Rockefeller Treasury Services, Inc. Analytics | 3 of July

Posted 03 July, 2017

Today we get the June ISM manufacturing index and vehicle sales, expected lower because of sales estimates already announced.

Late Friday the IMF released the most recent data on the composition of reserves, the exact right timing to ensure nobody notices the story. The dollar lost some share of total reserves, to 64.5% from 65.2% at end-December. This is not to say central banks bought fewer dollars—theybought more, from $5.50 trillion in Q4 to $5.71 trillion. They just wanted even more of other currencies, especially the yen. This is interesting in the context of the Greenspan comment we cited last week, that at some point investors and reserve holders will reckon they have as many dollars as they could possibly want.

The euro’s hare was almost unchanged at 19%. Reuters notes that at its peak in 2009, the euro share was 28%. It was the yen that benefitted, going from 3.9% to 4.6%. The Chinese yuan maintained it 0.9% share, first reported in Q4.

The IMF notes reserves rose to $10.90 trillion in Q1 from $10.72 trillion in Q4, which had been a contraction. It’s the “first meaningful quarterly rise since 2014,” according to Scotiabank. The AUD and CAD each get about 2% of total reserves, by the way.

Ahead of the G20 summit next week, Hamburg saw almost 10,000 protesters complaining about income inequality and the commitment to battle climate change. Separately, Quartz reports “There are no science experts left at the White House. The three remaining staffers in the Office of Science and Technology Policy left their posts Friday.”

Xi and Putin are meeting today. You can just imagine how they are laughing at Trump and conspiring to take advantage of his inability to govern himself, let alone the country.
The on-going big story is the sentiment that the ECB will be tapering and will announce it at the September policy meeting, or the October one, even if action is not expected until perhaps as late as Q2 2018—a full year out. Talk of the UK and Canada also contemplating rate hikes is less convincing. One of the interesting aspects of the speeches last week was the appearance of coordination among the central bank leaders. They all tried to send the message that the days of easy money are over. The end is not really nigh, except in the US.

Once it sinks in that we have a long wait ahead of us, and a ton of data that needs to flow under the bridge (and may whirlpool or eddy), some critics imagine the euro will falter. Well, yes, but a major Event like the Draghi statement, however riddled with conditionals, is still a major Event. Talk of misinterpretation and an exaggerated response is only to be expected. We wrote last week that we are offended by journalists calling traders stupid for overreacting. Of course they overreacted. It’s what their employers pay them to do.
We are also offended by journalists insulting central bankers, as in the WSJ story titled “Are Central Bankers Twisted Geniuses, or Just Twisted?” The core question is whether central bankers are “twisted geniuses manipulating the markets in order to meet their inflation goals? Or are they bumbling exacademics whose ramblings are overinterpreted by investors besotted with their brilliance?”

Draghi tried to talk in a nuanced way about policy, “only for most of it to be ignored by traders who seized on one sentence to conclude he had turned hawkish. The euro soared 1.4% against the dollar, then dropped almost a cent the next day when ECB officials denied the interpretation, before making it all back. German bond yields swung similarly.
“Bank of England Gov. Mark Carney then sent the sterling up 1% against the dollar when he said that he would be in favor of raising rates if investment and wages rose, a statement that is not only obvious but in agreement with his previous views.”

Did the central bankers know what they were doing? It’s hard to believe the central bankers were “capable.” In fact, “The true twisted genius would be on display if the Sintra speeches weren’t misinterpreted at all, but were trial balloons designed to test market sensitivities. On this reading, Messrs. Draghi and Carney want to know how worried investors are about tighter policy so they tried out ambiguous language before soothing nerves by letting it be known they were misinterpreted.” Oh, please. The author names this kind of speculation “Kremlinology.” He gives himself too much credit. Who is he to question whether central bankers are competent or perhaps toying with the market?

Deductions include that central bankers still adhere to the Phillips Curve, despite it not holding up. They abhor surprising markets so telegraph intentions long in advance. And there might be a whisper of central bank concern about a stock market bubble. Bottom line, watch what they do, not what they say. We received a copy of the actual Draghi and Constancio comments from a Reader. But we didn’t need it. Yes, the comments were mild and nuanced. Nudging expectations toward tapering were so ringfenced with conditionals as to be barely there. But that doesn’t mean traders were wrong to act the way they did. Exaggerated overreaction is what we do. It’s how money gets made. Any single trader may know perfectly well Draghi didn’t say “tapering right now” but he has to guess that’s what other traders will imagine, and act accordingly.

Sure enough, the WSJ has a front-page story today that starts out “The U.S. dollar is down 5.6% this year, its worst two-quarter decline since 2011, as investors see economic recoveries around the world gaining on or surpassing growth in the U.S.” Oil is the stock market’s new boogeyman. The “Collapse in crude prices could end bullish outlook for energy companies and remove boost to broader indexes.”

Wait a minute. Is it central bankers or cross-sector factors behind the dollar drop? Who, exactly, it hysterical? It’s not the FX traders, or the oil traders, either. Stock market traders, maybe. We would like to see a study indicating which sectors are most prone to panic. But most of all, it’s journalists, or maybe their headline writers, who promote panic. In the FX market, we pretty much know what we are doing. And what we are doing is retreating from the dollar for a host of reasons, including relatively better growth in Europe and relatively saner political life, too. The rate of increase in the rate of return is higher. What else do you need to know?

Politics: The US public is not alone in disliking Trump, whose disapproval rating has risen to 57%. Globally, The Economist reports a Pew survey of 40,447 people in 37 countries. “… trust in Mr Trump pales in comparison with Barack Obama’s final ratings. Whereas 64% of those surveyed had confidence in Mr Obama to do the right thing, just 22% are similarly optimistic about his successor, whom they described as “arrogant” (75%), “intolerant” (65%) and “dangerous” (62%). Citizens in Western Europe put no more stock in Mr Trump—who took office just five months ago—than they did in George W. Bush, the architect of the highly unpopular war in Iraq, when he limped out of the White House in 2008. Respondents’ approval rating for America overall has also slumped, from 64% to 49%.” Who dislikes Trump the most? Mexicans.


                                                                                              By Barbara Rockefeller


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05 July, 2017 15:30

← Rockefeller Treasury Services, Inc. Analytics | 5 of July

Today the data includes May durables and factory orders, but the biggie will be the Fed minutes. The WSJ reports that “Federal Reserve officials have suggested there is a strong chance they will announce a decision in September to start shrinking the bank’s portfolio of bonds and other assets, while putting off interest rate rises until December.

Rockefeller Treasury Services, Inc. Analytics | 5 of July

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29 June, 2017 15:30

Rockefeller Treasury Services, Inc. Analytics | 29 of June →

The “Draghi Effect” is exaggerated in the FX market. Currencies have moved farther than the differentials would call for. Compare the dollar index on the first page, near the low end of the 52-week range, with the 10-year, closer to the high end of the 52-week range. And see the chart showing the 2-year US vs. German Schatz yield. The German yield is rising, to be sure, but the euro is rising disproportionately more.

Rockefeller Treasury Services, Inc. Analytics | 29 of June
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