'Typical Summer Overshoot' in EUR/USD Likely

Kit Juckes at Societe Generale believes the conditions are ripe for the Euro v Dollar exchange rate to rush to 1.20 this summer and make life difficult for the team at the European Central Bank.

Juckes makes his views known in the wake of the July Federal Reserve policy update in which the Fed highlighted their concerns that US inflation was looking rather lethargic; something that undermined the Dollar.

The response by currency markets was notable with the GBP/USD racing to fresh ten-month highs and the EUR/USD reaching 1.1772 - yet another two-and-a-half year high.

It’s not long 1.20 is achieved says Juckes who warns the “danger is that we have a typical summer overshoot”.

“By the time the ECB meets again, they may well find a euro is worth USD 1.20, which really won’t help their inflation forecast at all,” says Juckes.

Like the Fed, the European Central Bank is also fighting to get inflation back to its 2.0% target but a rapid rally in the Euro makes this difficult as it presses lower on imported inflation.

The cost of imports fall, and therefore inflation falls alongside.

Recall earlier this month ECB President Mario Draghi appeared to suggest he was not worried about the rise in the Euro.

Well, EUR/USD at 1.20 was certainly not in the plan.

Draghi and the ECB probably did not see the latest shift in tone at the Federal Reserve coming.

While many of the key phrases in the FOMC statement were unchanged from June, markets focused on the removal the word “somewhat” from the reference to inflation “running below 2%”.

Market pricing of another 2017 rate hike has dipped below 40%.

“If the FOMC’s plan is to downplay talk of the future path of rates for now, so that the idea of an impending reduction in the balance sheet doesn’t scare investors and damage sentiment, it’s working out just fine,” says Juckes.

Societe Generale have briefed before on a belief that Fed balance sheet reduction will do less for the US Dollar than ECB tapering will for the Euro.

i.e the Fed’s ability to hurt the Dollar is less than the ECB’s policy to boost the Euro.

This all complicates the job for the ECB going forward and Juckes says “we’ll get an FX
response” from the ECB as they attempt to limit the damage of a strengthening Euro.

Juckes says the path from EUR/USD 1.20 towards the Big Mac Index's fair value for the exchange rate of 1.25, let alone the OECD PPP fair value at 1.33, won’t be in a straight line.

“But I mention those only to make the point that an economic bloc with a huge current account surplus can’t have both monetary policy normalisation and an undervalued currency,” says Juckes.

Regardless of the ECB's desires, they can't continue manipulating the Euro forever and an era of a stronger Euro beckons.

source ...

USD: Weakness To Get Deeper; EUR/USD To Break 1.20 By September

The EUR/USD rate could break the 1.20 level by September.

Political uncertainty in the US is weighing heavily on the USD, with a potential break below key technical support possible.

In particular, future USD weakness is likely to prove deeper and more prolonged than widely assumed citing the Trump administration’s failure to pass healthcare reform as highlighting legislative gridlock.

With forthcoming budget negotiations due to begin, the impact on the dollar could result in a dollar sell-off of over 3%.

We see no evidence that the tide is going to turn over the short to medium term. There’s plenty of scope for further weakness and the dollar is still materially overvalued

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Dollar index slips lower as markets digest NFP data

The dollar slipped lower against the other major currencies on Monday, pulling back from Friday’s one-week highs reached after the release of far better-than-expected U.S. nonfarm payrolls data.

The dollar strengthed broadly after the U.S. Labor Department on Friday said the economy added 209,000 jobs last month, blowing past expectations for an increase of 183,000.

The unemployment rate ticked down to 4.3% in July from 4.4% the previous month, in line with expectations.

The report also showed that average hourly earnings increased by 0.3% last month, in line with forecasts and after a 0.2% gain in June.

The strong data fueled expectations the Federal Reserve will stick to its plans for a third interest rate hike this year.

read more ...

EUR/USD, GBP/USD, USD/JPY: Tactical Views

EUR/USD correction did nothing to provide cheaper levels to buy yet and as such SocGen prefers playing GBP/USD at current levels.

If you think EUR/USD has further correction to go, short GBP/USD looks good

USD/JPY is the Bellwether for that we’d like the base of the upward trend we’ve been in since May, at 109.40, to hold.

Hold EUR/USD at 1.16 and avoid threatening the foundations of the EUR/USD and EUR/JPY rally.

source ...

Re: Market views ...

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Ocean Shipping Rates Plunge

Ocean Shipping Rates Plunge: Just A Blip Or The End Of Globalization?

The Baltic Dry Index represents the cost of renting an ocean-going container ship to move goods from, say, Chinese factories to the Port of Los Angeles. The more stuff being made and sold, the higher the demand for such ships, and thus the higher the price to rent one. And vice versa.

This is definitely one of the vice versa times. After rising to robust levels in mid-2018 the Baltic Dry Index has since plunged by about two-thirds.
[ZH: we are well aware of the seasonality within the global shipping markets but even adjusted for that, this is the worst collapse in shipping rates since 2012 (which prompted Bernanke to unleash Operation Twist and QE3)...]


Here’s a brief article on the subject from today’s Wall Street Journal:

Free-Falling Freight Rates Spell Trouble For Shipping
Dry bulk shipowners face a long period of uncertainty as spot prices collapse and China shipments shrink.

A slowing global economy, coupled with weak demand from China over the Lunar New Year and from Brazil after Vale SA’s iron ore disaster, is dragging shipping rates to near record lows, and few in the industry expect things to improve any time soon.

Brokers in Singapore and London said capesize vessels, the largest ships that move bulk commodities like iron ore, coal and aluminum, were chartered in the spot market for as low as $8,200 a day on Thursday, a $500 decline from Wednesday. Break-even costs for carriers can be as high as $15,000 a day, and daily rates in the capesize market hovered above $20,000 last year.

“Everyone is looking for a catalyst to push the market up, but it’s not there,” said a Singapore broker.

The Baltic Dry Index, which tracks the cost of moving bulk commodities and is considered a leading indicator of global trade, is down more than 50% since the start of the year.

The long Lunar New Year holiday in early February is one of the slowest periods in commodities trading as factories in China, the world’s biggest importer of raw materials, shut down. But ship executives say the bulk seaborne freight business is more broadly suffering from the lowest demand in two years, while China’s trade tussle with the U.S. is making the market more volatile.

“A long slowdown in the Chinese economy will hurt commodity demand and send shipping rates sharply lower,” Bloomberg Intelligence industry analyst Rahul Kapoor said.

The Vale iron ore disaster in Brazil in January, in which a mining dam burst, triggering a flood that killed at least 150 people and left close to 200 more missing and feared dead, created a new source of uncertainty.

Vale has suspended production at a number of sites, removing 40 million tons of annual output, or 11% of the giant miner’s total production in 2017.

The reduced sailings could affect dry bulk owners, including China Cosco Bulk Shipping Co. Ltd, Norway’s Golden Ocean Group and Greece’s Diana Shipping Inc.

“The Vale void will be largely covered by iron ore shipments out of Australia,” the Singapore broker said, “but Brazil generally commands higher freight rates so there is no good news.”

China has resumed importing soybeans from the U.S., a sign of progress in talks between Washington and Beijing. But the 540,000 metric tons of shipments from the U.S. in January were less than half the monthly average last year.

“If you are a bulk owner, you can no longer depend solely on China to make money, and that’s a seismic shift,” said a London broker.

So there are some specific, possibly temporary things going on here. The US/China trade war is slowing shipments between those countries while a Brazilian iron ore mine disaster is cutting shipments of that commodity for the time being.

Assuming the trade war ends and Vale’s Brazilian mine recovers, it’s reasonable to see this as the bottom for shipping rates – a forecast that shippers who need to double current prices just to break even fervently hope is true.

But there are also broader forces at work. The trade war isn’t just a piece of political theater for the US. We really do need factories to come back home if we want to avoid a populist and/or socialist revolution. And next generation manufacturing tech like 3D printers will in any event move production closer to end users, lowering the need for at least some of today’s shipping.

It’s possible, in other words, that the whole free trade/mobile capital/cheap labor/long supply chain Age of Globalization, with its assumption of unlimited rich-country demand and plentiful cheap energy for transport was just an artifact of a very specific time. It was so cheap and easy to move things around that building toys or TVs wherever labor was cheapest and shipping them to wherever the money resided made financial sense.

That might not be a permanent state of affairs, and if it’s not, those giant ships won’t be the only stranded capital out there.

https://www.zerohedge.com/news/2019-02- ... balization

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