Macro Cheat Sheet

Here is a succinct four-bullet summary of key considerations behind seven currencies:

USD:

Rising US rates in absolute terms and relative to other countries, coupled with the policy-mix and US tax reform are the main drivers.

The market has nearly completely discounted three more Fed hikes by the end of next year, while the Fed has signaled that four hikes may be appropriate.

Despite the fiscal stimulus and robust economy, several headwinds are emerging, including trade, interest-rate sensitive sectors such as housing and auto sales, and the dramatic rise in oil prices–(100-day moving average has risen 30% since the start of the year.

Midterm elections are unlikely to change the trajectory of US policy.

Euro:

The ECB has signaled it will not hike rates until at least the end of next summer. In the meantime, it has reduced its asset purchases and will stop them entirely at the end of the year.

The eurozone economy has slowed this year after a robust 2017, with Germany industrial output falling for three months through August, the longest contracting streak in four years.

Italy’s nationalist/populist government is challenging the EU’s fiscal rules. Italian bonds have sold off, but the contagion has so far been limited.

Europe’s leadership is particularly weak. France’s Macron is expected to announce a cabinet reshuffle shortly to bolster support. Germany’s political landscape is changing as both the CDU and SPD are doing poorly in the polls. Italy’s Prime Minister is overshadowed by his two deputies. The ECB and several other European institutions are in the middle of a transition phase that will produce extensive personnel changes, including at the ECB, the EC itself and the European Parliament.

Sterling:

The UK will leave the EU at the end of March 2019. The pessimism that has shrouded negotiations has eased, and an agreement is possible in the coming weeks. However, the challenge will lie with Prime Minister May’s ability to sell it domestically. She may have to rely on defecting Labour members.

The UK economy enjoying above-trend growth, even though the new monthly GDP report, suggests output stagnated in August.

The Bank of England hiked rates once this year. The next increase is not expected until after Brexit. The US two-year premium over the UK widened from about 140 bp at the start of the year to 200 bp now, a record.

Fear of a Brexit with without an agreement has weighed on sterling primarily through the cross against the euro. As the prospects of a deal are perceived to have increased, sterling has been bought against the euro and is trading near four-month highs.