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Apr 17, 2014
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Grabbing the dollar bull by the horns

The bullish case in favour of the dollar seems to be losing some clout as the euro remains stubbornly resistant to the European Central Bank’s attempts to talk it down and the noises coming out of the Federal Reserve indicate that the timing of the first U.S. rate rise in 8 years could be further away than the market has currently anticipated. Fed chairwoman Janet Yellen yesterday sounded a dovish enough note on the economy to give pause to the dollar-enthusiasts, but not enough to spark any kind of Treasuries buying-spree. The most recent Reuters foreign exchange survey of 60 currency strategists – carried out in early April – offers a median forecast of the euro/dollar exchange rate falling to $1.29 in a year’s time, a drop of about 7 percent from current levels. Yellen reiterated that the Fed will remove policy accommodation when the time is right but it let itself be guided by gauges such as the slack in the labour market and by inflation “… and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained,” she told the Economics Club of New York. Those comments were in contrast to remarks made in her first post rate-decision speech in March in which she suggested that the first rate hike could come as soon as next spring. “Yield spreads suggest the dollar index could gain a little from here, but with Yellen et al selling the message of any rate move being well into H2 2015, it’s hard to see where the major USD rally comes from,” our guest Charles Diebel, head of market strategy and research at Lloyds Bank, said today. “It’s interesting that her initial message of a 6-month time horizon has been discarded as a mistake to me. We had a similar faulty start when (predecessor Ben) Bernanke took over. As such, everyone assumes it was just a teething issue. I am doubtful it was that much of a mistake and instead was merely a reflex reaction to a question… as such, we may have some serious catch up to play later this year,” Charles said.

The gap between 10-year and 2-year Treasury notes is trading close to its narrowest in six months, suggesting investors expect short-term rates to rise more quickly than they did late last year. But to put the move into some kind of perspective, the spread, which is currently at 227 basis points, is only some 35 basis points off the near-two year highs seen in January. So while the prospect of a U.S. rate rise is something the markets have come to terms with, it might not happen as quickly as some of those dollar bulls would like. “The game remains the same as we have faced since the start of January … carry-and-roll make it too expensive to sit short of major bond markets. In short, in 2 out of the 3 possible market dynamics ie the market rallies or goes nowhere, you are paid to be long bonds,” Charles said. “As such any sell-offs have to be very intense but short-lived.”

Apr 17, 2014
via Global Markets Forum Dashboard

Grabbing the dollar bull by the horns

The bullish case in favour of the dollar seems to be losing some clout as the euro remains stubbornly resistant to the European Central Bank’s attempts to talk it down and the noises coming out of the Federal Reserve indicate that the timing of the first U.S. rate rise in 8 years could be further away than the market has currently anticipated. Fed chairwoman Janet Yellen yesterday sounded a dovish enough note on the economy to give pause to the dollar-enthusiasts, but not enough to spark any kind of Treasuries buying-spree. The most recent Reuters foreign exchange survey of 60 currency strategists – carried out in early April – offers a median forecast of the euro/dollar exchange rate falling to $1.29 in a year’s time, a drop of about 7 percent from current levels. Yellen reiterated that the Fed will remove policy accommodation when the time is right but it let itself be guided by gauges such as the slack in the labour market and by inflation “… and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained,” she told the Economics Club of New York. Those comments were in contrast to remarks made in her first post rate-decision speech in March in which she suggested that the first rate hike could come as soon as next spring. “Yield spreads suggest the dollar index could gain a little from here, but with Yellen et al selling the message of any rate move being well into H2 2015, it’s hard to see where the major USD rally comes from,” our guest Charles Diebel, head of market strategy and research at Lloyds Bank, said today. “It’s interesting that her initial message of a 6-month time horizon has been discarded as a mistake to me. We had a similar faulty start when (predecessor Ben) Bernanke took over. As such, everyone assumes it was just a teething issue. I am doubtful it was that much of a mistake and instead was merely a reflex reaction to a question… as such, we may have some serious catch up to play later this year,” Charles said.

The gap between 10-year and 2-year Treasury notes is trading close to its narrowest in six months, suggesting investors expect short-term rates to rise more quickly than they did late last year. But to put the move into some kind of perspective, the spread, which is currently at 227 basis points, is only some 35 basis points off the near-two year highs seen in January. So while the prospect of a U.S. rate rise is something the markets have come to terms with, it might not happen as quickly as some of those dollar bulls would like. “The game remains the same as we have faced since the start of January … carry-and-roll make it too expensive to sit short of major bond markets. In short, in 2 out of the 3 possible market dynamics ie the market rallies or goes nowhere, you are paid to be long bonds,” Charles said. “As such any sell-offs have to be very intense but short-lived.”

Apr 17, 2014
via Global Markets Forum Dashboard

Grabbing the dollar bull by the horns

The bullish case in favour of the dollar seems to be losing some clout as the euro remains stubbornly resistant to the European Central Bank’s attempts to talk it down and the noises coming out of the Federal Reserve indicate that the timing of the first U.S. rate rise in 8 years could be further away than the market has currently anticipated. Fed chairwoman Janet Yellen yesterday sounded a dovish enough note on the economy to give pause to the dollar-enthusiasts, but not enough to spark any kind of Treasuries buying-spree. The most recent Reuters foreign exchange survey of 60 currency strategists – carried out in early April – offers a median forecast of the euro/dollar exchange rate falling to $1.29 in a year’s time, a drop of about 7 percent from current levels. Yellen reiterated that the Fed will remove policy accommodation when the time is right but it let itself be guided by gauges such as the slack in the labour market and by inflation “… and the slower the projected progress toward those objectives, the longer the current target range for the federal funds rate is likely to be maintained,” she told the Economics Club of New York. Those comments were in contrast to remarks made in her first post rate-decision speech in March in which she suggested that the first rate hike could come as soon as next spring. “Yield spreads suggest the dollar index could gain a little from here, but with Yellen et al selling the message of any rate move being well into H2 2015, it’s hard to see where the major USD rally comes from,” our guest Charles Diebel, head of market strategy and research at Lloyds Bank, said today. “It’s interesting that her initial message of a 6-month time horizon has been discarded as a mistake to me. We had a similar faulty start when (predecessor Ben) Bernanke took over. As such, everyone assumes it was just a teething issue. I am doubtful it was that much of a mistake and instead was merely a reflex reaction to a question… as such, we may have some serious catch up to play later this year,” Charles said.

The gap between 10-year and 2-year Treasury notes is trading close to its narrowest in six months, suggesting investors expect short-term rates to rise more quickly than they did late last year. But to put the move into some kind of perspective, the spread, which is currently at 227 basis points, is only some 35 basis points off the near-two year highs seen in January. So while the prospect of a U.S. rate rise is something the markets have come to terms with, it might not happen as quickly as some of those dollar bulls would like. “The game remains the same as we have faced since the start of January … carry-and-roll make it too expensive to sit short of major bond markets. In short, in 2 out of the 3 possible market dynamics ie the market rallies or goes nowhere, you are paid to be long bonds,” Charles said. “As such any sell-offs have to be very intense but short-lived.”

Apr 3, 2014
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Surprise! The ECB leaves its toolbox closed

The European Central Bank surprised no one by leaving euro zone monetary policy unchanged and not launching any form of additional easing. But Mario Draghi surprised markets by saying the governing council unanimously agreed it would deploy anything in its toolbox to fight a prolonged period of low inflation if needed. While seemingly a sharp contrast to the last policy meeting at which he suggested the bar for action was set pretty high, Draghi didn’t detail what tools might be considered or indeed even what “prolonged” might mean. That doesn’t exactly translate into a hard-and-fast plan for euro zone monetary policy, according to our guest today, Reuters correspondent, Sakari Suoninen, our Finland bureau chief, who until very recently, had reported on the ECB for many years. “The unanimous about unconventional measures part is new … But still nothing firm, which makes one ask how seriously we should take their determination to take new measures if needed, what does it take if inflation at 0.5 percent is not enough,” he said.

Inflation in the euro zone has been stuck in what Draghi has called the “danger zone” below 1 percent for months, prompting markets to consider the possibility that the ECB could do anything from cut rates from their current 0.25 percent, to launch full-on quantitative easing, even though policymakers at the central bank haven’t come close to suggesting they might do anything of the sort. The feeling in the forum today was that Draghi was rather uncomfortable and not his usual calm self. Interestingly, Sakari also picked up on the fact that Draghi ducked the question on whether or not the rate decision itself was unanimous several times.  Easter was also in the spotlight,  falling later this year than usual and possibly another factor depressing inflation. “It could also be that he does not want to say they were (unanimous), as that would make it more likely they are not going to ease in coming months. But his words about different views about the inflation data indicated it was not unanimous,” Sakari said. The ECB’s view on inflation is that it will pick up throughout April. So it looks like it’s going to take at least another month of inflation data and another policy meeting before knowing what, if anything, the central bank will do. Back to square one.

Apr 3, 2014
via Global Markets Forum Dashboard

Surprise! The ECB leaves its toolbox closed

The European Central Bank surprised no one by leaving euro zone monetary policy unchanged and not launching any form of additional easing. But Mario Draghi surprised markets by saying the governing council unanimously agreed it would deploy anything in its toolbox to fight a prolonged period of low inflation if needed. While seemingly a sharp contrast to the last policy meeting at which he suggested the bar for action was set pretty high, Draghi didn’t detail what tools might be considered or indeed even what “prolonged” might mean. That doesn’t exactly translate into a hard-and-fast plan for euro zone monetary policy, according to our guest today, Reuters correspondent, Sakari Suoninen, our Finland bureau chief, who until very recently, had reported on the ECB for many years. “The unanimous about unconventional measures part is new … But still nothing firm, which makes one ask how seriously we should take their determination to take new measures if needed, what does it take if inflation at 0.5 percent is not enough,” he said.

Inflation in the euro zone has been stuck in what Draghi has called the “danger zone” below 1 percent for months, prompting markets to consider the possibility that the ECB could do anything from cut rates from their current 0.25 percent, to launch full-on quantitative easing, even though policymakers at the central bank haven’t come close to suggesting they might do anything of the sort. The feeling in the forum today was that Draghi was rather uncomfortable and not his usual calm self. Interestingly, Sakari also picked up on the fact that Draghi ducked the question on whether or not the rate decision itself was unanimous several times.  Easter was also in the spotlight,  falling later this year than usual and possibly another factor depressing inflation. “It could also be that he does not want to say they were (unanimous), as that would make it more likely they are not going to ease in coming months. But his words about different views about the inflation data indicated it was not unanimous,” Sakari said. The ECB’s view on inflation is that it will pick up throughout April. So it looks like it’s going to take at least another month of inflation data and another policy meeting before knowing what, if anything, the central bank will do. Back to square one.

Mar 31, 2014
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Yuan only live twice – or so it seems

The yuan’s decline against the dollar to its lowest level in 13 months has come after China’s central bank said it would widen the band in which the currency trades every day as it seeks to allow it to trade more freely. Great news for anyone seeking to buy Chinese imports, especially in Europe, as the offshore yuan (CNH) is at its lowest in over two years against the euro. Or is it? Neal Kimberley, Reuters FX analyst and a weekly guest in the forum, says right now it’s something of a double source of pain, not least because of the exposure euro zone exporters have to the Chinese currency now. “Much euro zone selling into China has now moved away from dollar invoicing to yuan (ie CNH). Invoicing EUR/CNH is a HUGE book now,” Neal said earlier. “The euro zone authorities will be very conscious that a combination of two-way risk on the yuan and a resurgent programme of urbanisation in China are a possible disinflationary impulse for the outside world generally and for the euro zone in particular.”

This can hardly be music to the ears of European Central Bank policymakers who meet this week to set interest rates and wrestle to respond to euro zone inflation sliding deeper in the so-called “danger zone” below 1 percent. An initial estimate showed prices rose just 0.5 percent year-on-year in March, the least since late 2009 and well below the ECB’s stated target of around or just below two percent. And a strong currency is the last thing the euro zone’s corporate world would welcome right now. The euro is already trading around $1.38, having touched its highest in over two years this month against the greenback, and around its highest against the yen since the 2008 crisis. “Euro zone treasurers will be waking up in a cold sweat above $1.40 and above $1.45 – and here’s the thing – if (the euro) is $1.3950 bid or JPY144.50 bid, do you hedge on the assumption it is going through (those levels) or do you do nothing?,” Neal asks. “If the latter, you’d better have a good explanation for the ‘hindsight-management’ who will pillory you if it does go and you were under hedged. So most will hedge, thereby making their nightmare scenario self-fulfilling.”

Mar 31, 2014
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Yuan only live twice – or so it seems

The yuan’s decline against the dollar to its lowest level in 13 months has come after China’s central bank said it would widen the band in which the currency trades every day as it seeks to allow it to trade more freely. Great news for anyone seeking to buy Chinese imports, especially in Europe, as the offshore yuan (CNH) is at its lowest in over two years against the euro. Or is it? Neal Kimberley, Reuters FX analyst and a weekly guest in the forum, says right now it’s something of a double source of pain, not least because of the exposure euro zone exporters have to the Chinese currency now. “Much euro zone selling into China has now moved away from dollar invoicing to yuan (ie CNH). Invoicing EUR/CNH is a HUGE book now,” Neal said earlier. “The euro zone authorities will be very conscious that a combination of two-way risk on the yuan and a resurgent programme of urbanisation in China are a possible disinflationary impulse for the outside world generally and for the euro zone in particular.”

This can hardly be music to the ears of European Central Bank policymakers who meet this week to set interest rates and wrestle to respond to euro zone inflation sliding deeper in the so-called “danger zone” below 1 percent. An initial estimate showed prices rose just 0.5 percent year-on-year in March, the least since late 2009 and well below the ECB’s stated target of around or just below two percent. And a strong currency is the last thing the euro zone’s corporate world would welcome right now. The euro is already trading around $1.38, having touched its highest in over two years this month against the greenback, and around its highest against the yen since the 2008 crisis. “Euro zone treasurers will be waking up in a cold sweat above $1.40 and above $1.45 – and here’s the thing – if (the euro) is $1.3950 bid or JPY144.50 bid, do you hedge on the assumption it is going through (those levels) or do you do nothing?,” Neal asks. “If the latter, you’d better have a good explanation for the ‘hindsight-management’ who will pillory you if it does go and you were under hedged. So most will hedge, thereby making their nightmare scenario self-fulfilling.”

Mar 27, 2014
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“This won’t hurt a bit” – IMF therapy for Ukraine

Ukraine has secured an agreement from the International Monetary Fund for a financial lifeline that will hopefully restore it to economic health, boosting the country’s dollar-denominated bonds and hryvnia currency. But there is no such thing as “money for nothing”. “If you read the IMF release and statements it’s very clear that they are trying to invent delayed shock therapy,” said Breakingviews columnist Pierre Briancon, our guest today. Kiev will have a number of bitter pills to swallow to secure the $14-18 billion in emergency aid that will eventually pave the way for up to $27 billion in assistance over the coming two years. Accept, and it risks public outcry. Refuse and it risks full-on bankruptcy, according to the prime minister. After the IMF’s two most recent programmes for Ukraine went off track, it wants to make sure Kiev is going to stick to the treatment plan this time. This puts Prime Minister Arseny Yatseniuk in an uncomfortable position but if he can push through the reforms the IMF is demanding, this bailout may end working, Pierre said. “On one hand, Ukraine badly needs money now. On the other hand, there would be no point in requiring immediate painful reforms in the current context – and before the May 25 election. I think they have struck the right balance,” he told us.

Yatseniuk, who was appointed in late February after violent protests led to the ouster of his predecessor Viktor Yanukovic, warned Ukraine is on the verge of bankruptcy and told parliament that without IMF medicine the economy would contract by up to 10 percent this year. Step number one is an eye-watering 50 percent rise in domestic gas prices. “Pain has already started with the 25 percent-plus depreciation of the hryvnia since the beginning of the year,” Pierre said. “The May 25 vote is the crucial date for everybody. But it won’t be about the current government – and I don’t see the main presidential candidates (there are many) running against the IMF programme.”

Mar 27, 2014
via Global Markets Forum Dashboard

“This won’t hurt a bit” – IMF therapy for Ukraine

Ukraine has secured an agreement from the International Monetary Fund for a financial lifeline that will hopefully restore it to economic health, boosting the country’s dollar-denominated bonds and hryvnia currency. But there is no such thing as “money for nothing”. “If you read the IMF release and statements it’s very clear that they are trying to invent delayed shock therapy,” said Breakingviews columnist Pierre Briancon, our guest today. Kiev will have a number of bitter pills to swallow to secure the $14-18 billion in emergency aid that will eventually pave the way for up to $27 billion in assistance over the coming two years. Accept, and it risks public outcry. Refuse and it risks full-on bankruptcy, according to the prime minister. After the IMF’s two most recent programmes for Ukraine went off track, it wants to make sure Kiev is going to stick to the treatment plan this time. This puts Prime Minister Arseny Yatseniuk in an uncomfortable position but if he can push through the reforms the IMF is demanding, this bailout may end working, Pierre said. “On one hand, Ukraine badly needs money now. On the other hand, there would be no point in requiring immediate painful reforms in the current context – and before the May 25 election. I think they have struck the right balance,” he told us.

Yatseniuk, who was appointed in late February after violent protests led to the ouster of his predecessor Viktor Yanukovic, warned Ukraine is on the verge of bankruptcy and told parliament that without IMF medicine the economy would contract by up to 10 percent this year. Step number one is an eye-watering 50 percent rise in domestic gas prices. “Pain has already started with the 25 percent-plus depreciation of the hryvnia since the beginning of the year,” Pierre said. “The May 25 vote is the crucial date for everybody. But it won’t be about the current government – and I don’t see the main presidential candidates (there are many) running against the IMF programme.”

Mar 26, 2014
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Feeling positive towards Europe

European companies have weathered a tough few years of economic recession, austerity-strapped customers and an uncertain outlook for the global economy which has led to a couple of years of zero earnings growth – never a good thing for investors or directors alike. But the corporate sector is about to leave all that behind it, says today’s guest, Can Elbi, who helps run the JB Europe Focus Fund for Swiss & Global, a long-only fund that invests in some of the region’s biggest blue-chips. He thinks the next move up in the equities market, which has risen 0.4 percent in Europe so far this year, compared to a 1.1 percent gain in the S&P, will be driven by earnings growth. European companies generate 45-50 percent of their earnings in Europe itself. “With revenues and earnings finally recovering and the cost of debt coming down due to the ECB, free cash-flow generation will increase even more. Company balance sheets are very robust,” Can says.

The past couple of years might have been tough for the companies themselves, but shareholders have been pretty sheltered from the cold spell. Dividends per share are around their highest in Europe since 2008 as companies spend more on rewarding their shareholders than on capital expenditure, a decision that Can says in the long run is a good call. “This is a wise use of cash as company balance sheets are healthy and capex budgets will typically not continue to rise. They will potentially rise if pent-up business demand comes back in Europe, where the average age of capital stock is at its highest,” he says. In terms of how to take advantage of the catching up Europe has to do compared with the U.S. equity market, Can says he’s investing in companies with a strong exposure to the region. French tyre-producer Michelin and chemicals producer Arkema, along with Dutch financial group ING and German software maker SAP are among his top holdings. Accommodative monetary policy and improving unit labour costs, along with structural reforms in formerly troubled countries will add to the positive backdrop, he says. “Net-net, we are constructive in Europe equities, as we believe the European economic recovery will finally create the earnings recovery cycle,” Can adds.

    • About Amanda

      "I moderate the Global Markets Forum, a Reuters online community for financial professionals. Based in London, I have worked at Reuters for over ten years, reporting from both London and New York on foreign exchange, macroeconomics, government bonds and commodities."
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