When we look at many of the financial media headlines over the last year, we have seen a good deal of attention focusing on the declining valuation in the Euro. However, when we take a closer at specific valuations in the Euro, we can see that this is not necessarily the case.
In the first quarter of 2014, the People’s Bank of China (PBoC) finally succeeded in breaking persistent renminbi (RMB) appreciation expectations. Unfortunately, the subsequent RMB depreciation coincided with the weakening of China’s economic fundamentals. As a result, instead of creating two-way fluctuations in the RMB exchange rate, expectations of RMB depreciation started to creep into the market. Capital outflows driven by expectations of RMB depreciation started to rise.
The latest Commitment of Traders report covers the week ending February 2 that included the FOMC meeting and the BOJ’s surprise cut. There was also speculation of a potential deal between Russia and OPEC to cut output. Speculative position adjustment in the futures market was more limited than one might have expected.
The US dollar traded higher before the weekend with the help a fairly robust jobs report. Although the jobs growth itself was somewhat disappointing, the details were constructive: More people working a longer workweek and earning more. The participation rate rose, and the unemployment rate (U-3) fell. The Atlanta Fed GDPNow tracker increased to 2.2% in Q1 16 from 1.2% at the start of the week.
Keynes and others may have referred to gold as a barbarous relic, but many investors continue to track it. In early January, we warned that gold appeared to be breaking out of a short-term bottoming pattern.
It had taken out a three-month downtrend line, which we suggested was part of a triangle pattern. Gold also traced out a double bottom pattern. The triangle pattern pointed to a move toward $1110 and the double bottom projected to around $1135. The yellow metal poked through $1157 today and remains near it highs in late turnover.
Sterling has neared the 50% retracement of the 11.5-cent decline since mid-December. It is near $1.4660. After easing ahead of the BOE announcement, sterling sold to $1.4530 on the initial headlines that showed the BOE was cutting its growth, inflation, and wage forecasts. However, the short-sterling futures had already largely discounted the rates being low for longer, and UK debt instruments also sold off, and after the initial flurry, sterling stabilized and recovered nearly fully.
The Bank of Japan surprised investors by introducing negative rates last week. Leave aside the fact that the negative rates do not go into effect for more than another week, and even when in effect, will apply to a relatively small amount of deposits at the central bank. The important point is that it is another central bank to introduce negative rates.
The yen is the strongest currency today. Many are still referring to it as a safe haven. However, this strikes us as a misuse of the concept. Investors are not flocking to the yen to find quiet place to ride out the storm. Rather the yen’s strength is a reflection of the turmoil.
The latest CFTC Commitment of Traders report covers the five sessions through January 26, the day before the FOMC concluded its two-day meeting and three days before the BOJ’s announcement. Speculators hardly changed their positioning during the period. There were no gross position adjustments that we would call significant (a bar we set at 10k contracts).
There is a mixed tone in the global capital markets today. Asian shares were mixed with declines in the Nikkei (-.07%) and Shanghai (-2.9%) being offset by modest gains elsewhere. European bourses are also mixed and the Dow Jones Stoxx 600 is off slightly. European bonds benchmark bond yields are lower though US yields are firmer.
