Friday, November 17, 2017

Currencies: "Euro, Yen and Sterling Regain Footing"

From Marc to Market:
The US dollar is trading with a heavier bias against the euro, sterling, and yen, but is firmer against the Antipodean currencies and many of the actively traded emerging market currencies. This mixed performance is the story of the week.

The US 2-10 yr yield curve is flattening further today with the two-year pushing above 1.70% for the first time since the financial crisis. The 10-year yield is slipping toward the middle of this week's 2.32%-2.41% trading range.

There are two big US stories being discussed today. The progress on US tax reform and news that the special prosecutor had subpoenaed documents from more than a dozen Trump campaign officials several weeks ago.

The House of Representatives passed its version of tax reform yesterday. The Republican majority in the Senate is narrower, and only a third face voters next year compared with the entire House. In its current form, it is difficult to see the current bill pass. It did pass the Senate Finance Committee late yesterday. The bill will be debated by the entire Senate after the Thanksgiving break. There will be a dozen legislative sessions between Thanksgiving and the holiday break in December.

The Joint Committee on Taxation, which does for taxes what the CBO does for budgets: official arbiter. It found that the Senate's plan, without including the repeal of the estate tax, leads to higher taxes for those households earning less than $75k a year. Note that the median household income in the US is around $55k. The JCT estimates that 65% of households will experience higher taxes, while 24% will get a cut. Oscar Wilde once quipped that there are only two tragedies in life. One is not getting what one wants, and the other is getting it. The Senate does not seem to know which tragedy it is writing.

There are seven Republican Senators that have expressed some misgivings, sometimes in contradictory ways. For example, Senator Paul wants broad tax cuts, while Senators Corker, Flake, and Lankford are concerned about adding to US indebtedness. A couple of other Senators are concerned about adding the repeal of the individual health care mandate.

There are several other developments to note today, including Moody's decision to raise India's sovereign debt rating (first time since 2004) to Baa2 from Baa3, with a stable outlook (from positive). This puts it one notch above the other two major rating agencies, Fitch and S&P. Moody's cited progress on institutional and economic reforms. Investors responded favorably, as one would expect. The current 10-year benchmark yield slipped nine bp. The rupee gained 0.25% against the US dollar, and Indian equities rose a little more than 0.5%. The other rating agencies did not comment, but they are likely to wait until after next year's budget is passed. There is some speculation that the upgrade will encourage the central bank to cut rates at its next meeting on December 6.

Meanwhile, German efforts to forge a four-party coalition government continued to be bogged down, as the self-imposed deadline passed. These are still so-called exploratory talks; the concrete coalition negotiations have not begun. There are some genuine policy disagreements on immigration, climate change, fiscal policy, internal security, and Europe. The negotiations are further troubled by the reported leadership challenge within the CSU, the Bavarian sister party to Merkel's CDU. The talks are set to continue. The underlying threat is that if the talks fail, new elections would be necessary, and many fear that the AfD would gain more support....MUCH MORE
I have no idea what, if anything, the euro chart is telling us although, if this were an equity I'd be watching for a developing cup-n-handle formation to challenge the September highs: