Earnings season kicks off as the dollar remains king

The dollar is once again king of the G10 FX space today as the market continues to raise its expectations of a Fed rate hike in December. Currently the Fed Funds Futures market is pricing in a 67% chance of a hike, compared with 60% last week. The dollar strength has seen the pound capitulate once again; it is currently trading just above the 1.23 mark. Prior to Friday’s flash crash in sterling, we had expected the pound to move towards 1.20 by the first quarter of 2017, however, at this rate we could be looking at a move to 1.20 before the US Presidential election.

Another driver of the stronger dollar on Tuesday were jitters in Asia’s tech sector, after Samsung had to once again halt sales of its Galaxy 7 notepad. This weighed on the South Korean Kospi index, which fell 1.5%; it also impacted on Chinese developers more broadly, with the Hang Seng down 2.5% at one stage. It will be interesting to see if European indices follow suit after the stellar gains on Monday on the back of the oil price rally.

GBP and Deutsche Bank worth watching

Deutsche Bank shares staged an impressive recovery on Monday, after initially falling more than 3% they ended up clawing back more than 7% of value to finish the day 3% higher. The reason for this impressive recovery is still unclear, especially after traders were initially dispirited that DB’s head honchos had failed to reach an agreement with the US Department of Justice to reduce its $14bn fine at last weekend’s IMF and World Bank meetings. Whether or not this recovery can be sustained in light of losses on the Asian indices remains to be seen, but DB’s share price could rally significantly if a deal with the US DOJ is announced in the coming days.

GBP: the comedy currency of the G10

The second thing to note is that GBP/USD is becoming the comedy currency of the G10; the joke is always the same: whatever the trading condition sell the pound. Overnight GBPUSD lost another 40 pips vs. the dollar, which seems to be an average night for the pound these days. The interesting thing is that the pound cannot muster much of a recovery, even after last week’s hefty sell off and flash crash. It is easy to blame nebulous concepts such as liquidity issues, however, could something else be going on? The continued move lower in the absence of a new driver, i.e., more negative headlines about the UK’s Brexit negotiations could also be down to politics. We noted yesterday that the silence coming from Whitehall regarding Friday’s sharp drop in the pound could be a considered action as a weak pound could act as a tonic to the UK’s economic problems, in particular its large deficit.

Trump’s crash and burn boost the dollar

The dollar is also embroiled in politics, although it is having the opposite effect on the dollar, compared to the pound.  The latest election polls in the US suggest that Hillary Clinton is extending her lead over Donald Trump, which is considered dollar positive. The most senior Republican in Congress, Paul Ryan, has abandoned Trump after the latest debate against Clinton, further signs that his campaign is losing momentum at this crucial stage of the election race.

Overall, with one month to go before the election, the dollar is likely to remain in focus and it could see further upside if Clinton maintains her lead. The other beneficiary could be the Mexican peso. As Trump’s campaign loses momentum, the short Mexican peso trade, which was seen as a hedge against a Trump Presidency, has started to unwind, with USDMXN losing 3% in the aftermath of the debate.

China takes its eye off the renminbi

The USDCNH (offshore Chinese Renminbi) continues to trade above the 6.70 level, the highest level since 2010. This suggests that the Chinese authorities are happy with a weakening currency. Perhaps the pressure is off the PBOC now that the renminbi has received global reserve status from the IMF, which could allow the Chinese currency to reflect actual economics. Based on current trading conditions in the renminbi, the market does not appear confident about the outlook for the Chinese economy, which could keep downward pressure on CNH for some time yet.

Earnings season kick-of

Elsewhere, Q3 earnings season swings into action later today with Alcoa announcing results before the US market open. We may have to wait until Thursday for earnings results to have a meaningful impact on the markets, when the large US banks start to announce results. Before then, risk assets will continue to look for signs that Trump’s Presidential campaign is failing, which could boost stocks and the dollar.