BOE AND FED NEWS BEHIND US, NOW WHAT HAVE WE LEARNED

Good morning

FED’s Yellen finally dropped the hint. They are NOT as hawkish as one would have thought. Stocks exploded with the S&P hitting an all time high 1957.74 and the Dow closing in on 17,000 (close 16906). What a difference a few years and a soft monetary policy makes. Both the BOE and the FED know that their hands are tied for now and the longer they delay raising interest rates the better their economies will be in the long run. We saw last year when the ECB jumped the gun and raised rates only to realise a month or so later that they messed up proper and reversed that hike. That was when rates were 1.25%, look at where we are now 0.15%. As long as the economy has time to get back on its feet and grow by way of low rates, the CB’s must be somewhat pleased with their ability to steer the economies through the turbulent waters and into sunshine and samba.

Bank Of England Monetary Policy Committee member Martin Weale noted there is no immediate need for the BOE to raise interest rates. He went on to say, this of course could change as we head into Q4. In his own words:  “At the moment, I don’t see a case for an increase in
interest rates and I would be surprised if that changed in the near future. Later in the year would be a different matter, I will have to wait to see how the economy evolves and pressures in the labour market.” The BOE is basically trying to man manage the “forward market” so that there are no knee jerk reactions if and when they (potentially) raise rates in 2014.

Retail sales at 9.30am (this morning) the consensus is for a -0.60% drop from +1.8% rise last month.

I OWE YOU AN APOLOGY.  Yesterday I noted USD/ZAR had broken through 10.8050 level and was firmly in a bear channel to 11.0600 area. The only problem i never foresaw was CPI would come in at +0.2% which super excited the market moving the ZAR from 10.8350 to 10.7850 and which was further buoyed by Yellen’s comments last night which pushed the EUR firmly above 1.3600 (currently 1.3630). There is a huge correlation between EUR/USD and USD/ZAR. Because the Eurozone is SA’s largest trading partner any moves in the EUR will have significant impacts on the ZAR.  The rally in the EUR o/n has added to the ZAR’s strength which is currently trading around 10.6400.

EUR/GBP taking an almighty knock. After yesterday’s 9-0 vote, the market decided it was time to take profit and has since moved the currency from 0.7970 to 0.8015 currently. GBP/USD is trading above 1.7000 (1.7010) and a move to 1.7040 is now on the cards as it plays catch up to the EUR.

All in alll with the 2 major news events out the way FX Option Volatility has been hammered. 1m EUR/USD down to 4.7250 mid (-0.50% o/n – new lows since 2007), 1m USD/JPY down to 4.95 (-0.65% o/n), 1m GBP/USD down to 4.50 (-0.50% o/n) and 1m EUR/GBP 4.625 mid (-0.375% o/n) … These are levels we have not seen for nearly 10 YEARS!!! What this tells me is the CB’s have done an outstanding job in “managing” the currencies to such an extent that it has all but taken the wind out the sails. And summer is on the way!!! that all spells MORE losses potentially.

Have a good day ahead