On Monday we heard rumours that Kevin Warsh, a former Fed Governor (who is viewed as hawkish), was potentially in line to take over from Janet Yellen in February. However, more candidates have come to the fray, in the form of current Fed Governor Jerome Powell and economic director Gary Cohn. While both are seen as serious candidates to replace current Chair Janet Yellen when her term expires in February next year, Powell is seen as more dovish than Warsh, who has criticised the Fed’s bond-buying programme in the past. The Dollar had rallied earlier this week on speculation that Warsh might be the leading candidate to replace Yellen, alongside positive fundamental data. A more hawkish Fed candidate would likely prompt investors to bet on more aggressive normalisation of monetary policy, which would see the Dollar benefit.

Yesterday saw the release of the second of three PMI data, as the construction data went into contraction for the month of September. The index fell to 48.1, which is the first time in over a year it has fallen below the all-important level of 50. The figure was well below expectations, and after a poor manufacturing figure on Monday caused further weakness to the Pound. Published at the same time was the record of the BoE’s Financial Policy Committee meeting held in September. As with the FPC statement published in recent weeks, there was a large focus on consumer credit. However, the record failed to provide any new major hints on what possible action the BoE may take on consumer lending at the November Financial Stability Report. Sterling fell to a 3 week low against the Euro and Dollar.

Sterling struggled further as Brexit minister David Davis told the Conservative Party conference on Tuesday that Britain wants to negotiate an exit agreement with the EU but is ready to walk away with no deal, and that officials were “contingency planning” to make sure all scenarios were covered. Despite Foreign Minister, Boris Johnson, saying at the conference that the cabinet was united behind every syllable of Prime Minister Theresa May’s recent speech in Florence, the event has been overshadowed by reports of disunity and leadership bids from rivals in the government. 

The week ahead

This morning sees the release of PMI services data from France, Germany, UK and the Eurozone. Remarkably all figures are expected to remain in line with the previous month. However given the UK’s performance in Manufacturing and Construction we are not entirely convinced that UK services will reveal a 53.2 figure. Shortly after Retail Sales data is released from the Eurozone, before heading Stateside to see the start of the monthly labour market data. The ADP Employment figure is expected to suffer due to Hurricane Irma, so a weak figure could easily be ignored. Shortly after the US releases their PMI Services and Non-Manufacturing data a slight uptick is expected which could help cap some of the losses the Dollar suffered overnight. The evening US Fed Chair Yellen is due to give the opening remarks at the Community Bank seminar, it is scheduled to take only 15 minutes and is not expected to reveal anything new, markets will likely pay more attention to early data releases this afternoon. Note also that UK PM May speaks at the Conservative Party conference in Manchester at lunchtime.

Thought of the day

Justin Thomas won golf’s FedEx Cup and a whopping $10 million winner’s cheque which came with it. The FedEx Cup rewards the best player of the season and no one could doubt that Justin was a fitting winner; winning 5 events including his first major, the US PGA. In the immediate aftermath of his victory, when asked how he felt about winning the FedEx Cup, he was actually a little disappointed, as he just lost the Tour Championship by 1 shot. The reality of the FedEx victory had not yet sunk in. That bittersweet feeling would no doubt have dissipated by now as he would have had time to see the bigger picture and bank balance, for that matter! In the world of FX hedging, it reminded me of that feeling one gets when a 50% participating forward beats the performance of an ordinary forward. To remind you, a 50% participating forward in EURUSD booked at the start of the year for September ’17 expiry, would have protected EURUSD 1.0500, a rate 2 cents lower than the forward rate at the time (at 1.0700). Were EURUSD to have moved lower in 2017, your notional would be fully protected at 1.0500, however, if the market moved higher (as it has done so) you are only obliged to deal 50% of your notional at the protected rate. Meaning you are free to buy the remaining half or more at the prevailing spot rate. In this example, EURUSD reached 1.2000 last month (the month of expiry) and so someone who hedged with this strategy would have achieved a hedge rate of 1.1250 (half at 1.0500 and the other half at 1.2000). Yes, it may feel a bit disappointing to be obliged to deal half of your notional at 1.0500 when the market is at 1.2000, but when the dust settles that bittersweet feeling will hopefully have dissipated, like Justin Thomas’s did, as you’d realised you outperformed the equivalent forward rate by 5.5 cents. Please speak to your FX dealer today to learn more about protection and participation strategies like the participating forward.