View from London: Bond Trading Key to Understanding USD, Forex Today
10/25/2017 1:41 am EST
The British pound/Australian dollar is the trade of the day but that isn’t the theme. The key is whether rates are moving up fast enough to matter to markets, writes Bob Savage, CEO of Track Research Wednesday from London.
The normalization trade continues with UK the key focus overnight as 3Q GDP cements expectations for a Bank of England hike for 25bps. The question is whether they are one and done and the growth suggests no. This sent the GBP notably higher.
The risk of rates moving up quickly everywhere has put the equity/bond see-saw into play but equities are mixed. The other story is about CPI in Australia and how the AUD reflects the reduced risk for RBA action until 2H2018, that sent the AUD lower.
So the British pound/Australian dollar (GBP/AUD) is the trade of the day but that isn’t the theme. The key is whether rates are moving up fast enough to matter to markets and change the dynamic of low volatility, grab for yield thinking that defines the present environment.
In many ways, the central bankers’ meetings this week are becoming even more important than usual as they face the risk that money velocity is about to change. Demand for cheap money to leverage businesses and consumer spending means inflation later.
The rising pressures on banks are showing up with some larger banks actually lifting deposit rates. The significant excess reserves held by the Fed are the key to this risk ahead and in some ways the world is going full circle back to watching monetary aggregates again.
The backdrop for global coordinated growth eating away at excess capacity puts the U.S. tight labor markets and tilt to national focus as a key driver for the rally up in rates today. President Trump’s war with his own Senate Republicans means the deal on any tax reform will be more complicated but that hasn’t mattered today, nor will it, given the first real economic data today from durable goods to new home sales.
The danger spot for rates is in the BOC and its tilt towards rates with the Canadian dollar (CAD/USD) allowing them to sound more hawkish than expected if not actually hike. If U.S. rates are up, Canada won’t be far behind. All of this puts bond trading as a key for understanding the USD and forex in general today – with the break of 2.45% overnight opening 2.60% in short order should the GDP support it Friday.