Good morning,
USD higher as per usual
Currency markets seem to be in a bit of a Groundhog Day scenario at the moment with the same forces hitting prices every day; stronger US dollar, oil fractious on an OPEC meeting and the euro worried about this weekend’s Italian referendum.
The causes of the dollar strength are well-known; Fed officials are expected with 100% certainty to hike interest rates in December with further rises expected next year in a bid to keep a nascent rise in inflation under control. The inflation is expected to come from higher import prices courtesy of trade disturbances as well as an increase in fiscal spending as part of the Trump government infrastructure plans.
The yield on US debt has risen to 2.3% on a 10yr time frame, back to levels not seen in around 18 months and investors remain more than happy to buy this debt to obtain that yield whilst still holding on to an asset seen widely as a safe haven. A continuation of this will drive the US dollar higher.
How far can it go?
The dollar index – the rate of the greenback on a trade-weighted basis – is currently at 101.11 and we think that we could see a rise to as high as 103/104 – an increase of around 2/3% before the Federal Reserve begins to express concerns over the strength of the US dollar. The Fed has only just got growth and inflation going in the US economy, the last thing that they want is it being snuffed out by a stronger US dollar.
Yesterday’s revision of US GDP gave us a positive surprise with overall growth and personal consumption being revised higher to 3.2% and 2.8% respectively and solidifies expectations that the December Fed meeting will drive expectations of 2/3 rate rises in 2017.
Similarly moves in oil markets have also helped the greenback higher as an OPEC meeting in Vienna struggles to find a deal on production cuts. Oil is still very much oversupplied at the moment and any deal that does not deliver meaningful production cuts will drag the price out of the $40s and back towards the $30 per barrel
RBS fails Bank of England stress tests
This morning’s Bank of England stress tests have seen Barclays, Standard Chartered and RBS struggle with the latter the only failure. The scenarios within these stress tests measured the impact of a severe slowdown in Chinese growth, a global recession of 1.9 per cent of GDP and a more than 30 per cent fall in UK house prices over five years on the balance sheets of these financial institutions.
Sterling has done little in reaction but the Bank of England’s Financial Policy Committee continues to warn of further headwinds to UK spending and growth from Brexit and issues around the UK’s trading position in the world.
Elsewhere
The day ahead holds US inflation and German unemployment numbers neither of which are expected to reverse the positions of their relative currencies. We also have speeches from ECB President Mario Draghi, Fed Governor Powell and the Federal Reserve’s Beige book look at the US economy.
Have a great day.