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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 23 July 2015 at 10:24 GMT

FX: The Wheels of Fortune?

Head of Trading / The ECU Group plc
United Kingdom

  • We maintain a positive bias on UK domestic consumption
  • Mark Carney wants Janet Yellen to attack first on rates
  • Commodity falls maintain our negative view of AUD and CAD


By Neil Staines


“The worst wheel of the cart makes the most noise”       Benjamin Franklin

In FX, the broad focus of attention turned back towards the UK this week with the highlights of an otherwise quiet data calendar. Yesterday, saw the release of the minutes from the July Bank of England policy setting meeting, where the MPC maintained the view that it expected “inflation to pickup notably towards the end of the year” and that “all” of the MPC saw “shrinking slack and rising domestic costs”. A further (albeit modest) hawkish progression.

The vote was 9-0 for unchanged rates (and QE) at the July meeting, however, the minutes stated that “for a number of members, the balance of risks to medium-term inflation relative to the 2% target was becoming more skewed to the upside” and that “Greece was a very material factor in their decisions’ to vote for no change in rates.” 

We now expect that following more progress in the (mutually uncomfortable) Greek bailout situation, the August vote will likely be a 6-3 in favour of maintaining policy with the dissents likely coming from Messrs Weale and McCafferty, likely joined by one of the other external members, perhaps Kristin Forbes. 

This morning’s retail sales data were a little disappointing, recording a mild drop on the month and slowing the annual rate of expansion to (a still strong) 4.2%. In fact, the official data this morning was counter to other retail sales activity data that showed marked increases on the month and we maintain a positive bias on UK domestic consumption. 

The data may take some wind out of the sails for GBP in the very short term, but we continue to expect consumer strength to compliment business investment and, along with rising wages (and broad inflation gains as the year progresses), anticipate rate normalisation expectations to continue to move closer, supporting GBP against a number of alternate currencies.

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 UK retail sales unexpectedly fell in June, but are still positive. Source: iStock


Tour de rate hikes

While the UK’s Chris Froome may be the current holder of the yellow Jersey in the Tour de France, in monetary policy I would anticipate that Mark Carney is keen that Janet Yellen takes the Yellow Jersey in the ‘Tour de rate hikes’ and that Carney would be happier in the chasing peloton.

In the US, the data calendar has been light, however, market sentiment towards US policy normalisation has maintained its broadly hawkish bias, keeping front end US yields supported. Following yesterday’s existing home sales data (rising to the strongest level since 2008) 2-year US swap rates rose to 0.97%, significant since they have not traded above 1.0% since 2011. 

Longer dated yields across the board have stuttered, implying expectations of more modest sequential rate rises moving forwards, at least for now.

The recent sharp declines in the broad commodity complex have confused markets further over recent sessions. On the one hand, in conjunction with weakness in emerging markets and and the Greece debacle, it could be viewed as adding further uncertainty to the US rate normalisation urgency (as if Yellen needed any more excuses). 

From our perspective, however, it likely adds further to the case for slower rate hikes, rather than a delayed liftoff. 

Lower long end rates over the past few days are perhaps testament to this. Either way the commodity decline maintains our negative bias towards commodity currencies such as AUD and CAD. 

Who’s watching the watchmen

Over recent months there has been a significant breakdown in historic correlations between financial market instruments. At the start of July, these correlations appeared to have corrected to their rational default. 

On Tuesday, amid a bout of position squaring, those correlations faltered again. Amid nervousness, it seemed that Bonds were watching, equities that were watching commodities, that were watching currencies, that were watching bonds… but not necessarily in that order. 

The result being sharp, uncorrelated corrections. Despite the heightened volatility, we maintain our overall views of USD and GBP big picture outperformance on monetary and economic differentiation.


– Edited by Oliver Morrison


Neil Staines is head of trading at The ECU Group

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