Macro Cheat Sheet

Here is a succinct four-bullet summary of key considerations behind  seven currencies:  

USD:

·  Rising US rates in absolute terms and relative to other countries, coupled with the policy-mix and US tax reform are the main drivers.

·  The market has nearly completely discounted three more Fed hikes by the end of next year, while the Fed has signaled that four hikes may be appropriate.

·  Despite the fiscal stimulus and robust economy, several headwinds are emerging, including trade, interest-rate sensitive sectors such as housing and auto sales, and the dramatic rise in oil prices--(100-day moving average has risen 30% since the start of the year. 

·  Midterm elections are unlikely to change the trajectory of US policy. 

Euro:  

• The ECB has signaled it will not hike rates until at least the end of next summer.  In the meantime, it has reduced its asset purchases and will stop them entirely at the end of the year. 
• The eurozone economy has slowed this year after a robust 2017, with Germany industrial output falling for three months through August, the longest contracting streak in four years.  
• Italy's nationalist/populist government is challenging the EU's fiscal rules.  Italian bonds have sold off, but the contagion has so far been limited.  
• Europe's leadership is particularly weak.  France's Macron is expected to announce a cabinet reshuffle shortly to bolster support.  Germany's political landscape is changing as both the CDU and SPD are doing poorly in the polls.  Italy's Prime Minister is overshadowed by his two deputies.  The ECB and several other European institutions are in the middle of a transition phase that will produce extensive personnel changes, including at the ECB, the EC itself and the European Parliament.  

Sterling:  

• The UK will leave the EU at the end of March 2019.  The pessimism that has shrouded negotiations has eased, and an agreement is possible in the coming weeks.  However, the challenge will lie with Prime Minister May's ability to sell it domestically.  She may have to rely on defecting Labour members.  
• The UK economy enjoying above-trend growth, even though the new monthly GDP report, suggests output stagnated in August. 
• The Bank of England hiked rates once this year. The next increase is not expected until after Brexit.  The US two-year premium over the UK widened from about 140 bp at the start of the year to 200 bp now, a record. 
• Fear of a Brexit with without an agreement has weighed on sterling primarily through the cross against the euro.  As the prospects of a deal are perceived to have increased, sterling has been bought against the euro and is trading near four-month highs.  

Japanese Yen: 

• Tax cuts appear to be boosting Japanese capital expenditures and strengthening the economy.
• The retail sales tax hike in October 2019 is a major challenge for the economy ahead of the 2020 Olympics.
• Japanese exports have risen by a little more than 6% this year although world trade is slowing.
• Officials seem content with the dollar trading between JPY110 and JPY11

Canadian Dollar:  

• The Bank of Canada is one of the few major central banks to have begun an interest-rating hiking cycle  It has raised rates four times since the middle of 2017 and is expected to hike rates later this month that would lift the overnight rate to 1.75%.  
• Canada recorded its first monthly merchandise trade surplus in August since late 2016.  Exports have held up, and imports have softened.
• A major vulnerability comes from high household debt and a housing market that appears to be rolling over.  
• Arguably the largest benefit from NAFTA 2.0 is that it avoids the bleaker downside scenarios and Canada will not be subject to auto tariffs that the US has threatened on national security grounds. 

Australian Dollar:

• The central bank is on hold, and Australia's discount to US rates are at the widest in years.
• Australian housing market is a concern.
• Australia's economic ties to China are helpful when the Chinese economy is booming, but it is a drag when China is slowing like now.
• The Australian dollar is among the weakest of the major currencies this year, off a little more than 9% this year.  The big technical objective is near $0.6900.   The OECD's model of purchasing power parity has the Aussie about 4% over-valued near $0.7100.  

Mexican Peso:    

• The Mexican peso is the only emerging market currency that has risen against the dollar this year  (~+2.8%).  It gained roughly 5.5% last year.
• The central bank passed on hiking rates at the October 4 meeting.   It sees economic risks to the downside.  As long as the peso remains resilient and price pressures moderating, the central bank would like to hold off raising rates for the remainder of this year
• The chief uncertainty going forward will be the policies of the new government (AMLO takes office December 1).  
• Mexican officials are under the impression that the US aluminum and steel tariffs will be lifted by the end of next month.  

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