Date: September 14, 2018
U.S. Import Prices Fall by Most Since Early 2016 Amid Trade War
Prices for goods imported by the U.S. fell in August by the most in more than two years amid global trade tensions, Labor Department figures showed Friday. Import prices declined 0.6 percent from the prior month, the most since January 2016 and compared with the median estimate of economists for a 0.2 percent drop, according to the data. The figures don’t reflect the impact of tariffs. While fuel import prices fell 3.9 percent, the most since February 2016, several non-fuel categories also showed declines, including industrial supplies, capital goods, metals and building materials. Prices for imports from Canada fell 1.5 percent, the most since January 2016, while the European Union, China and Mexico each showed a 0.1 percent drop.
Pound Volatility Premium Over Euro to Persist on Brexit Concerns
Buying protection over fluctuations in the pound will remain a relatively costly exercise as Brexit headlines gather momentum and central banks slowly tighten policy. Uncertainty over the endgame of Brexit talks — key disagreements still need to be addressed — and risks that euroskeptic Conservatives may challenge U.K. Prime Minister Theresa May’s leadership may support gamma demand for sterling. The same cannot be said for the euro, as one-month volatility in euro-dollar extended its recent drop as the European Central Bank stuck to its well-communicated patient monetary tightening. Sterling volatility over the one-month tenor is the highest across the Group-of-10 currencies as the U.K. and the European Union enter the last stages of the Brexit negotiations. The gauge hit its strongest level since February on Wednesday, almost two percentage points above its year-to-date average, as the two sides were seen preparing for a special summit to sign the Brexit deal in November. Volatility got a boost in early August on concerns over a no-deal, with the one-month gauge rebounding from a six-month low. Euro volatility, however, hit a five-week low after President Mario Draghi adopted another balancing act on Thursday. He downplayed lower growth projections by highlighting that the euro-area economy is still solid enough to cope with global risks, sounding rather upbeat on inflation prospects. Soft data out of the U.S. keep market pricing lagging that of the Federal Reserve when it comes to higher interest rates, resulting in subdued demand to own euro volatility, which could persist at least until the Fed meeting on Sept. 26. As a result, the spread between one-month implied volatility in pound-dollar and euro-dollar steepened this week to the most since January 2017. Correlation between Brexit headlines and pound volatility hit a record high Friday above 70 percent and an EU summit on Sept. 19-20 may provide another round of news for long-gamma sterling trades.
Turkey Banks Tap $4.5 Billion Gold Reserves to Shore Up Finances
Commercial lenders in Turkey have pulled as much as $4.5 billion worth of gold reserves since mid-June in an effort to avert a liquidity crisis as the lira plunged. Weekly holdings reported by the Central Bank of Turkey fell by almost a fifth since June 15 to 15.5 million ounces with the lion’s share — $3.3 billion — of the exodus sparked by the monetary authority’s Aug. 13 move to lower reserve requirements. “The commercial banks were probably switching to more liquid assets, given what has happened to the lira,” Jason Tuvey, a senior emerging markets economist at Capital Economics in London said by phone on Friday. “There’s been concern at the commercial banks over their external debt burden, which has been reflected in the rising bank bond yields.” Turkish lenders are allowed to meet reserve requirements with bullion deposits, unlike in most other countries. Turkey is one of the 20 largest sovereign owners of the precious metal and boasts the fifth-biggest consumer demand in the world, according to 2017 data from the World Gold Council. It refines scrap gold into jewelry sold all over the Middle East.