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The Morning Track noise-2

- The Morning Track - Noise by Bob Savage
http://track.com/articles/the-morning-track-noise-2/

One man’s music is another man’s noise. That maybe the lesson for today as the markets have again tempted traders to believe bond spreads determine all in FX and then find that there is more to the story. Narratives about markets drive investors to have the courage to take positions. US rate hike expectations are less than the FOMC speakers are telling them could happen and that alone makes the long USD position attractive. But the last 2 weeks have been about moderating this story with China and the Trump doubts about policy. This tale isn’t as compelling because we just don’t know what the next Tweet will say. Its also not sequential but holistic as we grabble with the reality of China PPI overnight – margins are the more logical focus for investors going forward – as global supply chains are going to be pushing up prices everywhere. This may indeed feed back to rates driving everything with the US 10-year bond yield determining everything else – but
until 2.52% prints – nothing will change and we will remain in the land of noise with competing stories being shouted to grab the money.

Overnight in FX markets CNH weakened further – off for the 3rd day – highlighting that there are bigger risks in China than PBOC intervention and capital controls working. The need for a stable to stronger CNY comes out clearly with the PPI print. If you have debt concerns raising rates won’t help, if you have inflation ones, raising them becomes necessary particularly if the FX rate is adding rather than subtracting from import price pressures. This leaves CNH as the FX chart that still matters to speculators the most in 2017 – just as in 2016 - at least for now.