Forex Institutional Research: Societe Generale FX Daily
Key quotes from the Societe Generale report:
Yesterday afternoon’s bounce in oil prices has been sustained through Asian trading, providing a mostly risk-friendly backdrop and helping commodity-sensitive currencies while the keeping the dollar under a little downward pressure. Today’s data includes the flash PMIs for the Euro area, Germany’s IFO, UK CPI, the Markit manufacturing PMI and Richmond Fed index in the US. The European PMIs take pride of place, though the consensus forecast (and ours too) is for the composite measure to be unchanged at 53.0, which doesn’t promise thrills or spills for markets. We expect marginally stronger German manufacturing (50.9) to be offset by slightly softer services (55.0).
Good for oil & risk sentiment
The clearest conclusion isn’t about FX at all, but about breakeven inflation. Core CPI rose to 2.3% in February and the core PCE deflator had already ticked up to 1.7% from 1.5% in January. You can’t avoid thinking that the FOMC was worried about the fall in inflation expectations and will be happy to see them rise. 5y/5y breakevens had fallen to a low of 1.43% in February and while they are now up to 1.65%, a move to and through 2% seems likely to me, even in the context of a low inflation world.
USDJPY A Buy?
This time last week I was merrily suggesting that USDJPY was a buy as risk sentiment held up well and Treasury yields edged slowly higher. Today risk sentiment is in fine fettle and Treasury yields are once again edging up so guess what? A degree of circumspection is only reasonable under the circumstances but across markets generally, the effects of the Fed’s dovish stance are gradually starting to unwind. I’ll come back to reasons to (re)short the yen in due course and put down a market for now that becalmed markets with slowly rising US yields would be bad for it.
The first reaction to the Fed’s dovish stance was shock (and position-reduction). The second was to look for a conspiracy theory (what was in the Shanghai water?). The third reaction is to take a step back and wonder what the point of ever-easier monetary policy might be (we know, by now, that it does more for asset prices and inequality than it does for aggregate demand). There is growing doubt that any kind of acceleration in global growth is likely in the absence of fiscal expansion. The debate is increasingly between those who think that slower growth is just the price we have to pay for the surge in debt levels of the past decade (and more) and those who think private sector reluctance to invest at these rates demands public sector intervention
UK Brexit hyperbole went up a notch overnight when Kristin Forbes compared it to the Suez crisis. The heart of the point was that the current account is a growing source of concern, and that will persist even if, ultimately, it’s the effect on uncertainty and on economic activity which will drive GBP/USD down between now and June 23. Still we’ll re-iterate our generally bearish view and stay short GBP/NOK.
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