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The Morning Track excuses

- The Morning Track – Excuses by Bob Savage
http://trackresearch.com/articles/the-morning-track-excuses/

Explaining Foreign Exchange movements in markets requires a large imagination, good story-telling skills and a solid list of excuses. The EUR is bid because of increased M&A stories – Praxair/Taiyo for E5bn – because German Factory Orders were better and because the ECB sounded more hawkish putting the odds for the first hike to September 2019 from December. These are the excuses given for the rally from 1.1650 to 1.1710 today. Fundamental reasoning about currency movements has that random noise generator assigned to it. Take it with a large grain of salt. If rate expectations drive FX then the FOMC minutes today will see the USD stronger. If money flows matter, like repatriation, then the USD would be stronger. There is clearly more to the story about macro today than the excuses given. Growth and the outlook for it sustaining remain more to the point about what matters for currencies. Fear about politics is another, though today, GBP shrugs off the Brexit debate i
nside the UK May cabinet and outside the world. The UK PM travels to Berlin to talk with another embattled leader, Merkel, about her plans. Even as the UK Times reports Brexit Secretary David Davis has written to May to tell her that her new idea for how customs should operate after the divorce is unworkable. BOE Carney spoke today sounding hawkish and that maybe the balancing act with rate hike probabilities for August back to 80%. As for the EUR, the rally up started when the Italian Finance Minister said “nobody wants to leave the EUR.” However, the biggest excuse for EUR today is really about the USD as the US trade war looms large over all emerging markets – namely the imposition of $34bn in tariffs on Chinese goods and the threat of retaliation from China to follow tomorrow. This excuse about global trade terrorizing investors has been the noose around the neck of risk takers for the last 2 months as hopes that Trump’s tweets were a negotiation tool collaps
ed into outright actions on the EU, NAFTA and now China. Some markets show the fear more clearly than others – Platinum – at 10-year lows being one as its linked to autos and their catalytic converters. But perhaps here is the bigger reason for EUR gains today as the US/EU negotiations over auto tariffs go into high gear with even higher hopes for a deal to eliminate all tariffs. A bilateral trade win for Trump could significantly change the risk mood and the course of the USD particularly in Emerging Markets if this logic holds. The one market outside of trade that captures growth and politics is oil. President Trump continues to push for lower oil prices in return for security ties. The pressure there is worth watching and given the US balancing act of higher gasoline hurting consumers versus helping US oil patch producers. The role of energy in the FX equation isn’t easy nor perfectly logical but it’s the best we have in measuring the hope ahead for less trad
e war actions and more coordinated global growth. The run up to $74 seems overdone like the CNY and EUR moves and the USD uptrend may return if oil turns back to $72.