Perhaps fearing some kind of Erdogan-esque reprisal from the White House, the Fed pussyfooted its way through the January/February statement, seemingly content to let Peter Navarro coordinate America’s FX policy for the time being.
Of course there are other reasons why the Fed might have chosen to effectively play the background. That is, it’s not all about Trump and his weak dollar policy. Or at least I hope not. Hawkish leans can be dangerous things for emerging markets and I suppose there’s no point in starting a VaR-shocking-correlation-flipping-freakout-inducing-taper-tantrum prematurely.
Still, this week notwithstanding, financial conditions really couldn’t be much looser. High stock prices, a fading dollar – it’s the exact opposite dynamic from that which caused the Fed to rethink liftoff in early 2016.
Then again, America was still a democracy this time last year and people weren’t protesting in the streets, so maybe the committee took “imminent constitutional crisis” into account when they decided not to rock the boat.
Whatever the case, the dollar is flagging as the market adjusts to Donald Trump the FX/rates strategist. As Deutsche Bank noted on Wednesday, “the US president is presumably aware that he is making impossible demands with an eye toward bilateral negotiations.”
Then again, one might have also “presumed” that Trump knew Frederick Douglass has been dead for 122 years.
There are no safe assumptions here.
And so, down the tubes goes the reflation trade…
…and down goes the greenback in general…
[Aside: look at that lira!]
“The dollar continues to be on the back foot,” Mitul Kotecha, head of Asia currency and rates strategy at Barclays said Thursday. “The Fed may hang on to see the new fiscal plans of the U.S. administration before we get a clear indication of how the Fed sees things.”
“The big events yesterday were the ongoing bickering about currency levels between the new US administration and Germany/Japan/China (there will be more, no doubt), and the FOMC meeting. The combined effect is a risk-averse mood to start the day, and a weaker dollar (again),” SocGen wrote this morning, adding that “the US campaign of words is clearly having an impact on market participants, and many are now looking for an alternative to the dollar as the currency to be the long leg of trades.”
Ok, so you get the idea on that.
Moving on, the market apparently wasn’t happy with the results of a 10Y auction in Japan as is clearly evident from the following:
JAPAN’S 30-YEAR YIELD RISES TO 0.855%, HIGHEST SINCE FEB.29
JAPAN’S 10-YR YIELD RISES TO 0.105%, HIGHEST IN YEAR
JAPAN 10-YEAR BOND YIELD RISES ABOVE 0.1% FIRST TIME IN A YEAR
The BoJ’s failure to hold a fixed rate auction may indicate Kuroda isn’t all-in on anchoring 10s after all. Keep in mind that that has implications for FX.
Meanwhile, the Nikkei was down (for obvious reasons) along with other Asian markets.
- Nikkei 225 down 1.2% to 18915
- Hang Seng down 0.6% to 23185
- S&P/ASX 200 down 0.1% to 5645
In Europe, Deutsche Bank reported an awful quarter as the bank is weighed down by legacy litigation costs that I for one doubt will ever completely disappear from the bank’s quarterly reports.
DEUTSCHE BANK 4Q NET LOSS EU1.89B; EST. EU1.32B LOSS
As for US markets, futs are lower ahead of a big day for earnings. Amazon, Visa, and Chipotle are among the names on deck after the bell. We’ll get initial claims as usual and a few other econ prints.
- 7:30am: Challenger Job Cuts YoY, Jan. (prior 42.4%)
- 8:30am: Nonfarm Productivity, 4Q P, est. 1.0% (prior 3.1%)
- 8:30am: Initial Jobless Claims, Jan. 28, est. 250k (prior 259k)
- 9:45am: Bloomberg Consumer Comfort, Jan. 21, est. 2.063m (prior 2.100m)
- 10am: Freddie Mac mortgage rates
- 10:30am: EIA natural-gas storage change