The Pound continued its relentless drive vs the EUR as the markets begins to discount a hike in interest rates around May 2015. While this has been one of the reasons for the recent strength, another catalyst has been the recovery of the UK economy vs Europe and other 1st world economies. Growth rates are returning to levels seen pre-2008 with the IMF acknowledging that even they might have underestimated the recovery. With this backdrop and a potential hike in rates, money managers and the like have been moving cash out of the EUR (whose Depo rates went into -ve territory at last weeks ECB meeting) and instead ploughing cash into GBP. This is creating a knock-on effect for the FTSE where hot money is flowing. The housing market, and I should stress it is really within the M25 (highway) borders, has not helped matters and it is my opinion that even a hike in rates will do little to dampen the housing rally. Put it this way, if you are a money manager looking for returns where would you look!!! There is so little in the way of opportunity right now (and CB’s attempt a gentle landing of their economies) that your options are really limited to property, stocks and corporate bonds. I for one see this rally continuing for the time being as investors look for opportunities.
US equity markets ended flat last night with Europe opening flat to down overall. Non-farm payrolls continue to impress and this too is adding to the recovery we are seeing in the States. I for one do not see Ms Yellen raising rates before the end of 2015 giving the economy time to settle into a rhythm and finding support. I was always a firm believer that the worlds economies were so reliant on the US economy. Remember the old saying, if the US sneezes the world catches a cold. This is why it is so important that they get it right first time.
Lastly on the EM side, as the EUR begins its move down BE CAREFUL of a fall out (which I anticipate) and depreciation in ZAR, TRY, BRL, MXN, IDR, to name but a few. Huge correlation trades and any deterioration in the EUR will have a marked impact on the EM currencies above
EUR USD – looking to test 1.3480/1.3500
GBP USD – looking to test support at 1.6700
EUR GBP – looking to test below 0.8050
AUD USD – looking to test recent high of 0.9445
USD JPY – $ strength makes me look for 102.80