“Global standard” gauge of currency misalignment has GBP 22% undervalued against the USD

Here’s a bit of (useful) fun, The Economist’s “Big Mac index” to gauge whether currencies are at their “correct” level against the US dollar.

Its based on the currency valuation model of purchasing-power parity (PPP), i.e. that “in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries”.Says the magazine (link here, may be gated(

  • Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of dozens of academic studies. 

Some of the results (more at that link)

The Economist's "Big Mac index" currencies US dollar

Weekly market roundup: Bitcoin surges up and trade tension declines

What drove markets this week

BitcoinThe dollar has generally made some gains this week against various currencies. These movements came after fairly good data from the USA as well as the signing of a first stage trade deal between the USA and China.

Some of the biggest news in forex markets this week came from central banks. Both the South African Reserve Bank (SARB) and the Central Bank of the Republic of Turkey (CBRT) cut rates against expectations. The CBRT was first yesterday morning, cutting its one-week

repo rate from 12% to 11.25% compared with the consensus expectation of 11.5%.

Then the SARB also cut its repurchase rate to 6.25% yesterday afternoon, another decision that defied expectations. In a rare display of agreement among central bankers, the SARB’s

monetary policy committee voted unanimously to cut by 0.25%.

Shares reacted eagerly to news of the preliminary Sino-American trade deal, with US500 continuing its rapid gains since Monday’s open. Many European indices and shares also reached new all-time highs.

Bitcoin-dollar, daily

Bitcoin chartBTC-USD has surged up even more in the second half of the week. Current levels around $8,900 are the highest for about two months. The red trendline here is based on the weekly chart, starting from last summer’s highs around $13,000.

We can clearly see that price has broken out upward from this trendline, facing little resistance from the 100-period simple moving average.

The first major hurdle for the bulls here is likely to be the 200-day moving average. This is expected to be a strong area that could well resist testing at least temporarily. The 61.8% Fibonacci retracement area which price is currently testing could also function as a resistance.

Technical indicators here give a very strong overbought signal. Price closed the last three days completely outside the upper deviation of Bollinger Bands (50, 0, 2).

The slow stochastic (15, 5, 5) is also clearly within the upper trigger zone. These factors would suggest that a retracement to some degree is likely within the next few periods.

American light oil, four-hour

American light oil chart

USOIL’scorrection appears to have paused for now. The large losses from last week’s nine-month highs were driven mainly by the decline of military tension between the USA and Iran in Iraq. Now, though, the signing of the first stage deal between China and the USA has given crude a significant fundamental boost.

As China is the world’s biggest consumer of crude oil, the outlook for the Chinese economy often influences the price of the commodity.

The regular data for crude were somewhat incompatible this week. The API’s stock change announced a gain of 1.1 barrels per million, but the EIA’s stock change read negative 2.55 million on Wednesday night.

USOIL didn’t react very strongly to either release, so we might expect that trade and Chinese data could continue as key drivers next week as well.

From a technical standpoint, the conditions seem to be there for oil to continue its overall uptrend from Q4 2019. Momentum to the downside has dried up this week while buying volume remains fairly high.

The most important resistances in the short term are likely to be the three moving averages, with the 200-period SMA probably the most important of these.

Dollar-yen, four-hour

USDJPY chart

USD-JPY has been somewhat less volatile this week while continuing to make some gains overall in the aftermath of decent data from the USA. Annual inflation and core inflation on Tuesday both printed 2.3% in line with expectations, the former beating the previous figure by 0.2%.

American retail sales came in at 0.3% yesterday afternoon in line with the consensus, but November’s release was revised upward slightly.

The charts look positive for dollar-yen but buying saturation could limit any ongoing gains. Price remains above all three of the usual moving averages, with the faster 50 SMA completing a golden cross of the slower two on Wednesday afternoon GMT.

On the other hand, volume remains very low, and the slow stochastic is still slightly inside the overbought zone.

It seems that most traders are waiting for key releases next week to provide some momentum, up or down. The Bank of Japan’s meeting on Tuesday morning and Japanese inflation late on Thursday evening are expected to bring some more direction to USD-JPY.

OPEC Barkindo: Could see sharp supply fall in 2020 from US shale output

OPEC Secretary-General Barkindo

OPEC Secretary-General Barkindo is on the news wires:
  • likely C# downward revisions of supply going into 2020 especially from United States shale output
  • fundamentally global economy range strong
  • there is no sign of global economic recession
  • Demand numbers for 2020 has potential for an upside swing
  • confident OPEC+ members will continue with their agreement in 2020
  • some US oil companies see shale output growth in 2020 only up by around 300,000-400,000 BPD. That it is not as high as OPEC optimistic estimates
  • Saudi authorities have reassured US that Aramco IPO won’t affect kingdom’s role within OPEC as the biggest producer
  • no one in OPEC+ wants to return to where we came from during oil prices downturn
  • The Aramco IPO won’t affect Saudi Arabia’s participation in supply adjustments to ensure oil market stability

The week ahead is a big one on the US economic calendar

What’s coming up in the week ahead

The final week of the month is always a busy one. Here’s what’s coming up in the week ahead.
Monday:
  • Chicago Fed national activity
  • Durable goods orders
  • Dallas Fed
Tuesday:
  • FHFA house price index
  • Case Shiller house price index
  • Richmond Fed
  • Conference Board consumer confidence
Wednesday:
  • Weekly oil inventories
  • Fed’s Barkin and Daly
Thursday:
  • Second look at Q2 US GDP
  • Advance goods trade balance
  • Wholesale inventories
  • Weekly jobless claims
  • Pending home sales
Friday:
  • PCE report
  • U Mich final consumer sentiment
  • Chicago PMI

Ifo economist says that German economy faces a turbulent time ahead

Comments by Ifo economist, Klaus Wohlrabe, following the data earlier

Germany
  • Sees a slightly positive growth rate in 2H 2019 for Germany
  • But notes that recession is spreading in all important sectors in German economy
  • Says risk of disorderly Brexit has increased
  • Doesn’t believe that the ECB will loosen policy today
The early signs for Q3 haven’t been encouraging for Germany with the manufacturing sector in freefall as the recession in that area deepens. As that continues, the risk of spillover to the services sector will intensify and that won’t bode well for the economic outlook.
As for his comment on the ECB, I’m also leaning more towards that as the governing council may likely see fit to only change its forward guidance as they will only release their latest staff projections in September. That said, they will be skating on very, very thin ice in the mean time in managing the euro and inflation expectations.

Powell does not comment on monetary policy or the economy in opening remarks

Gives opening remarks at Boston Fed conference

  • stress tests most evolved to avoid complacency
Chair Powell’s main event(s) this week will be on Capitol Hill on both Wednesday and Thursday as he testifies to US lawmakers.  That is where the rubber will meet the road.
Later today, the Fed’s
  • Bostic is due to deliver opening remarks at the Official Monetary and Financial Institutions Forum Meeting, in St. Louis at 10:10 AM ET/1410 GMT
  • Quarles speaks on stress tests in Boston (not sure can expect much there).   That starts at 2 PM ET/1800 GMT
  • Fed’s Bostic will be speaking at Washington University in St. Louis at 2:20 PM ET/1820 GMT. He will be do an “armchair chat” and not speak from text.