Market Views For 2016 - page 19
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From Craig James, Chief Economist, CommSec (part of the Commonwealth Bank of Australia) on the Reserve Bank of Australia minutes today
Fed Rate-Hike Odds Approach 100% in Anticipation of Trumponomics
nalysts spent early November warning a Trump victory in the U.S. presidential election would make the Federal Reserve less likely to raise interest rates. What happened instead is that it made a December increase a near certainty.
Traders assign about a 94 percent probability, the highest level this year, to a Fed boost at its final meeting for the year on Dec. 13-14, futures contracts indicate. Trump’s spending plans, and Republican control of Congress, are causing the market to revise higher its outlook for the pace of Fed rate increases.
“It’s hard not to think this is incredibly reflationary for the global economy,” said Mark Nash, the head of global bonds in London at Old Mutual Global Investors, which oversees about $37 billion. “We believe there should be more hikes priced in and bond yields should rise,” he said Tuesday in an interview on Bloomberg Television.
Treasury 10-year note yields rose two basis points, or 0.02 percentage point, at 2.24 percent as of 10:41 a.m. in New York, according to Bloomberg Bond Trader data. The 2 percent security due in November 2026 dropped 6/32, or $1.88 per $1,000 face amount, to 97 7/8. The yield climbed to 2.3 percent Monday, the highest this year. The next target is 2.5 percent, Nash said.
The odds of a Fed move by December have risen from 68 percent at the start of November as inflation expectations surged.
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Pound to Euro Exchange Rate to Struggle Beyond 1.17, US Dollar Surges into Overbought Territory
The British Pound failed has failed to advance beyond a key resistance line against the Euro while the Dollar remains the dominant force in global FX but there are growing concerns over the currency now being overbought.
Pound Sterling was the fourth-best performing G10 currency behind the Canadian, US and New Zealand Dollars for the week ending November 18.
The Euro was the week's second-worst performer in G10.
However, if we look at currency performance since the US election the softest currencies since the election are the
Australian dollar, the Japanese yen and the New Zealand dollar, while the most resilient relative to USD is Pound Sterling.
For GBP/EUR watchers the trend remains positive, however we have seen the pair struggle to hold a close above 1.17.
There appears to be little bid support for the Pound above this level as the GBP/EUR pair has been banging its head against this ceiling for a couple of days now:
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Market will keep buying USD on dips
The USD continues to ride the momentum in bonds yields, but there has been an important shift in the underlying driver of the yield curve.
President-elect Trump has proposed an ambitious fiscal stimulus agenda, including USD1trn in infrastructure spending, cuts in personal and corporate taxes, and incentives to bring back corporate earnings retained abroad. While this agenda is likely to be significantly restrained by the fiscal hawks in Congress, even a moderate fiscal stimulus with an economy near full employment could generate inflationary pressures. These expectations are increasingly reflected in the US 10Y breakevens that are up some 20bp since the election. The tightening in financial conditions via higher bond yields should be of some concern for the Fed but in our view it will not deter the FOMC from hiking in December, especially as the move is more than 90% priced in. The Fed is likely to stick to its game plan of only very gradual rate increases thereafter as the fiscal outlook remains unclear for now. The USD may thus be reliant on the details of President Trump's cabinet, fiscal signals from recently re-nominated House Speaker Paul Ryan's and incoming inflation data to continue its uptrend.'
This week is shortened by the Thanksgiving holiday and probably does not lend itself to fresh USD highs but we suspect markets will continue buying into any corrective USD weakness.
On the economic calendar next week are October durable goods orders and the minutes from the November FOMC meeting, which should highlight that the Fed was in a wait-and-see mode ahead of the elections.
S&P's Gill says looking closely at reserve status of pound
Bloomberg with that headline, no further details
Exclusive: Mastercard Determined to Cut Binary Options Deposits from Canada
The international binary options industry has been under tremendous pressure recently with various countries banning advertising, marketing or even the instrument itself outright. This intense regulatory focus is radiating outwards onto companies servicing the industry, scaring them into cutting ties with the business.
The latest example for this is Mastercard – Finance Magnates sources have learned that the payments cards giant now lists binary options as a brand damaging activity, alongside the sale of controversial products such as psychoactive “herbal” drugs and illegal elephant ivory. It associates binary options with risk of fraud, deception and disputes.
Tightening the noose
According to our sources, Mastercard has issued a notice to its clients to make sure they understand and adhere to a number of restrictions on binary options transactions. Mastercard has verified that no binary options providers are approved in any province of Canada and therefore the industry is completely out of bounds for Canadians. Canadian securities regulations are decentralised with each province issuing its own licenses to brokers. It therefore can be time consuming for merchants to check if a firm is authorized to provide services for each specific client.
Mastercard also reminds merchants that in countries where binary options is regulated as gambling, they must use the code for gambling for any deposit. Mastercard additionally warns that transactions with binary options firms may not involve credit.
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EUR/USD: Set to 'rebound anew' into year-end
In the week ahead it will likely continue to be external factors that drive the EUR, especially as November CPI is unlikely to have a greater impact on ECB monetary policy expectations. It remains the central bank's base case that price developments will continue to stabilise and that is reflected in market based inflation expectations too.
When it comes to external factors next week's US labour data is key. For November non-farm payrolls our economists expect a slight acceleration to 175K, with the unemployment rate unchanged at 4.9%. After a 0.4% MoM jump in October, average hourly earnings growth should slow to 0.1% MoM, partly reflecting calendar effects. This would bring down the YoY rate to 2.7% from 2.8%. October personal spending is expected to show a strong 0.6% MoM increase as signalled by retail sales data, but the bigger potential market driver would be any surprises to the core PCE deflator where we see a steady reading of 1.7% YoY.
Although EUR/USD may remain subject to downside risks we see limited room of further diverging monetary policy expectations to the detriment of the pair.
As such we stick to the view that the currency is likely to rebound anew into year-end.
source
Feds Beige Book: Strong dollar reported as a headwind/slight upward pressure on prices
The beige book was prepared by the Cleveland Fed with data collected on or before November 18
Nov NFP: 'Easily Clears The Bar For A December Rate Hike'
Nonfarm payrolls expanded 178k in November, in line with our (175k) and consensus expectations (180k). The three-month moving average held steady at about 175k (Figure 1).
Within this number, private payrolls expanded 156k and public sector payrolls grew 22k. Within the details of the report, overall private job gains were in line with our expectation but weakness in retail trade (-8k; previous: -9k) and a somewhat subdued pace in trade, transport, and utilities employment continue to disappoint our expectations.
The decline in retail trade was concentrated in traditional brick and mortar stores, with the fall especially large in clothing retailers. We suspect that this decline in employment marks a further shift toward online venues for retail goods rather than a signal of impending weakness in consumption. Consistent with a healthy economy, employment gains in professional and business services seem to have returned to normal after considerable softness early this year. Goods sector employment rose 17k as a solid gain in construction employment offset small declines in manufacturing employment.
Overall and in our view, this report easily clears the bar for a December rate hike and represents some of the continued progress towards the dual mandate that the committee desires. Of course, the committee could decide that the tightening of financial conditions since September are sufficiently large to forestall a hike but we consider that to be very unlikely at this point.
source
Supreme Court Decision: Pound Sterling Forecast Vs Euro, Canadian Dollar & Australian Dollar
Pound Sterling (GBP) Exchange Rates Rally But Forecast is Neutral Negative
The POUND STERLING (currency : GBP) continues to climb a wall of fear against the other sixteen most actively traded global currencies.
The UK unit is managing to claw back a large proportion of its post-Brexit vote losses in spite of constant newsflow pointing to a potentially messy EU exit.
A stronger-than-anticipated Purchasing Manager Index survey of the British construction sector helped the Pound, but there could be choppy waters ahead, so the Pound forecast is NEUTRAL TO NEGATIVE.
Italian Referendum Pressuring Euro (EUR) Exchange Rates Lower
The EURO (currency : EUR) has put in a generally flaky performance this week as investors nervously eye Sunday’s Italian Referendum.
A ‘No’ vote, followed by political consternation is considered the most likely outcome of the plebiscite. If this leads to an Italian General Election, then support for the shared currency is expected to slump.
Analysts forecast that the euroland unit will trade on a NEUTRAL TO NEGATIVE footing moving forward and the Pound Euro exchange rate stands at 1.1880 GBP EUR.
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