Is it just some Holla Dolla or a new phase of King Dollar and why?

The last few days have brought an ongoing topic to the fore and Holla Dolla refers to another strong period for the US Dollar. This morning it has been illustrated in a couple of ways as for example the UK Pound £ has nudged below US $1.29 and the Australian Dollar is nearing (0.7008) passing 0.7.

Australia

If we stay in a land down under for a moment we see abc news reporting this.

At 7:10am, the dollar was buying 70.1 US cents.

It was a significant drop from its value on Good Friday (71.5 US cents).

The currency’s sell-off was sparked by yesterday’s weak consumer price index (CPI) — with the figures revealing that core inflation ( at 1.4pc) had drifted to its lowest level in at least 16 years.

This looks the beginnings of another success for my leading indicator which I highlighted on the second of this month.

If we look ahead and use the narrow money measures that have proved to be such a good indicator elsewhere we see that the narrow money measure M1 actually fell in the period December to February. If we switch to the seasonally adjusted series we see that growth faded and went such that the recent peak last August of Aussie $ 357.1 billion was replaced by Aussie $356.1 billion in February so we are seeing actual falls on both nominal and real terms.

It would appear that according to abc others are if belatedly, keen to join our theme.

These latest developments have led to analysts from Australia’s major banks upgrading their rate cut expectations.

“The downward surprise to core inflation in the first quarter leaves the RBA with little choice but to cut the cash rate by 25 basis points at its May meeting,” ANZ economists Hayden Dimes and David Plank wrote in a note.

They also both expected a second rate cut to happen in August.

Or if we return to Men At Work.

I come from a land down under
Where beer does flow and men chunder
Can’t you hear, can’t you hear the thunder?
You better run, you better take cover, yeah

As a technical note yet again we see a central bank responding to events rather than getting ahead of them. Whatever happened to aiming at something 18/24 months ahead? Or to put it another way forward guidance has been anything but.

Canada

If we stay with customers of the Type 26 frigate programme then there was this yesterday from the Bank of Canada.

Given all of these developments, Governing Council judges that an accommodative policy interest rate continues to be warranted.

Which replaced this in January.

Weighing all of these factors, Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target.

Depending on how you look at this they have either capitulated or adjusted to reality, albeit just like Australia they find themselves chasing events rather than anticipating them as reflected below.

In Canada, growth during the first half of 2019 is now expected to be slower than was anticipated in January.

Along the way we saw yet another bad afternoon for supporters of output gap theory and the concept of neutral interest-rates. Both were adjusted to suit the new outlook meaning they are fitted to the decisions taken rather than being part of any scientific process.

The combination of these factors led to the Financial Post reporting this.

The value of the Canadian dollar dropped by nearly a penny to roughly 74 U.S. cents, as traders repriced financial assets to match a prolonged period of low borrowing costs.

It remains there as I type this leaving it around 5% lower than a year ago which again reminds us of dollar strength as it was only a couple of days ago we were noting that the Loonie had been boosted by the higher price of crude oil.

Japan

I am not sure who could possibly have thought that the Bank of Japan had any intention of raising interest-rates. But if you did you were disappointed this morning.

The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, at least through around spring 2020, taking
into account uncertainties regarding economic activity and prices including developments in overseas economies and the effects of the scheduled consumption tax hike.

The Yen is difficult to read this year after what happened on January 3rd with its flash rally.

We cannot rule out that this was deliberate and please note the Yen low versus the US Dollar was 104.9 as you read the tweet below.

Japanese exporters had bought a lot of usd/jpy puts at year end with 105 KOs so now they are really screwed … ( @fxmacro )

So it is a case of watch this space.

Euro

This has been in a downtrend against the US Dollar for a while now. The 1.115 of this morning has replaced the 1.21 of a year ago. The last week or so has seen something of an acceleration of this trend which has been driven by various factors. The economic slow down in the Euro area has been mostly in an exporting sector with manufacturing and particularly car production under pressure. This has led to more expectations of further easing from the European Central Bank. As interest-rates are already negative (-0.4%) this may be in other areas and this is why we have seen the ten-year yield in Germany go negative again (-0.01% today). Although interest-rate futures have risen a bit too ( this suggests lower interest-rates) although they always suffer from vertigo when they go above 100 as they were never supposed too!

Maybe the shenanigans around Deutsche Bank have not helped either as the merger with Commerzbank appears to be off. Which as it share price is a mere 7.67 Euros does not leave Deutsche Bank with a lot of options.

Comment

There has been an elephant in today’s room which is that since the middle of December we have noted a change in US interest-rate policy as we wonder if Rod Stewart was on the money.

The first cut is the deepest
Baby I know the first cut is the deepest

What I think has been happening is that the change in US policy has reminded traders of two things. You can get 2.5% in the US right now via the official rate and the ten-year Treasury Note which is better than elsewhere. These days Canada (1.75%) and Australia (1.5%) are relatively high interest-rate countries however odd typing that feels. Also the US depends on external trade relatively less than other countries as this from the morning hints at.

KOREA: GDP -0.3% in 1Q v +0.3% est. Shrank most in a decade. ( @fiatcurrency)

God knows who did the forecasts there as they must have been wearing blinkers.

Next we can return to our topic of Tuesday as the higher crude oil price ( now US $75 for Brent) impacts other countries who have to exchange their currency for dollars to buy it.

So let me sum up the trend with a quiz I posted yesterday on Twitter.

Me on The Investing Channel

 

12 thoughts on “Is it just some Holla Dolla or a new phase of King Dollar and why?

  1. The thing with economic predictions is most economists are stuck in a time bubble of scarcity and Gold Standard, analog thinking in a digital world. You make a simple observation of what works, ie what really happens, and hey presto you can make accurate predictions that leaves others flummoxed. Those making the incorrect predictions are right to do so, the only trouble being their theories don’t fit modern reality. So much for progress.

    • Hi bill40

      Establishments hate progress that upsets the status quo, so they are always against much of it. I like the “analog thinking” line as it does sum up all the “neutral interest-rate, output gap and full employment” theories.

      I do challenge people on these but they seem t be missing the part of the brain which tells you it matters if a signal keeps being wrong.

  2. As Shaun points out, the US ten year pays 2.5%, in a world where any yield is sacrosanct, investors are betting the US economy will continue to outperform the rest, compare that to a UK gilt paying 1.15% in a basket case economy, with a central bank hell bent on supporting both a credit and housing bubble at any cost, a one hundred year history of choosing devaluation over economic reform and the small matter of it possibly leaving the EU in some form – sometime, just who in their right mind would even consider it???

    I’m just amazed sterling is as high as it is considering the above, but eventually it will go -there has to be consequences for all the printing done by Carney , the daily chart is already looking like the dreaded waterfall pattern, on the way back to retest the lows at $1.25 methinks. The headlines of course have already been written for when it breaches, those BREXIT voters were warned etc etc…., and as I predicted on numerous occasions before, Carney’s response will be to CUT rates if not before, certainly after to force it down even faster, and will be depicted by mainstream media as saving the UK economy from its disastrous fate thanks to those selfish, knuckledragging racist BREXIT voters.

    • Hi Kevin

      The technical ( chart driven) traders are looking for US $ 1.277 so let’s see. Some are also pushing the Yen so maybe being short the UK Pound £ against the Yen will be the play and work like it did on January 3rd.

  3. So I had Shorty in the third right! He was juiced and he had a good driver- and I was winning right! -but in the final stretch those other two drivers blocked him-right!- those b@#&rds-those thievin’ bast&@&ds- it was rigged!- they stole my money those thievin’ bas#@&rds- c’mon let’s go to the Winners Circle and split a pint-I got 50p-and ask for a glass of water- and get a copy of tomorrow’s program-I got a tip from a
    bloke who hangs around the stables- (musical selection- Penn
    and Tellers three card monte video-“It’s Tricky” Run Dmc- just ignore the misogynist lyrics.

  4. I don’t know how many times I’ve seen options/futures spike in
    Tokyo because of low volume/holiday break and poorly handled by low level technocrats left handling the trading desks. Everything normalized by the time the traders arrived in London/New York, but your high margin position was automatically wiped out by computer algorithms. Hhhhmmm.
    Couldn’t happen again?!? These weird blips don’t even occur on most charts!!!

    • Hi Canuckistinian

      In a way some of the problem should have gone as the algorithm driven traders just respond to news. But I guess even they need someone to trade with because if they are news driven they will be a one-way street.

      Also as you hint at it can be convenient to fire off some stops or break option trades. The catch though is once a market gets a bad name then the main traders steer clear. That happened to the Italian BTP options on LIFFE for example

  5. As in-“were recorded as having occurred”-smoothed out of historical chart records-but your high margin position was wiped out never the less!!

  6. Hi Shaun,
    Similar noises in NZ. From this morning’s NZ Herald-

    – ANZ Research now picks three official cash rate cuts from the Reserve Bank – one in August, followed by November and again in February 2020.

    “Overall, we see risks to GDP as broadly balanced, while risks to medium-term inflation are skewed south. ” ANZ says. “OCR cuts are needed – it’s just a question of when they will eventuate and what impact they will have.”

  7. Great blog as usual, Shaun.
    It was predictable that the Bank of Canada would leave the overnight rate unchanged yesterday. What was unexpected was how deeply the BoC downgraded its real GDP forecast for 2019, going from 1.9% in January to 1.2% in April. By contrast BMO is still predicting 1.5% growth for 2019. The switch to a neutral stance between raising and lowering interest rates was also probably not expected by markets. Before the January interest rate announcement the CDHI Monetary Policy Council voted for the BoC to raise the overnight rate to 2.0% in July with only one dissenter. Before the April IRA the same MPC voted by the very narrowest of margins to increase to 2.0% in April 2020, but no-one voted for a decrease then or earlier. It’s arguable whether Poloz is genuinely agnostic on the issue. As a former head of the Export Development Corporation he seems to like talking the loonie down.
    Barry McKenna in the Globe and Mail wrote “the bank estimates that the [federal backstop] tax will add a modest 0.1% to the national inflation rate.” This is a tax on carbon dioxide equivalent (CO2e) emissions for provinces or territories that do not have their own CO2e tax regimes that meet federal standards and was applied in Saskatchewan, Manitoba, Ontario and New Brunswick starting in April and will be applied in the Northern territories starting in July. Carolyn Wilkins said in the Q&A yesterday that there would be a 0.1% hike to inflation in 2019, when the backstop tax was $20 per tonne of CO2e equivalent and about a 0.05% hike in 2020 when it goes up to $30. It was left vague after that, although the federal government plans to raise the tax to $50 per tonne in 2022, and hints at increases after that. The 2019 and 2020 estimates do not include Alberta, although its new government plans to make repealing the existing provincial CO2e tax a priority, and the federal government has promised to impose a backstop if it does so. Wilkins added that the estimates take no account of the indirect impacts of the CO2e tax on inflation, although it is hard to see why as they would be substantial. (What else are the provincial I-O Tables for, if not to calculate such indirect effects?)
    Most of the core inflation measures exclude changes in indirect taxes but the CO2e tax is out of scope since it is not a tax at the retail level. The BoC doesn’t deign to forecast its new operational guide over the next three years as it did for CPIX before the 2016 renewal agreement, but suppose it indicated a core inflation rate for 2019 of 1.9%. It would imply that after adjustment for the CO2e tax, core inflation would be less than 1.8%. The BoC’s approach to adjusting for indirect taxes is not keeping up with developments.

  8. Treasury bill auction excellent (forget to mention) The yen pension, fed, NY merry munckins are making merry?!? Don’t want to be these guys roadkill!!

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