Dollar Builds on Gains

The Federal Reserve might not be on a unified effort to convince the economies of a impending rate hike as it did so efficiently in late February and early March. But investors are getting the message. The Bloomberg calculation of the odds of a rate hike before the end of the year has climbed to 70 percent from 53% before last week's FOMC meeting and 33.5% in the end of last month. The CME sets the odds at 81% a month 15, up from 37%. Yellen did not break new ground yesterday. She reaffirmed the belief at her media conference that the uncertainties about inflation do not stand in the way of another hike. Remember the dot plots revealed that 11 of the 16 Fed officials thought a December hike would be proper, up from eight in June. Yellen acknowledged three areas of uncertainty about inflation that the Fed and she could be wrong. But as a few in the media have rather than read this as self-doubt, we guess the market got it right. She shared an intellectual honesty that's frequently noticed in its lack. Some of the Fed's critics accused of dovishness and hubris. That does not appear to be the case presently, whatever the situation might have previously.


Also the improvements on the monetary policy front, US fiscal policy is front and centre today. President Trump is expected to provide a framework for the tax reform. Of course, it is in the hands of the legislative branch. Much of the details have been leaked, such as a 20% corporate tax program rate three family tax brackets (12%, 25 percent, and 35 percent), allowing companies to write off capex immediately for around five decades, and eliminating the alternative minimum tax and property tax. Households will drop the deduction for state and local taxation, while business' capability to write-off debt servicing will be curbed as well as the tax of international action of US business will change, with a tax holiday of some sort to induce them to bring back the extra capital booked overseas.


The important thing to bear in mind is that this is still very early days for tax reform. The most recent implosion of the effort to repeal and replace the Affordable Care Act (Obamacare) underscores the legislative battles. In addition to the distributional gains/losses, a number of this debate will centre around what is called dynamic scoring. This refers to taking the impact on growth (and future tax revenues) of the tax cuts/reform themselves.


The growth in US rates and also the expectation of this tax announcement isn't the only thing underpinning the buck today. First, as we mentioned yesterday, there will seem to be a squeeze in the dollar funding markets (dollar shortage). It isn't apparent what many is the, and also that these are quarter-end pressures.


Secondly, there are a few idiosyncratic variables too. Consider that the dollar was bid to nearly JPY113 today, a level not seen in just two weeks, and extending the rally out of JPY107.30 on September 8. The growth in US yields (US 10-year yield is up nearly six bp today almost 2.30%) assists, but one may have expected the 0.5% drop in the Topix to lend the yen support. On the other hand, Japanese shares' decrease seemed to be a variable that over half of the Topix went ex-dividend.


Consider too a report in the Nikkei Asian Review that Norway's autonomous wealth fund stated that it would lessen its vulnerability to illiquid bonds such as sovereigns. Government Bonds fall into this bucket. JGBs accounts for around 6% of its bond portfolio or roughly $21.5 bln. The dilemma of liquidity has come to be an important talking point among fund managers.


Sterling is trading heavily. It is now back within the range seen on September 14 when the BOE amazed with a spin that was hawkish on the decision that was benign. Really Spartan has approached the 61.8% retracement of the profits scored from the low the day BOE match. A break of the level (~$1.3345) or even maybe a bit lower ($1.3320) could signal another cent drop.


There appear to be two burdens on sterling apart from a broad dollar recovery. First is the confirmation from the EC that the Brexit negotiations have not progressed far enough to be to go over the relationship. Additionally that due to May's evolving position that is Brexit that Labour's remarks from the Labour Party Conference, Corbyn in charge, and notably the shadow chancellor spooks investors.


Yesterday, based on our comprehension of market plogy as reflected in prices, we proposed a $1.16 goal for the euro, realizing support close to the mid-August low that has been set close to $1.1660. The euro is finding some support around $1.0730 before the North American semester. Among the investment themes this year has been flows into shares. As we have pointed out, the outperformance for dollar-based investors comes from the euro, not the equity performance. Here is what it looks like now: the SP 50 is up 11.5% Nominal, although the Dow Jones Stoxx 600 is up 6.6% (such as the current profits that have lifted it to some two-month high). The euro, together with the current drawback, is up 11.6% year-to-date. If the euro slip to a more competitive goal of $1.14, it could impact both the demand for European stocks and the desire to hedge the currency.


The US reports durable goods orders, that can be expected to bounce back after a slip (6.8%) in August. Aircraft, specifically, make the time series volatile. The details will likely be greater than the headline, as the center orders (excluding military and aircraft) might have increased after July's 1.0% growth. |Shipments likely slowed. The weather distortions might be evident. One of the four Fed officials supposed to speak, Brainard's address this afternoon (2:00 pm ET) is the most important. The regional Federal Reserve Presidents' views are well known. The DOE oil inventory report might be watched closely after the quote of a drawdown of API.
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