As forex reacted to the expected FOMC hike Wednesday, risk/reward into 2018 is about the British pound regaining despite its politics, Brexit confusion and the BOE being behind the inflation curve, writes Bob Savage, CEO of Track Research.
We have all walked down the wrong road at some point, for most they turn back and restart, others go to the next fork. Political paths are more rocky than monetary ones but both seem more akin to mazes than super highways.
The Tory Brexit rebellion Wednesday in the UK leaves PM May suffering a path change risk. The UN envoy to North Korea returned from a trip there and thinks there is a desperate need for a new approach, so did the US/South Korea as they postpone their military drills until April.
The Republican push for tax reform is on a straight path despite the Alabama election twist, leaving future fiscal policy less clear.
Path guidance is at a premium and the root cause of the present volatility as the FOMC guidance on its path forward for rate hikes was disappointingly slow – unchanged dot plot and all. The key point is that even with a U.S. fiscal stimulus and talk of 4% growth from the Republicans, the FOMC didn’t change its views much.
Slow and steady rate moves up (5 more penciled in through 2019) make the terminal rate significantly higher than the market thinks and so bonds, U.S. dollar (USD/EUR) are lower still.
The Norges bank overnight sparked excitement by lifting its rate path and in the process lifting the NOK 1.3% to 9.7145 against the EUR and 1.2% to 8.2250 against the USD.
Let’s be clear, the Norwegian krone (NOK/USD) remains cheap and it’s the worst performer in the G10 for 4Q still.
The Philippine peso (PHP/USD) was the opposite today – the BSP kept rates unchanged at 3% and the currency didn’t move.
Staying on the same road after the Fed hike wasn’t seen as being obvious. For the Chinese, they responded with a lifting of rates as 7-day open market operations rose to 2.50% from 2.45% - hardly a significant move but clearly a suggestion about another path in 2018.
The point is that markets are waiting for the BOE and ECB today and their path directions. The risk post the FOMC hike is that others follow – and that means the key driver is the British pound (GBP/EUR) more than EUR.
Why – seems clear that Brexit uncertainty hasn’t done enough to kill inflation and the GBP weakness is more a curse than a game-changer for trade gains.
Risk/reward into 2018 is about GBP regaining despite its politics, Brexit confusion and the BOE being behind the inflation curve.
View TrackResearch.com, the global marketplace for stock, commodity and macro ideas here
