USD strength spotty, sterling bounces yet again

On top of Friday’s broadside from White House trade adviser Navarro, who railed against large banks’ “shuttle diplomacy” and attempts to lobby the administration on a trade deal, yesterday saw the Wall Street Journal publishing an article (note: paywall) on the US widening its efforts to thwart Chinese intellectual property theft. This further spooked markets, especially in the US tech sector, where the chief focus of IP theft accusation lies. At the same time, China is mounting a significant campaign of sending all of the right messages on opening up ahead of the Trump-Xi summit at the end of the month.  

The pattern of USD strength versus other currencies suggests a real yield focus – as US real rates (the yield on treasuries versus inflation) have gone clearly positive while they are punishingly negative in Europe and Sweden (with incoming hikes and very cheap currency helping a bit there), and quite negative in the UK and Switzerland and even Japan.

Until either the Fed changes course or other central banks show a firmer commitment to tightening policy, the US dollar may have a hard time falling. Late yesterday, the San Francisco Fed’s Daly (filling the spot recently vacated by David Williams, who has moved to the NY Fed) was out speaking in favour of a December rate hike and possibly two more in 2019 as the Fed’s job is to bring down the overheating US economy for a soft landing. This may have boosted the US dollar, though rate expectations were steady.

In other news, NOK is even weaker than the very weak euro on another anaemic GDP print for Q3, with EURNOK toying with the 200-day moving average – we still prefer NOK to the single currency unless oil prices maintain their current rate of decline (surely too steep?). Sterling is back on the bid against the euro as the EU’s Barnier made positive comments and as negotiators were working through the night to put together a deal.

The hope is still that an agreement can be reached by Wednesday to allow the scheduling of a late-November Brexit summit. As we have pointed out, however, the issue is whether the UK Parliament will sign on. Surely any deal would have to see the UK payment into the EU tapered sharply after next year as part of a deal since the UK will lose its vote? Important UK data on tap today as an input for the last Bank of England meeting or the year on December 20.

Chart: USDJPY

USDJPY is back on the rise as risk appetite likewise bounces back. Japan’s negative real yields contrast with the positive real yields available in the US, which may be a key driver here for the US dollar and leave the JPY out in the cold. Only very weak risk appetite, most likely also requiring a simultaneous fall in sovereign bond yields can seem to offer the yen any support (unless the Bank of Japan performs an about face, something that would likely require significant pressure from global bond market developments). With risk appetite bouncing back overnight and bonds offered in early Europe, the yen shows how quickly it can weaken again.