BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

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Categorized | Currencies

It’s the USD’s world, we just get to trade in it

Posted on November 24, 2016

From SocGen’s Kit Juckes this morning:

A strongish durable goods orders release, and a perception that easier fiscal policy is coming all over the world are cited as the catalysts for yesterday’s lurch higher in Treasury yields, but the underlying cause is that after 10year yields halved between the end of 2013 and mid-2016, there were a lot of longs which are still being flushed out. Positioning isn’t going to stand in the way of bond prices falling which in turn is the fuel for the dollar’s advance. DXY is testing 102, a level last seen in March 2003, and we expect a further 6% rise over the next few months. In broader trade-weighted term, the dollar is now within 2% of the 2002 peak which seems sure to break in the coming days, taking the dollar back to levels not seen since 1986.

Here’s the long term view of DXY:

Screen Shot 2016-11-24 at 14.16.27

And the broad trade weighted dollar index from FRED:

Screen Shot 2016-11-24 at 14.45.55

Do please, however, spare a thought for the Indian rupee, which India’s massive cash scrapping operation can’t be helping; the Japanese yen, which, as Kit also says, “has fallen by over 7% against the dollar since the election, more than any other Asian currency, beating only the Turkish Lira and Mexican Peso more widely”; and other Asian currencies under the cosh.

Apparently yield differentials matter (charts from HSBC):

Screen Shot 2016-11-24 at 15.09.48Screen Shot 2016-11-24 at 15.08.18

Finally, here’s a longer term framework for USD strength, also from HSBC, for those who want some semblance of control while stuck in The Forex:

The building blocks of President-elect Donald Trump’s policies point to USD strength in the near-term. We believe politics is the dominant driver to FX, but uncertainty over what these policies may look like has made it problematic for the FX market to price the election outcome with conviction. However, the process of crafting an FX view driven by US politics hinges on four key areas:

1. Fiscal policy (USD positive): We believe an easing of fiscal policy would be USD positive as the boost to interest rates would dominate the adverse currency implications of higher inflation and a wider current account deficit.

2. Overseas income repatriation policy (USD positive): A 10% repatriation tax as part of a comprehensive tax reform package should encourage some modest degree of inflows and be USD positive.

3. Trade policy (ambiguous USD vs G10, stronger USD vs EM): Instigating a trade war would likely be damaging for US growth and foster a more dovish Fed. But the USD would likely strengthen against EM, especially those targeted by higher tariffs.

4. Immigration policy (USD negative vs G10): Policy steps that could reduce the supply of labour to the US economy would be growth negative

The currency market has so far concentrated its energy only on fiscal policy. The market will also need to take account of developments in other aspects of policy but we believe they point to USD strength over all. In time, fiscal expansion may become a USD negative if the market belatedly worries about rising debt levels. This could then join any USD drag from the structural headwinds of a trade war or aggressive immigration policy. But such dynamics are likely to take time to unfold, if at all, and so our forecasts dwell instead on near-term strength for the USD.

Related links:
The curse of Indian cash scrapping – FT Alphaville
India cash crunch update: Still chaotic – FT Alphaville
Digging through India demonetization history — 12 Jan 1946 (Saturday) and 16 Jan 1978 (Monday) – Mostly Economics

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