Back from holidays to a stronger US dollar

Good morning

I’m back from what can only be described as a glorious family holiday in Menorca.  Don’t expect clubs and parties, it is a fairly quiet island, relatively unspoilt with its fair share of sandy bays, sleepy marinas and small but pretty cities.  For those who enjoy a bit of countryside, there is a 185km walking route that circles Menorca which offers a variety of trails for all levels of hikers.  The weather was fantastic which obviously helps any holiday, and for anyone looking for a late getaway temperatures are likely to stay in the high-20’s for a couple of weeks yet. 

Mind you, I returned yesterday with pretty decent weather here, with temperatures in the low to mid-20’s which is decent enough, although I presume it has rained a bit given the patches of green grass that are doing their best to break through the still predominantly brown lawn.  I did watch a little football while I was away, although it’s fair to say I’m not impressed with the start Spurs have made this season, bottom of the league with just two points from five matches.  It’s a bit early to be overly worried but we’ve only stayed up the last two season because we had a decent start to the season.  Without that, we’d have been relegated.  It can’t happen, can it?  Still, there have already been some interesting results which suggests this season could be more unpredictable than ever, as Brighton’s recent 3-0 win over high-flying Arsenal attests to.

So, what have I missed while I’ve been away.  We had the US Fed’s 25bps rate rise, a unanimous decision, along with an updated dot-plot that supported the idea rates would be higher for longer to battle persistently high inflation.  Trump didn’t openly criticise Warsh for the decision although did say US rates should be nearer 1%, adding that US borrowing costs should be cheaper given what he believes is the world’s strongest credit.  Over the weekend Feds Kashkari said US inflation was still too high across the board, adding the although the Fed have measures to help inflation he hoped that broader government policy would ease pricing pressure.

I presume the policy he refers to is over Iran.  The US/Iran conflict is at risk of escalating once again and there is a real risk of contagion in the Middle East, with Saudi Arabia facing attacks from Yemen and seemingly offered little help from the US which looks like an odd policy to me.  Perhaps US weapon supplies really are low.  Oil prices are higher than when I left for holiday, WTI and Brent now $94 and $101.50 but well off the recent highs of $106.75 and $110 or so respectively. 

ECB raised rates 25bps while I was away, UK’s BoE chose to leave rates unchanged at 3.75%, and BoJ raised rates 25bps to a heady 1.25%.  In currencies, the US dollar has been the winner while I’ve been off.  GBP and EUR, which were around 1.3560 and 1.1650 before I left traded down to 1.3335 and 1.1455 after the Fed announcement, now off those lows at 1.3375 and 1.1475.  GBPEUR is 1.1660, pretty much midway between the high and low seen in the last couple of weeks.  GBP is 1.8770, 2.3385 and 1.8750 against AUD, NZD and CAD.  AUDNZD has continued to make gains, seeing a high of 1.2480, even a better than expected NZ GDP release did little really help NZD. 

USDJPY had been below 153 before I went away but I return to see it traded above 158 briefly on Friday after the BoJ rate announcement which raised the possibility of a slower pace of BoJ tightening although some talk that BoJ were checking rates sent the pair running for cover later in the day, trading to 156.60.  We are now 157.25 as I type, with GBPJPY just above 210

In other news, Germany’s political situation is pushed into further crisis after another state election saw Chancellor Merz’s CDU party fall short of the 5% threshold needed to enter parliament, a result Merz called a disaster.  As with the recent Saxony elections, right-wing AfD looks set to win the most votes but not reach a majority, and will struggle to form a coalition given other parties have vowed not to work with them.  In Berlin elections we have a different story, where the Left (Die Linke) looked like beating CDU, opening speculation that Merz could be replaced mid-term.  No election surprises in Russia, where Putin’s United Russia has won the majority of votes, pretty much expected given any decent opposition is probably in prison.

This week brings EU, UK and US PMIs, Aussie employment numbers and a host of central bank speakers.  We should also have a long-awaited meeting between Trump and China’s Xi although I doubt much will be firmly agreed.  Still, it’s better to talk than not talk I guess.

Have a great day…

-  11.30 Feds Goolsbee speaks

-  16.00 BoCs Macklem speaks

-  16.00 ECBs Lagarde speaks

-  16.10 ECBs Cipollone speaks

-  04.10 RBAs Bullock speaks