Wednesday, March 8, 2017

Currencies: "Sterling continues to trade like a dog"

The author of that line is the  Global Head of Currency Strategy at Brown Brothers Harriman & Co.
Although we attempt to avoid most technical jargon here on the blog I like the expressiveness of the seven little words and henceforth I believe I shall adopt it as my own.

From Marc to Market:

The US dollar is moving higher against nearly all the other major foreign currencies today.  As far as we can tell, the driving force remains interested rate considerations.  US rates are rising in absolute terms and about Europe and Japan.  The US 10-year yield is moving above the downtrend that has been in place since the day after the Fed hiked rates last December.  It is now near 2.53%.  The US two-year yield is making new multiyear highs today.  

At the same time, official, investors and collateral-related demand for German paper have continued to widen the interest rate differential.    The correlation (60-day, percentage change) between the rate differentials and the euro-dollar and dollar-yen exchange rates remains high.

The euro is lower for the third session.  Recall that last Friday; the euro snapped a three-day slide.  It is now retraced 61.8% of its bounce (~$1.0550).  The euro was unable to resurface above $1.06 in North America yesterday, and this will likely continue to cap the single currency ahead of the ECB meeting tomorrow.  The strong German (January 2.8% and December revised to -2.4% from -3.0%) and Spain (0.3% vs. consensus 0.2%) were largely ignored by the market.  There had been some talk last week that the ECB could alter its forward guidance at tomorrow's meeting, but most seem to be downplaying the likelihood in recent days.  

The US 10-year yield is higher for the eighth consecutive session.  Over this span, the dollar has risen against the yen in six sessions, including today.  That said, the ranges remain tight.  For the third day, the dollar is in a JPY113.50 to the JPY114.15 range.  The small upward revision to Q4 16 GDP was of little importance to trading. The upward revision to 0.3% from 0.2% left consumption flat and seemed to be mostly a function of slightly stronger capex, which appears tied to the export sector.  It was the fourth consecutive quarter that the world's third-largest economy expanded in three years. The key test for the dollar comes near JPY115.00.  

China surprised the market.  Despite being well aware of distortions caused by the Lunar New Year, investors were surprised by the news that China recorded a trade deficit in February.  The  $9.15 bln shortfall is the first since February 2014.  Exports collapsed, falling 1.3% after rising 7.9% year-over-year in January.  The median estimate in the Bloomberg survey was for a 14% increase.  Imports surged 38.1% (16.7% in January), compared with the median estimate of 20%.   The recorded trade deficit and the build in reserves reported yesterday are not preventing new yuan weakness.  The dollar is edging above CNY6.91 to reach its highest level since mid-January.  It has nearly retraced 61.8% of this year's fall (~CNY6.9135).  It seems more a case of dollar strength then yuan weakness.  

Sterling continues to trade like a dog.  Last Friday was the only session since February 23 that has not fallen.  Once it broke $1.24, it has not looked back.  Perhaps the Gilt market is awaiting Hammond's budget, but the foreign exchange market is not. ...MORE looks more like a serpent or some other ground hugging creature.