FOMC Up Next
By Peter Rosenstreich
As proven yesterday, the divergence between surveys and hard data in the US is continuing. The Conference Board’s index of consumer confidence increased to 121.1 in July versus expectations for marginal decline. When you compare this to the negative trend in retail sales, investors can’t avoid having a distorted perspective of the US economy. There are two key takeaways: first, the real economy is underperforming expectations and second, the Fed’s threshold of reducing their bloated balance sheet is significantly lower than increasing interest rates.
A weak USD was built on the expectations of no hikes in 2017, but it seems to sidestep the potentially more destabilizing effect of an exit on global yields. Yield spread differentials between US and G10 nations have narrowed, while VIX index has fallen to new historical lows.
Reads suggest that there is limited risk with the Fed’s current policy path. Markets are uniquely focused on inflation to their detriment. In our perspective, the Fed will continue to tighten via balance sheet reduction regardless of inflations levels. For today’s FOMC meeting, we don’t see any real market impact. At most, we anticipate a slight adjustment in language, highlighting the transitory inflation’s weakness and the stronger labor market. More importantly we don’t expect any additional clarity on the Fed exit strategy, which will likely come in September.
USD has become increasingly sensitive to interest rates and, with limited expectations for repricing the Feds’ interest rate path, a reversal in USD is unlikely today. Additional USD weakness is also unlikely due to an overstretched short position, unless the Fed becomes meaningfully dovish.
AUD/USD slides after 2Q CPI misses expectations
By Arnaud Masset
The headline inflation measure fell unexpectedly in the second quarter, printing at 1.9% y/y versus the 2.2% expected and down from 2.1% in the previous quarter. This lacklustre reading should be viewed in the context of significantly overly optimistic market participants about the eventuality of a tightening move from the Reserve Bank of Australia. AUD/USD slid 0.50% to 0.7878 this morning as investors priced in the info. Looking at the details, there is no reason to panic as the core measure remained stable, with the trimmed mean holding up at 1.8% y/y while the weighted mean edged up to 1.8% from 1.7%. Most of the decline in the headline measure is due to lower automotive fuel and food and non-alcoholic beverage prices. Overall, tradable components fell 0.3% q/q, while non-tradable components rose 0.4% q/q.
Despite a minor reversal, the Aussie held ground on Wednesday as investors continue to anticipate the RBA will start lifting borrowing costs as soon as Q2 2018. We take a more cautious approach as we believe the central bank is also keen on keeping the Australian economy competitive on the international level and with falling inflation measure across the globe, a delay in the tightening process is more than likely. In the FX market, the Australian dollar had a nice ride since early May. The Aussie rose more than 7% against the greenback, 6.40% against the pound sterling and 5.30% against the Japanese yen. However, we believe there is room for a correction, especially against the USD. Indeed, speculators have bet heavily on the Aussie as highlighted by the latest CFTC’s COT report. Long AUD speculative positions rose the highest level since 2013, reaching 43.60% of total open positions. This extreme positioning together with the AUD’s recent sharp rally will likely trigger some significant profit taking. AUD/USD has been unable to break the 0.80 threshold to the upside. From our standpoint, a correction towards the 0.76 area would be more than healthy.
The future of Bitcoin – Buy Fear, Sell Greed
By Yann Quelenn
August 1st is a key date for Bitcoin. Indeed, there is a risk that the most famous cryptocurrency could be split into two different digital currencies. A new algorithm must be activated and it needs to be validated mostly by miners, people who approve transactions. The Bitcoin network is only able to process less than 7 transactions per seconds, which would likely prevent greater use in the future. In order to increase the settlement speed, a new transaction process, called SegWit2x, must be implemented. If this change is not accepted by miners at 80%, the result will be two different bitcoins – and owners will need to choose which one they want
There may be an opportunity there. Indeed, it is going to be hard to know which, if either, version will be sustainable into the future. In the event of a hard fork to the Bitcoin format, the prudent choice may be to leave one’s own bitcoin in a wallet and wait for the market to decide on the more sustainable before choosing one. On the other hand, Bitcoin stored at exchanges will be split into the two versions. A familiar story may repeat itself. Last year, Ethereum had to split after a hack. The wise decision at the time was to keep its Ether in a wallet, giving a choice between the ETH version, which has since peaked at around USD 400 or the classic version ETC is languishing below USD 23.
Volatility in all cryptocurrencies is massive and Bitcoin hard fork fears are definitely driving the whole crypto market at the moment. Earlier last week, Bitcoin reached almost USD 3000 before bouncing lower. This has consequences on all other coins whose prices are suffering at the moment. This may be a good moment to stack a few more altcoins. We consider that the fork is unlikely to happen at the moment. Slightly below 80% of the Miners are expected to approve the new SegWit2x protocol. This could lead to a relief rally above USD 3000 that may start before the 1st of August.
Bitcoin has advanced beyond the difficulties of some of its peers and despite its technology. does not compete anymore with newcomers (altcoins). Bitcoin first mover quality provides Bitcoin a great advantage for potential massive usage. It is not always the best technology that wins but the best experience.