EUR 8.90 For Business Accounts Only

The Morning Track head-on

- The Morning Track – Head On by Bob Savage
http://track.com/articles/the-morning-track-head-on/

Risk-on today, as assets climb the wall of worry, and meet all doubters head on – but bravery in the face of danger may not solve all issues – just ask the sharks lifted by the storm. Irma delivered the expected disaster to Florida but wasn’t the worst-case scenario as Miami flooding and wind damage less than feared. The storm heads on to Georgia and Alabama, then to the Tennessee and Arkansas with threats to Atlanta, Birmingham, Memphis with high winds, more flooding, and threats to US agriculture from soybeans to cotton. That maybe the US headline, but the global markets traded a relief rally for risk as North Korea didn’t launch a missile or blow up a nuclear device. This led to a JPY reversal and USD rally from 32-month lows. But the UN Security Council meeting today maybe the eye of the storm as Kim warned of retaliation if there are harsher sanctions imposed. Instead of flight, there was fight from central bankers as they combat a weaker USD. ECB Coeure comme
nts on the EUR being a source of uncertainty faces the storm of FX head on - "exogenous shocks to the exchange rate, if persistent, can lead to an unwarranted tightening of financial conditions with undesirable consequences for the inflation outlook," Coeure said. "Against this background, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring," he said. This isn’t to say that economics don’t matter – nor politics – as the Norway election yesterday and today is too close to call and the Norway inflation at 1.3% y/y missed the 1.7% y/y expectations – lowest since Feb 2013 leading to EUR/NOK up 0.3% to 9.3450. The other place to watch is China where the PBOC lifting of USD forward buying reserve requirement led to a weaker CNY despite higher PPI/CPI reports over the weekend. The markets are expecting a battle for 6.50 to be the base for USD now. This also set the tone for all Asia with USD higher across the region. Fo
cus today is on the Brexit vote in Parliament while tomorrow maybe about the French CGT Union strike. The other economic data overnight Japan core machinery orders were better but don’t make up for Capex and 2Q GDP downgrade, nor was the BdF forecast for 3Q GDP at 0.5% q/q sufficient to take away strike risks for France while the Italian IP was up but not as much as hoped – that was it overnight and it leaves the markets watching the USD for a larger bounce bank. The problem is that US rates are the anchor that matters and given the hurricanes, the dovish FOMC tilt and the mixed US politics its going to be about US bonds and the 3Y auction today more than FX.