Market Views For 2016 - page 9
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FOMC Minutes: A Heated Debate About April; We Still See A Sep Hike After holding rates unchanged at the March meeting, the minutes suggest that rates will probably remain at current level also at the April meeting; various views emerged but several argued against hiking rates in April while some favored it. While only Esther George dissented in favor of hiking rates in March already, according to the minutes it was actually a couple that wanted to hike in March already. But the cautious approach to raising rates prevailed and many participants said it was prudent to wait before taking the next tightening step. First and foremost, it is the uncertainty around the global economic backdrop that is preventing policy action at the moment; many on the FOMC saw bigger global risks.
The tightening in financial conditions seen in January and February has been fully reversed since, but a number of participants still judged that headwinds will subside only slowly. What the Fed wants to see is better growth before the next tightening step. But with indicators such as ISM manufacturing going up, US economic growth will surely follow suit given the strong labor market backdrop. In our view, one should appreciate that the Fed truly is data-dependent and as such future market pricing seems to be taking the Fed dovishness to extremes; according to these futures it is almost like a toss of a coin now if the Fed is going to hike again in 2016 or not. We still expect a September hike
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Dovish FOMC Already Priced In; Buy USD Dips Vs AUD and CAD - Credit Agricole According to yesterday’s FOMC several participants argued for proceeding cautiously in reducing monetary policy accommodation "because they saw the risks to the U.S. economy stemming from developments abroad as tilted to the downside or because they were concerned that longer-term inflation expectations might be slipping lower, skewing the risks to the outlook for inflation to the downside,". It must be noted too that several members stressed that there is little room to ease monetary policy further through conventional means if needed.If anything the minutes more or less confirm that there is little scope of the Fed tightening monetary policy as soon as this month.
However, as such prospects are already fully priced in we see limited room of falling monetary policy expectations to the detriment of the USD. If anything we stick to the view that the currency should be bought against higher yielders such as the AUD and CAD.
This is especially true as in an environment of capped global growth momentum and limited room of further falling Fed rate expectations investors’ appetite for risk assets should stay muted. As such we do not expect the most recent improvement in sentiment to last. It must be remembered too that our FX risk index remains in risk averse territory, which indicates thatcaution remains warranted.
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EUR/USD: Real Rates Key; Where To From Here? - BNPP We have long argued that, with a number of major central banks reaching a lower bound for nominal policy rates, real rates should become key for G10 FX. This is because at the lower bound, non-conventional policies increasingly work through inflation expectations. When nominal rates have little room to move, market reaction to central bank policy action should be mainly captured through inflation expectations and their impact on real rates.
Real rates spreads are currently sending a bullish signal for EURUSD (Chart 1). Drilling into the details of what moved the eurozone-US 2y real rate spread suggests that, while both eurozone and US real rates declined recently, US rates fell by nearly twice as much as eurozone rates. As highlighted in Chart 2, US real rates fell because a 70bp rise in US inflation expectations from mid-February far outpaced the 13bp rise in 2y yields. Meanwhile, eurozone inflation expectations rose by a smaller 35bp and nominal yields were little changed.
In our view, real rate dynamics capture well the market impact of recent central bank policy announcements. Markets went into the March ECB meeting with a rate cut priced in and came out with the perception that the ECB has reached the lower bound for the deposit rate. Subsequently, the eurozone 2y yield is not far from where it was nearly two months ago. At the same time, the ECB still has a hard time raising domestic inflation expectations, which remain stuck below levels that prevailed around the start of the ECB’s quantitative easing programme in 2015, as measured by shorter-term measures such as the 2y inflation swap as well as the longer-term 5y5y measure, which is the ECB’s preferred gauge.
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...Where to from here? Already at a lower bound for policy rates, and with only limited scope to increase the size of its asset purchase programme, the ECB may struggle to push real rates down by much, at least in the near term. At the same time, we don’t believe the risk environment will be positive enough in Q2 to allow the Fed to hike, implying that US front-end yields will remain at current low levels.
This should keep EURUSD gradually rising towards our 1.16 target. In the second half of the year we expect a modest decline in EURUSD to 1.14, as a better ri
EUR/USD, USD/JPY: No Sign Of Dollar Rebound Yet Real interest rate support for the dollar has significantly eroded in recent months as US real rates have fallen in absolute terms and relative to those of other major economies. It is hard to imagine the Fed being a source of renewed support in the near term, and soQ2 may see a range-bound USD/JPY and EUR/USD, while drivers of currency moves will come from elsewhere, outside G3; Brexit risk and the outlook for crude oil prices are two major candidates.
...A break through 1.16 for EUR/USD needs the real yield spread to narrow by about 25bp. That would need 10-year nominal Treasury yields to fall comfortably below 1.5%. I think a 1.16-1.06 range holds. That’s a fairly wide range, but it’s captured nearly all the price action since last February, and the moves within that range are likely to depend on the ebb and flow of bond market sentiment and the vagaries of each and every economic statistic. We don’t intend to publish any directional EUR/USD ideas until there’s a chance of a clearer trend emerging.
The yen’s recent strength has been driven by tumbling Japanese inflation expectations, which have driven real Japanese yields higher against both US and European ones, even as nominal Japanese yields fall into negative territory. The strengthening yen in turn feeds disinflationary pressures in Japan.
Short of direct intervention, the BoJ needs either higher inflation expectations or a more hawkish Fed to turn USD/JPY around decisively. Neither appears in the offing near-term.
...Our technical analysts note layered resistance between here and 106 in USD/JPY(see below). There is also the fact that CFTC data show the speculative yen net position at near historical highs. More broadly, we expect that last year’s low of approximately 93 in the DXY Index to hold.We therefore see good support for USD/JPY near current levels.
Technicals: Earlier this year, USD/JPY confirmed a massive Head-and-shoulders pattern, which has led to a steady decline, and it looks poised to achieve the projected potential at 106. This week, the pair breached below a daily descending channel limit (110), signaling an acceleration of the downtrend.... Immediate upside is likely to be contained at the channel limit near 110.
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Fed Lacker: Good Case for June Hike
The case for raising rates in June looks to be "pretty strong," Richmond Federal Reserve Bank President Jeffrey Lacker told the Washington Post in an interview published Monday.
"The concerns, the downside risks that we saw at the very beginning of this year, have dissipated. And we're very far away from the benchmarks that we have to guide where rates ought to be," Lacker said. "To me that adds up to a pretty strong case for a June move."
The rate-setting Federal Open Market Committee is set to meet on June 14-15. Lacker, who's not a voter this year, has repeatedly said he still favors three to four rate hikes this year.
In the Post interview, Lacker said the first quarter "seems pretty clearly to be a transitory dip in growth." The U.S. economy has shown itself to be resilient and the Fed should be thinking about making up ground after delaying taking steps toward monetary normalization earlier in the year, he said.
"Inflation is moving decidedly toward 2%. Labor markets have tightened very significantly," Lacker told the paper. "Consumer spending growth maybe dipped a bit, but the fundamentals look strong."
"The downside scenarios just haven't materialized," Lacker said.
Lacker added the Fed runs the risk of causing market turmoil if it doesn't adjust its policy in a timely manner.
"What we could find is that inflation pressures emerge pretty rapidly and that we have to act vigorously to counteract, and that brings along financial market turmoil of the like we saw in 1994, which wouldn't be the best way to do policy," Lacker said.
Morgan Stanley on what to expect for the major currencies now
Morgan Stanley with a quick looks at the FX bias
USD: Fed Supports USD. Bullish.
The Fed minutes have supported our bullish USD view, and we see scope for further gains. As long as the Fed wants optionality on a June rate hike, rate hike expectations are likely to increase and higher yields should support USD. At the same time, the global economic backdrop has worsened, with China data weakening, and risk appetite has weakened. We are watching core PCE and payrolls this week closely for evidence of improving economic data. We like buying USD against commodity currencies and EM.
EUR: ECB Watching. Neutral.
We expect EURUSD to remain fairly range-bound. This week's CPI and ECB rates decision will be watched, but we do not think they will impact EUR significantly. Our economists are not expecting any policy change from the ECB, though inflation and growth projections could be revised upwards due to higher oil prices. We think this will not impact EUR meaningfully as the markets are only pricing a 5bp rate cut for this year, and the ECB has made it clear that further rate cuts are unlikely, implying yield differentials affecting EUR will continue to be driven by the Fed.
JPY: Tactically Bearish, Structurally Bullish. Bullish.
Our long-term view on JPY remains unchanged, though there is scope for USDJPY to rise on the back of broad USD strength, higher US yields and strong risk appetite. Nonetheless, this is a rally we would sell into, given our structurally bullish JPY view. FX hedging and repatriation flows will continue to dominate, and we ultimately expect USDJPY to fall through 100.
GBP: Asymmetric Risk Profile. Bearish.
GBP has outperformed in recent weeks due to markets reducing the probability of Brexit. We think the markets may have become a little too complacent and the risk profile is now asymmetric, with the risks skewed to the downside. Any turn in the survey data should put GBP under renewed selling pressure. In the longer term, we are also bearish on GBP due to its weakening economy and triple deficit. This week, we watch to see if manufacturing PMI confirms our view of a faltering UK economy.
CAD: Fade CAD Strength. Bearish.
We maintain our bearish view on CAD following the BoC meeting as we believe it was not as hawkish as the market took it and expect further economic weakness will cause markets to price a higher chance of rate cuts. The BoC did not have a large shift in tone but some dovish changes, on capex and the wildfires, open the door for a larger shift at the July meeting (which is accompanied by an MPR). Canada's rotation away from the resource sector is in doubt, with weak March trade showing non-commodity export volumes falling an additional 2% after their nearly 5% fall in February.
AUD: RBA Easing to Push AUD Lower. Bearish.
We remain bearish AUD and expect the RBA easing to push AUD lower. We believe the market overreacted to the RBA minutes and the SMP makes clear that the RBA stands ready to act further, given the very weak inflation trend. Given the worrying inflation trend, falling house price growth and iron ore prices resuming their downward trend, our economists are now expecting 75bp more rate cuts. RBA Governor Stevens' comments this week echo our view that the RBA will gladly watch AUD depreciate in order to help the difficult adjustment. We continue to like holding AUD short positions.*
NZD: Looking to Sell. Bearish.
We like selling NZD in this current USD rally as we expect high-carry commodity currencies to underperform. NZD has benefited in recent days as the RBNZ's financial stability report pointed to rising house prices as a risk and pointed to the possibility of more macroprudential policies. While this, along with some better-than-expected data, has caused the market to price out the probability of RBNZ cuts, we expect this to reverse. However, we don't think macroprudential policies will preclude the RBNZ from cutting, given New Zealand's pressing inflation problem and that the elevated NZD TWI remains too high. With our expectation for commodity prices to fall as well as the RBA's recent dovish turn, we believe the RBNZ will stay dovish and limit currency strength.
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Eurozone 2016 GDP hiked to 1.6% from 1.4% in June OECD outlook report - US GDP cut to 1.8% from 2.0%
The OECD have release their latest economic outlook
The OECD say that governments should spend more on growth friendly policies and that additional mon pol easing could now be proved to be less effective in the past.
Q1 2016 Eurozone wages 1.8% vs 1.5% prior
Q1 2016 Eurozone wage and labour costs data 17 June 2016
Alongside falling unemployment we're seeing wages and costs starting to creep up. Maybe the next ECB move will be to taper QE ;-)
Fitch sees BOE lowering rates by 0.25% by year-end
US ratings agency out with a client note 29 June 2016
Say Fitch:
There is little doubt that the UK referendum vote in favour of leaving the EU will take a significant toll on the economy, Fitch Ratings says. Businesses are facing a surge in uncertainty on three separate fronts - the future of the UK's trading relationship with the EU, the shape of the regulatory framework, and domestic political uncertainty, including the future status of Scotland. This uncertainty will prompt firms to delay investment and hiring decisions, while elevated financial market volatility will further damage business confidence.
Full report here