Good morning

As many of you will have read in my previous commentaries over the past few weeks, there is an overall plan to try weaken the USD to a level where it will then be possible to re-enter and initiate LONG USD positions. I have stated previously that 1.3725-1.3750 (€/$) is an area where this appears TO BE THE MAGIC NUMBER. Trading just shy of 1.3700 at the moment and with the ECB and NFP to be published on Thursday it is my belief and opinion that the markets will continue to push ahead especially as there is a press conference after the ECB announcement which usually adds an extra spice to their decision. So for now the trend is your friend and it is worth holding on for additional gains. I do not think we will see a reversal of gains over the past 24 hours especially with these 2 events on Thursday. Additionally having a look at the FX Options vol market, there is nothing there to suggest otherwise and 1m vol remains around 4.4/4.5….continuing to steepen vs the back end (1y 6.10/6.25). Keep in mind while there has been a “decent” move over the past 24 hours this does not mean you should be looking to buy “gamma” because of the limited follow through that’s likely to occur. So the Options market is still happy to be a net seller of front end vol and trade its negative gamma.

The RBA (Australia) left their interest rate unchanged at a record low of 2.5% and repeated its forward guidance of steady rates. As expected, the RBA kept the cash rate steady at a record low of 2.5%, having last cut rates in August 2013. The RBA repeated its forward guidance that “on present indications, the most prudent course is likely to be a period of stability in interest rates”.  The RBA did however reword its complaint about the higher exchange rate, noting that “the exchange rate remains high by historical standards, particularly given the declines in key commodity prices and hence is offering less assistance than it might in achieving balanced growth in the economy”.   The RBA noted firmer growth at the start of the year, but “still expects growth to be a little below trend over the year ahead”.  Growth (GDP) is expected to be between 2.50-3.10% going into 2015. The RBA also mentioned that credit growth is picking up “most recently [for] businesses”, but left it there and made no further comment.

GBP remains “on fire”. How many times have I said how attractive GBP is right now to the FX community. With all the rhetoric of late regarding interest rates and when they likely to start going up, it is no surprise to see GBP so bid (vs USD & EUR). I still think with regards to EUR/GBP, the level to break is now 0.7950/0.7955 (low of 0.7958) if we are (and we will) to see the next leg lower. However as far as I am concerned while GBP/$ remains bid, the catalyst to see the break will therefore come from a weaker €/$. I am confident that these moves will materialise in the coming weeks.

Only yesterday I said to you if you are an importer looking to BUY foreign currency these are GREAT levels to get involved. That synopsis has not changed and I continue to recommend and suggest you take advantage of the GBP strength to AT LEAST PART HEDGE and lock in these levels. The option of course if you are allowed and want to do FX Options is BUY a GBP/USD Risk Reversal.  In this case you would SELL a GBP CALL (best case) and BUY a GBP PUT (worst case). With the risk reversal trading around flat (you do not pay away much vol) you would be able to secure very attractive strikes ALL FOR ZERO COST. The same applies to EUR/GBP though here you are BUYING a EUR CALL (worst case) and SELLING a EUR PUT (best case). This is better value because the risk reversals are currently SKEWED in favour of EUR PUTS so in effect you are “getting paid” to sell the EUR PUTS. Again this is ZERO COST.

I personally am a big fan of Risk Reversals especially to hedge. Let me know ( if you need further clarity and I will be happy to help.

So good luck, GO THE GBP!!!!!