August 5. Canada, China and Indonesia

–So Lockhart opens his big yap and says the bar is high to NOT tightening in Sept.  5/30 immediately plunges to a new low of 128.5 (futures close it was 129.3).  Yields rose across the curve with tens up 6 to 220.7, and the green euro$ pack down just over 9 bps.  The dollar strengthened.  A BBG article notes that the rupiah is making new lows against the dollar as commodities and exports slump.  Shades of 1997/1998 Asian crisis, when US stocks retreated by over 20%.  Canada is also making new lows vs the dollar.  The Bank of Canada had risen three times to 1% since the crisis and is now back at 50 bps.  Same possible for the US Fed?
–Trade data released today, as is ADP, expected 210k, and non-mfg ISM 56.2.  Trade deficit expected at $43 billion; both import and export yoy growth are negative and weakening.  The strong dollar is a wet blanket on inflation and the curve reflects that factor with a relative bid for long dated dollar assets.
–The IMF staff recommended delaying inclusion of the yuan into the SDR, perhaps into next year.  The tight yuan peg to the dollar that’s been in place since March is therefore likely to continue as it appears China’s goal of becoming a reserve currency outweighs other considerations.  As China’s currency appreciates against its Asian competitors, it likely loses export share.  A Fed hike will accentuate this dynamic. Maybe it will accelerate structural reforms and more domestic spending…like ramping up South Sea military island construction.  The immediate concern though, is that I hope Farrakhan doesn’t have the same instant influence on his constituents as Lockhart has on his.

Posted on August 5, 2015 at 5:08 am by alexmanzara · Permalink
In: Eurodollar Options

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