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18 Dec 2015
Fed’s aftermath: USD higher, equities lower – Rabobank
FXStreet (Delhi) – Michael Every, Research Analyst at Rabobank, notes that yesterday Asia seemed to largely take the Fed’s rate hike in its stride.
Key Quotes
“That being said, things have started to look less rosy back in the US itself, where 2-year yields dipped back below 1.00% (and were 2bp lower at 0.98% this morning in Hong Kong time) while 10-year yields dropped 6bp to 2.22%, showing no signs of an imminent break-out to the upside even though we are – ostensibly – around three months away from the next Fed hike if we believe the FOMC’s own expectations. Moreover, US equities reversed course, the Dow -1.4% and the S&P -1.5%. Data-wise, the Philly Fed index also collapsed from 1.9 to -5.9: apart from September (which was -6.0) that is the worst reading since February 2013, making for another “Rate hikes? Really?” message from the part of the US economy still trying to actually make things. Given that the USD index jumped from 98.4 to 99.0 on the day, expect more of that to come.”
“Meanwhile, back in Asia we saw a further drop in USD/CNY to 6.4837 and in USD/CNH all the way to 6.5722. Given that the median FX forecast on Bloomberg for USD/CNY is still 6.60 by end-2016 (not 2015), most of the market must be presuming that there is going to be a whole lot of nothing happening with that particular FX cross all next year.”
“The unofficial Q4 China Beige Book just released (based on the Fed’s equivalent, and drawn from a survey of 2,100 firms across the country) supports my view that such benign expectation will not be the case, in fact. ‘The Book’ noted that China’s sales, revenue, volumes, output, prices, profits, hiring, borrowing, and cap-ex were all weaker than the prior three months. Indeed, it summarised that “The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Only the part about struggling manufacturing held true.....It looked like firms were encountering genuinely harmful deflation.” Weakness in the labour market would of course be Beijing’s greatest concern, in which case we can expect fiscal policy to get even more stimulatory. However, monetary policy was shown to be losing effectiveness in ‘The Book’, as the share of firms borrowing declined to a record low, underlining that China’s problems are structural (i.e., over-capacity) as much as cyclical; nonetheless, lower interest rates – and a lower CNY – both seem inevitable in 2016.”
“By contrast, yesterday’s UK retail sales data were incredible at 1.7%% m-o-m, as cash registers jingled all the way (‘tis the season to be jolly generous). Nonetheless, even all that ho-ho-ho couldn’t keep GBP from slipping back under 1.50, and even testing below 1.49 at one point, testimony to USD’s new momentum: JPY is back at 122.50, for example, AUD at 0.7126, NZD at 0.67, and EUR has tested down towards the 1.08 level.”
“In EM FX, BRL surprisingly gained to 3.88, but notably in Argentina USD/ARS surged from 9.81 to 13.33 after the new government devalued the official exchange rate to that prevailing on the black market: so yet another country joins the FX War – bienvenida!”
Key Quotes
“That being said, things have started to look less rosy back in the US itself, where 2-year yields dipped back below 1.00% (and were 2bp lower at 0.98% this morning in Hong Kong time) while 10-year yields dropped 6bp to 2.22%, showing no signs of an imminent break-out to the upside even though we are – ostensibly – around three months away from the next Fed hike if we believe the FOMC’s own expectations. Moreover, US equities reversed course, the Dow -1.4% and the S&P -1.5%. Data-wise, the Philly Fed index also collapsed from 1.9 to -5.9: apart from September (which was -6.0) that is the worst reading since February 2013, making for another “Rate hikes? Really?” message from the part of the US economy still trying to actually make things. Given that the USD index jumped from 98.4 to 99.0 on the day, expect more of that to come.”
“Meanwhile, back in Asia we saw a further drop in USD/CNY to 6.4837 and in USD/CNH all the way to 6.5722. Given that the median FX forecast on Bloomberg for USD/CNY is still 6.60 by end-2016 (not 2015), most of the market must be presuming that there is going to be a whole lot of nothing happening with that particular FX cross all next year.”
“The unofficial Q4 China Beige Book just released (based on the Fed’s equivalent, and drawn from a survey of 2,100 firms across the country) supports my view that such benign expectation will not be the case, in fact. ‘The Book’ noted that China’s sales, revenue, volumes, output, prices, profits, hiring, borrowing, and cap-ex were all weaker than the prior three months. Indeed, it summarised that “The popular rush to find a successful manufacturing-to-services transition will have to be put on hold for a bit. Only the part about struggling manufacturing held true.....It looked like firms were encountering genuinely harmful deflation.” Weakness in the labour market would of course be Beijing’s greatest concern, in which case we can expect fiscal policy to get even more stimulatory. However, monetary policy was shown to be losing effectiveness in ‘The Book’, as the share of firms borrowing declined to a record low, underlining that China’s problems are structural (i.e., over-capacity) as much as cyclical; nonetheless, lower interest rates – and a lower CNY – both seem inevitable in 2016.”
“By contrast, yesterday’s UK retail sales data were incredible at 1.7%% m-o-m, as cash registers jingled all the way (‘tis the season to be jolly generous). Nonetheless, even all that ho-ho-ho couldn’t keep GBP from slipping back under 1.50, and even testing below 1.49 at one point, testimony to USD’s new momentum: JPY is back at 122.50, for example, AUD at 0.7126, NZD at 0.67, and EUR has tested down towards the 1.08 level.”
“In EM FX, BRL surprisingly gained to 3.88, but notably in Argentina USD/ARS surged from 9.81 to 13.33 after the new government devalued the official exchange rate to that prevailing on the black market: so yet another country joins the FX War – bienvenida!”