Macro Cheat Sheet

A high-level distillation of the macro forces impacting various currencies.

US Dollar 

• Equity market volatility has not reached levels that will spur the Fed's concern.  No one expected a hike at next month's meeting.  The December meeting is too far way for short-term volatility to have any bearing.  The volatility in Jan-Feb did not deter the March hike.
• The US reports its first estimate of Q3 GDP at the end of the week.  Although the economy is understood to have slowed from the heady 4.2% pace in Q2, strong consumption is likely to keep a "3" handle on growth.  
• The US yield curve (2-10) is a little below 30 bp.  It has been range-bound since July between roughly 20 bp and  35 bp.  
•  President Trump has indicated that a proposal for a 10% middle-class income tax will be announced before the November 6 midterm elections and Chair of the House Ways and Means Committee has promised to take it up if the Republicans retain control of both houses of Congress.  The estimated cost of a 10% income tax cut on incomes of $40k-$200k could be around $715 bln over the next decade, according to some initial estimates.    

Euro

• The ECB meets tomorrow.  A reaffirmation of its policy to complete its asset purchases by the end of the year and not raise rates until after next summer.   Although recent data has been soft, including today's dismal flash PMI, the ECB President Draghi is unlikely to shift his emphasis away from the strength of the labor market.  
• Italy has until the middle of November to respond to the EC's unprecedented request that it alter its budget.  The slow-moving confrontation between the EC and Italy will ultimately be resolved by a different EC after next year's European Parliamentary elections.  
• The Bundesbank warned that the German economy might have stalled in Q3.  This puts downside risk on eurozone Q3 GDP to be released on October 30.   Every quarter last year, the eurozone economy expanded by 0.7%.  In the first half, growth downshifted to 0.4% in each quarter.  Growth may have slowed to 0.2% in Q3, which would be the weakest in four years.
•  The euro may be carving out a near-term base ahead of $1.1400.  The upper end of the near-term range is a little above $1.1625.  Meanwhile, three-month implied volatility (~7.4%) is near the 50, 100, and 200-day moving averages (~7.2%-7.4%), while the euro has fallen four cents since the high set at the end of last month as is approaching the August 15 low for the year near $1.13.  

Sterling

• The EU and the UK government appear to be moving toward an agreement on Brexit.  The main challenge will then shift to selling it at home.  Despite the recurring talk of a leadership challenge to May, PredictIt shows wagers favor May continuing to be Prime Minister through the end of the (85-15).
• The Bank of England meets next on November 1.  Another unanimous decision in favor of standing pat is the most likely outcome.  The next hike in Q3 19.  
• The UK 10-year Gilt has been an outperformer over the past month.  The yield has fallen 15 bp while the yield on the German Bund has fallen 10 bp.  The European peripheral yields have risen, and with the euro falling, it appears some of the funds leaving the periphery are finding a home in the UK. 
•  A break of the early October low near $1.2920 would open the door to this year's low recorded in August near $1.2660.  A move above $1.3125 may help neutralize the technical negativity.  

Yen

• The yen is the only major currency that has appreciated against the dollar so far this month.  The 1% rise appears to have been aided by the sell-off of equities and the more recent decline in core yields.  
• Japan's Q3 GDP (November 10) likely slowed a little from the 0.7% (quarter-over-quarter) pace from Q2, but it is expected to rebound in the current quarter.  Look for the data from early Q4 to confirm this.  
• Over the past six weeks, Japanese investors have stepped up purchases of foreign bonds, reaching  JPY5.34 trillion (~$47.7 bln), the most in more than a year.  
• The US dollar continues to hold an uptrend line drawn from the March, August, September and October lows.  It is found now near JPY111.80, rising to about JPY112.15 at the end of next week.  

Canadian Dollar

• The Bank of Canada hiked the overnight rate 25 bp to 1.75% as widely expected.  It was more hawkish than many expected.  It dropped the reference to qualify the coming rate hikes as "gradual" and upgraded its assessment of exports and investment.  It committed itself to bring rates back to a neutral setting, which we suspect is closer to 2.50%.  
• Canada reports August monthly GDP figures next week, and a 0.2% increase would lift the year-over-year rate to 2.6% from 2.4%.  Note that the 60-month (five years) and 120-month (10-years) average is 2.3%-2.4%.  
• Canadian oil sells at a large discount to the US.  Partly it is a function of quality, as it is heavy and needs much refining.  Partly, it is the cost of transporting it to US refiners.  Partly, it is a function of bottlenecks in the pipe network.
• Since reaching a high near CAD1.34 in June, the US dollar chopped its way a little below CAD1.28 at the start of the month.  It has worked its way higher and is knocking on the downtrend line drawn off that June high, which intersects now close to CAD1.3120.   The trendline held, with the help of the Bank of Canada. The greenback could slip back toward the middle of its price channel (~CAD1.2930) that is found ahead of the 100-day moving average (~CAD1.2910).  

Australian Dollar:  

• The flash PMI composite showed continued weakness, falling from 52.5 to 51.2.  It is a new low for the time series that began in 2015.  The disappointment was not in manufacturing, which could have been linked to trade tensions.  The manufacturing PMI edged up to 54.3 from 54.0.  Services are more likely to reflect domestic demand, and the service PMI fell to 50.8 from 52.2 
• Australia reports Q3 CPI figures next week.  Price pressures appear to have been fairly steady after a 2.1% year-over-year rise in Q2 and 1.9% in the previous two quarters.
• The US offers about 86 bp more than Australia to borrow for two years.  There have been two periods that the US premium exceeded this June 1984 and September 1997.  It is interesting to note that the Australian dollar was near $0.86 and $0.7150 respectively.  
• The Australian dollar is the weakest of the majors this month, losing 1.8% against the US dollar to reach its lowest level since early 2016.  The Australian dollar has carved out a shelf near $0.7040.    A move above $0.7180-$0.7200 would improve the technical tone.  

Emerging Markets:  

• China was not cited by the US Treasury as a currency manipulator, but macroeconomic considerations on balance favor a weaker yuan.  Chinese officials have drawn the line at CNY7.0 for the dollar, but an advisor to the PBOC has been quoted suggesting the level may break by year-end.  Officials have unveiled a number of measures to support companies who used their stock as collateral for loans.  Expect measures to continue to be rolled out until something singularly or collective works.  
• The US dollar reached a two-month low last week against the Turkish lira near the 100-day moving average and rebounded around 2.75% (to ~TRY5.87) and is consolidating today, ahead of the central bank meeting tomorrow.  The rebound in the currency has removed immediate pressure to raise rates, but it is too early to cut.  
• Along with Turkey, the Brazilian real and Argentine pesos are also enjoying a strong month so far (9.1% and 12.9% respectively).  In Brazil, the equity market is outperforming (+7.5% MTD) while Argentina is off more than 15%.  Similar outperformance is evident in the bond markets too.  We suspect that investors are buying Brazil on the back of the political story (elections), while simply reducing short currency positions/hedges in Argentina.  
• The dollar has firmed to important levels against the Mexican peso around MXN19.50, which it has not closed above in more than three months.  A break of it could see MXN19.65-MXN19.70 relatively quickly, but peso bears, perhaps for Mexico's developing political story (AMLO presidency is a little more than a month away) are looking at MXN20.00.  

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