sazeracs just yet, everything is coming up roses.
Ah! The start of the new year. The new calendar offers so much possibility! A moment of change that seems to come just as we have spent time following traditions and celebrating holidays that have managed to survive. It’s a comforting reminder that while “progress” is relentless, amid the seasonal ebb and flow there are still some things we can rely on. A missed Fed inflation and rates projection, a TFTD that is once again arriving after the end of the year (mea culpa encore), and… a return to the wisdom of Whitney Houston?
We would be the first to admit a tendency towards pedantry: that we enjoy a little definitional punctiliousness. Surely, we are not alone in being amused by then-President Clinton asking, “what the meaning of ’is’ is”. But rather than being a mark of a scholar, this kind of diving into minutiae is often as much a sign of sophistry as it is of sophistication. Case in point was the debate around the definition of “transitory”. It might seem intuitive that trees don’t grow to the sky, but Yellen and crew somehow wanted to argue that that was why they had in fact been right all along in their argument that Covid era inflation was “transitory”. Yes, Janet, you were right that, like all things, this too did pass.
Even in times of turmoil (see President Lincoln’s Thanksgiving Day Proclamation), fall is a time to give thanks. And what should we be more thankful for than the gift of shopping? Retail sales reflected “continued resilience in the American consumer” and one might think recent Fed surveys are indicative of a new sense of optimism? The Empire Fed Manufacturing Survey’s headline index “shot up forty-three points to 31.2, its highest reading in nearly three years, and the six-month outlook showed that “firms remained optimistic about future conditions”. The Philadelphia Fed survey was not quite as ebullient in its reading of the current environment, the headline index dropping from 10.3 to -5.5 (a section headline drily noting “Most Current Indicators Soften”), but, on balance, the sense of optimism was palpable and mirrored the Empire Fed, (“Most Future Indicators Rise”) with the future a…
In the edition of The Week Ahead, Chris Versace discusses the October data being reported this week and why the market will be focusing on the latest CPI and PPI data ahead of an appearance by Fed Chair Powell on Thursday. We also examine the impact…
In a stroke of luck (from the perspective of clarity) it turns out concerns about the possibility of a long, protracted election fight was wide of the mark. The Presidential election was called quickly (though at the time of writing, control of the House is still up in the air.) But as Trump trots to the “winner’s circle”, markets are still busy correcting commentators regarding just who the winners and losers of Trump v2.0 will be.
The strong USD bias worked well for our FX models last month, with our dynamic hedge adding over 1% outperformance for EURUSD and GBPUSD, and over 3% for USDJPY. We note, however, that our models have now moved to neutral for the USD against the EUR and GBP, though still look for higher USDJPY. Reducing FX risk may well be sensible given the closeness of the US Presidential election, and doubts about the accuracy of polls. Though, as we note overleaf, late momentum now marginally favours Harris.
“Why is it people got so incensed about the reason why inflation might be happening?” Happy Halloween! Tis the season for ghouls, gremlins and zombies, so perhaps we should not be so surprised that even President Biden has gained a taste for flesh! (Though it’s not the first time?) We kid of course, but one might be forgiven for suspecting “Irish Alzheimer’s”, given the latest “garbage” gaffe/misstep. Of course, Trump is not one to miss an opportunity. This comes at an inopportune time as the election heats up with various election-related stories battling for headlines. Voter fraud! Early voting shenanigans! Election market manipulation! Some might joke that POTUS himself would be hard to pick out among the ranks of the undead (we would never stoop so low …), but the more intriguing zombie speculation is the election. It wouldn’t be the first time the lawyers have found ways to keep th…
Perhaps it’s just us, but as the spooky season returns and jack-o-lanterns bedeck porches, we notice that markets and commentators also seem a bit skittish. Maybe it’s the looming election, or perhaps the geopolitical horror shows, but folk seem surprisingly easy to spook. Case in point was the hullabaloo around the $44bn jump in US (government) debt. The hue and cry of folk such as ZeroHedge were enough to get more mainstream interest, including the owner of X and a son of FP Trump, to take notice. The jump is seasonal, as Constan and others pointed out, rather than some ghoulish trick, but of course it’s easy to make fun of those who took fright. But perhaps this misses the point about horror movies. Some argue that the genre works for some because it allows them to push their boundaries and learn the limits of their fears. If that describes you, we recommend reading the CBO Long-Term…
“I actually think we’re going to see inflation be choppy, and I expect that we’ll see employment stay robust.” As we noted back in May, “one swallow does not make spring”. But if we are to follow the advice of Keynes/Samuelson, when information changes, we should adjust our conclusions. Blast! The trick is, of course, balancing the two ideas to adjust conclusions when the evidence suggests such an adjustment is appropriate: you might call it Bayesian inference. The above quote from Bostic illustrates the problem, with the Atlanta Fed head implicitly stating that he will be ignoring any hot inflation prints.
One might have expected yesterday’s CPI data to be of significance for asset prices. As it happened the figures were interesting, with the inflation data surprising to the high side: marginally, but still a miss, while core CPI actually increased for the 2nd month. Hardly proof of resurgent inflation but notable in the context of a series which has been trending lower since Sep 2022. But asset prices didn’t seem to notice the miss. Perhaps that’s because policymakers hardly noticed it either. The quote above came from the NY Fed Williams yesterday, and seems to be representative of policymakers’ focus shifting from inflation to the labor market. So perhaps markets took that cue and paid more attention to the rather striking weekly claims figure (258k).
We were very sad to see that Warren Mosler has decided to take an extended break from posting on X. Mr Mosler has helped inform our views about the overall policy stance. Most of all, Mosler was right: tight monetary policy did not stop the economy, and those who bet on that lost. Fiscal was certainly a factor, although reasonable people might debate how much of a factor. But with Fed officials mostly of like mind in thinking it is time to cut rates (see quote above), the question we find ourselves asking is whether it is finally safe to bet against Mosler. Or, to put it another way, “Is the U.S. consumer tapped out?”.
“I think it was the right decision, and I think it should send a signal that we, that we’re committed to coming up with a good outcome here” There is no verse in scripture that says “blessed be the dovish, for they shall fatten the sacred bull”. More’s the pity, because it would have been apt. James Macintosh seems to have noticed the same, but framed it slightly differently. Nothing says I love you to asset markets more than Fed rate cuts: the original PCA factor. And to be fair, the admiration appears to be mutual: Powell loves markets and markets love Powell. It’s nice to get positive feedback and it’s not like JP had to drag everyone screaming and kicking.