Sterling didn’t show much follow through from its recent strength on the back of yesterday’s healthy employment numbers. A classic sign that positioning was already quite long. If positive GBP performance is to persist then a period of consolidation might be necessary. From a technical perspective there’s a hint of divergence which could be a sign that we’re close to topping out, but I wouldn’t be surprised if we make another charge to a new short term high before that happens. Back to the employment numbers, broad based not London-centric improvements in performance…wow! Ed Milliband must be chewing his finger nails, and other developed nations can only look on with envy. I’ll stop there, this is no political blog!


European inflation numbers this morning, if we get lower numbers than consensus estimates that could add fuel to recent euro weakness, we’re hovering just above significant support levels in EUR/USD. I look at the 1.3470 – 1.3510 zone as a support area, below which we could find the pair moving back to the low 1.30s. It’s something to keep an eye on.


Apart from that earnings season bears watching. So far the numbers have been reasonable in general. This is good as on some level current valuations need to be justified. Clearly we could alternatively just disregard valuation and accept that we’re where we are because we live in a zero bound world, but that’s a very scary way of looking at things.


Nothing controversial from the chairwoman of the Federal Reserve’s testimony to Congress, the markets left unscathed. Furthermore earnings numbers yesterday were fairly decent – the boat was most definitely not rocked.


Cable (GBP/USD) appears to either be in a ‘flag’ consolidation pattern or may even have just come out of it, with the aggressive post-inflation number bounce yesterday. A flag is generally a continuation pattern, after which the prior trend (GBP/USD higher) re-asserts itself after completion. Sterling appears strong against more than just the dollar. In fact give the decline in EUR/USD over the last 24 hours, moving to 1.3550 from a 1.36 handle, the star currency pair is EUR/GBP.


EUR/GBP is making new lows and is trending very nicely indeed. Look for this to run in my view, the power of the downward thrust from resistance levels yesterday was clear, and achieving new lows just reinforces the message – sterling will continue to appreciate vs the euro. And why not? In one economy the central bank is talking about exit strategies, in the other participants talk about extraordinary tools to kick-start the economy even as the macro data stagnates.


Elsewhere, China’s Q2 GDP numbers were a slight improvement on expectations, but it didn’t help either AUD/USD or NZD/USD which have given up recent gains in fairly short order. These risk currencies bear watching. But for now I’m not sure there’s a broader narrative in play.


I had dinner with a good friend of mine who is a portfolio manager at a long term investment fund, and I took the opportunity to ask him about his current views. I’m not going to go into detail here, but he did say something very interesting. He thinks equity markets are richly valued here, but – he said – from a relative perspective, where else can you put your money? I raise the issue because if he’s thinking that, then other investors are likely to feel the same way. Bond yields are very low, so don’t present an attractive investment case; commodities have negative carry; and currencies are stymied by central bank manipulation; so for a lot of people there is simply no alternative to owning equities. Well… what does this mean for currencies generally? It looks like an environment where equities might still continue to grind higher, a kind of low volatility risk positive situation, with not a huge amount of excitement. Paying attention to the macro signals is key. Looking for the inflection points in the macro that could induce central policy changes. EUR/GBP may well be the star example of this, but surely there are others out there.


Some potential market movers today. Earnings numbers from Goldman Sachs and JPMorgan Chase, as well as numbers from both Intel and Johnson & Johnson. Individually these are important companies, taken together their results will start to clarify the picture for this earnings season. With regards to Goldman Sachs and JPMorgan Chase, if they post upside surprises like Citibank did then that will be a boost to risk. Intel’s numbers will give us an insight into the technology sector and plans for future corporate investment. But that’s not all, we have retail sales today, and perhaps most importantly, we have the testimony of the chairwoman of the Federal Reserve.


If Yellen does any less than reiterate her dovish view that there’s still plenty of slack in the labour market, traders will view it as an implicit change in the monetary policy outlook, perhaps a hint that the first hikes will be earlier than current expectations – think ‘exit strategy’. That would be a negative for risk as US markets look fully priced, and they have to be vulnerable to any changes in monetary policy. Make no mistake, that scenario would be bigger news than anything else that is likely to happen today.


GBP/USD bounced nicely off former resistance, turned support on the back of the inflation numbers which have just come out this morning, and EUR/GBP pulled sharply back from the highs (the resistance area I identified yesterday). Consumer prices rose to 1.9%, above the consensus expectations of 1.6% after May’s 1.5% number. Again… read exit strategy. Tomorrow’s employment numbers could add further fuel to sterling strength if the unemployment rate is below consensus.


Markets today should generally be cautious, in front of the big data. Traders are likely to pare their positions in order to manage risk, and wait to assimilate new information. The key is likely to be Yellen. While markets ended yesterday on a positive note, it’s worth pointing out that the Bank of Japan has lowered it fiscal year2014 forecast, and some banks have lowered Q2 estimates for the Eurozone. There’s ample liquidity out there, but it’s not all rosey in the garden. If the markets weren’t already so high, I would view this as the kind of environment where there’s just enough information out there to keep the sceptics cautious about markets, and enough looseness in financial conditions to allow the markets to keep grinding higher. But let’s wait and see what happens later on today!


Short one today. We’re now into earnings season. What happens in corporate US matters, as the US remains the largest economy in the world and it’s macro picture has a significant impact on perceptions of risk and sentiment in general. Data that surprises could cause short term spikes in volatility, but unless a theme can be divined from earnings or sales data that contradicts the current macro narrative we shouldn’t expect a broader impact. This is the ideal domain for range traders, a highly specialised market, that can be difficult to profit from.


Majors continue to trade within defined ranges. EUR/GBP looks to be approaching first minor resistance levels {0.7970ish}, and with cable (GBP/USD) bouncing off trend-line support, we could see sterling appreciating versus its main crosses, but all of this feels within the context of the ranges. USD/JPY also looks like it could bounce from supports {101.20ish}.


Bigger picture technicals continue to concern me, but I have enough self-awareness to appreciate my personal biases. Some traders are more comfortable in bull markets, others like me prefer bear markets for the winning trade. We all tend to “see” what we want to see. For now we need to continue to monitor the macro-scope, if we identify any factors that could impact the normalisation narrative that dominates then perhaps we (or I) can give in to bias! Rest assured if we spot anything we will update you in our blog.

THIS ISN’T 2012, THIS IS 2014..

Fears about Banco Espirito Santo (BES) one of Portugal’s largest banks did some damage to markets yesterday. Stocks were lower, EUR/USD dipped back below 1.36. It seemed like we were back to 2012 and with concerns about the health of European financials, but look where we are this morning – it’s like it never happened. Had this been back a couple of years ago – before Draghi put his foot down – the panic would have been feeding on itself by now, with senior figures across Europe announcing emergency meetings. But this isn’t 2012, this is 2014, and Draghi has been extraordinarily effective – a central banker not to be messed with. It seems clear the short term players were short euros when the rumours about BES got out, thus the dip was an opportunity for those guys to get out, take a step back and wait for better levels to get back in.


Yes the trend for EUR/USD looks to be down, but I’m guessing the smart guys will wait for the panic sellers of yesterday to capitulate and stop out of their positions. Where that level is could be 50 or so pips higher than where we are, it’s hard to be precise, but my sense is that there are stops a bit higher than where we are now. What that means is we should probably see higher levels today, but it will be a very short term thing with the pair moving back to pre- BES levels in short order. Personally I prefer EUR/GBP for expressing a short euro view… you take the dollar out of play. I wouldn’t be expecting major things to happen over the summer months though, it tends to be like that unless we’re in crisis mode. And it seems like Portugese banks are not enough to do more than momentarily perturb the market now.


In my view, we need to look out towards events like Jackson Hole in August – the annual economic symposium where central bankers often make key speeches; and the return of the big players from their holidays in September, for the market to make an assertive move in one direction or another. We could be in for a directionless market until then with ranges large enough to discombobulate, but not so big it makes us question the dominant narratives.


The recent release of the latest FOMC minutes was fairly dull to be honest, but it did strike me as interesting that both the Bank of England (BOE) and now the Federal Reserve have commented about the complacency of investors regarding when hikes are likely to start. Janet Yellen noted “pockets of increased risk-taking across the financial system”, well Janet…. who’s fault is that? The more easy money there is washing around in the system the lower volatility is likely to be. And folks? Vols are pretty darn low in aggregate!


Regardless of who’s fault it is though, major central banks are telling us that we’re at the beginning of the endgame of this zero interest rate policy (ZIRP) world we’ve been living in. Whether it’s the 3rd quarter next year or the beginning of the year after, rates in major markets (Japan and Europe possibly excepted) need to start to go up. Markets and investing are obviously expectations based when in rational mode, but there’s the darker side of our collective consciousness which is dominated by greed and fear. Greed is definitely in the ascendancy right now, but if.. and this is what central bankers are worried about… the collective fails to properly factor in the end of ZIRP into expectations, we’ll get a negative surprise when the easy money disappears. When that happens fear will dominate and the mob is much harder to control or predict.


What can we take from this? I think markets need to have slightly more aggressive expectations of higher rates in the UK and US over the next 12 to 18 months. This will be a cushion for both GBP and USD. It doesn’t have to end in tears for risk. You can have rates going up and benign markets, as long as you have real sustainable growth.


Keep an eye on Japan. 2 months of ugly ugly machinery orders now. This is not good, yes it’s a volatile data point, but these are the core numbers that strip out the most volatile components. If you ever needed examples as to why QE may not be the panacea it’s cracked up to be, Japan is the perfect case study!


Anyway it would be unfair to pick on disappointing Japanese macro. Manufacturing data out of Italy, France and a few days ago the UK, hasn’t exactly been inspiring. We all want to think this phenomenon (poor manufacturing/ industrial production data) of the short term variety and not affecting the bigger picture macro. Too soon to tell. You’ll note I’m only mentioning today’s BOE monetary policy decision at the end of the blog. I really don’t see anything new coming from it and clearly the market doesn’t either, because GBP is not doing much of anything this morning!


You only have to look at the Galliford Try record profits from home building to appreciate that the UK economy continues to thrive, disappointing industrial production numbers yesterday cannot obscure this fact. In any case industrial production can be volatile, you need a few months of negative surprises to identify a change in trend. The bottom line is Galliford Try’s numbers surpass pre- 2008 levels and their construction order book has improved.


On a more sobering note, I’ve noticed stories from esteemed outfits – Bloomberg, Wall Street Journal and the like – openly discussing the possibility of a melt up in equities. Suddenly people are talking about average annual returns of 10.5% on the Dow and the industrial average reaching 44,000. For those who haven’t noticed it, recently achieved the 17,000 level a new record. Why am I cautious? When a consensus builds that markets are going one way… and one way only… the smart investor should be cautious! One of the great investors once said (and forgive me if my quote isn’t verbatim) “be greedy when others are fearful, and fearful when they’re greedy”. I’m not saying it’s that time yet.. markets can persist for a long time before the trend changes, but I always try to keep an eye out for the warning signs. Technical analysis can probably help identify specific levels to keep in mind, but a general feel for sentiment and the underlying macro-picture can alert you to when you need to start looking.


What does this mean for currencies? I would expect the trend of sterling strength and euro relative weakness to persist. I would also expect the more risky (higher yielding currencies) to perform well. But shorter term pullbacks are a part of the game, markets don’t move in straight lines, as we can clearly see from recent equity market pullbacks (the Dow is back below 17,000). I don’t expect weakness to persist for long (and we are coming up to earnings season after all), but these are the lazy summer months, the big boys are out in the Hamptons, or on their yachts so don’t expect too much excitement for the next while. What goes for equities and risk in general goes for currencies as well.


Good day

Firstly apologies for the late posting of my commentary.

Following the US holiday last Friday in the US, the market has opened and trading sideways today with a number of interesting Economic numbers due this week.

UK Industrial Production (Tuesday 8th expecting +5.6% from +4.4%),  US Redbook (Tuesday 8th), China CPI (Wednesday 9th expecting +2.4% from 2.5%), FOMC minutes meeting (Wednesday 9th), BOE QE total and interest rate decision (Thursday 10th, unchanged), are the most important ones that come to mind.

All in all I think the market will continue on its current path given that we do not see any material changes amongst CB’s and the market in general. While the market overall anticipates the USD to mount a challenge, I think this challenge will come later (perhaps August/September) rather than over the coming month. The reason I say this is with the next NFP meeting on 01 August I would imagine the market wants to see if there will be a follow through from the awesome number we saw last week (+288k). No point loading up on USD only to see the NFP number come back somewhat muted. In other words there are a number of unsettled issues that still need resolving before the next real move happens.

So while I am still a firm believer that EUR/USD will head south (stronger USD), I am happy to wait until there is a more progressive move to rubber stamp the move. Even now the EUR/USD is teetering around 1.3600 (from 1.3580’s) telling me there is a chance we could see another attempt to take the EUR back to the 1.3675 resistance level.

GBP (USD and EUR) and given up some profits with v USD trading at 1.7125 from 1.7150 and v EUR at 0.7935 from 0.7920. Again this move has not surprised me given we have seen a strong robust and quick move down from 0.7970 on Thursday. Ask any trader and they will say the same thing….it is always a good sign when the market rebounds after a strong move showing healthy profits were taken. Overall the market is still prepared to wait and take GBP stronger…HOWEVER and it is a big HOWEVER, the NFP number on 01 August will be crucial as to what GBP will do next. I think vs EUR there is still a strong trend to take the EUR down towards 0.7750 (1.2900) and this could happen quite possibly throughout the coming month as long as the economic number in the UK remain on course for new highs. This week sees some important announcements so we will be watching the market closely to see what the next move will bring.

Looking at the FX options market, now that the US holiday and weekend roll is out the way, vols have climbed a little…EUR/USD 1m 4.5/4.75, 1y 6.00/6.10, GBP/USD 1m 4.5/4.7, 1y 6.3/6.5 and EUR/GBP 1m 4.55/4.70, 1y 6.25/6.375….basically all in line with expectation. No doubt the market still content to sell gamma and vega especially with Summer upon us. While one would expect the Summer to be “quiet” given lower liquidity, it sometimes turns out to be the opposite and catches the market unaware. Personally Summer 2014 is going to be flat and for this reason I see vols remaining offered (sellers market).

Wish you a pleasant day ahead.



Good morning

WOW WOW WOW. There is a fire in GBP’s belly.

I wrote in my blog yesterday how I predicted EUR/USD and GBP/USD would fall from 1.3650/1.7150  to 1.3600/1.7100  respectively. That happened alright, but then GBP/USD left the EUR/USD behind and rallied back all the way to 1.7150 leaving EUR/GBP the ultimate winner FINALLY (as I predicted) breaking the psychological 0.7950 level. Currently trading at 0.7925 this represents another crucial level for EUR/GBP and a close under this level opens up 0.7850-75 as the next big trigger point. This is a monumental move, make no mistake.

What is interesting to note at this point is how the FX vol (options) market has reacted, or in this case NOT!! 1m EUR/USD LOWER at the open quoted 4.05/4.35 and the 1y 5.85/6.05 (curve steepening), GBP/USD 1m 4.30/4.50, 1y 6.20/6.45 and EUR/GBP 1m 4.20/4.35, 1y 6.20/6.35. If you follow the vol market like I do you will know that this fall (remember it is a US holiday today and there is the “weekend roll” effect, still the extra 1/10 of a vol still leads me to believe that overall the options market is probably LONG overall and thus happy to offer vol out to cover their positions. That and the summer holidays and the complete lack of volatility overall (THANKS YOU CB Governors) leaves the options market at their all time lows (and making news lows daily).

EUR/USD needs to break 1.3500-1.3475 for us to see a change in vol sentiment. Until that happens be rest assured, things are likely to stay the way they are and anyone long vol/gamma will be hurting (pay theta/decay).  I remember back in 2005 when vols in EUR/USD came down to roughly these levels for the summer. It was a disaster. Traders did not know what to do with themselves and trading revenue collapsed. Welcome back to 2005. Pretty it is not!!

I will repeat what I have said a few times previously. If you are a seller of GBP, buyer of foreign currency you would be well advised to look to hedge a “portion” of your book and lock it is. Having said that in EUR/GBP I have eaten humble pie. While I was confident of a break of 0.7950 I never saw it coming this aggressively.  Then again the NFP number yesterday was AWESOME (+288k vs expected +215k) a number the stock market loved and a number the USD loved. The rest as they say was history.

So what for today, well the US holiday will dampen things somewhat. I expect the USD to continue fighting back (vs the EUR) though I would imagine somewhere behind the scenes the CB’s have other ideas. I would be surprised to see the EUR/USD crack 1.3475/1.3500 over the coming weeks. My gut tells me it is not the right time…but hey I have no crystal ball…

EUR/GBP is a winner through and through. GBP traders love GBP and strong PMI numbers and recent rhetoric of rate hikes reinforces the desire to hold GBP (amongst G7 currencies). So I am of the opinion that the rally vs both the EUR and USD and AUD and JPY (etc) will continue unabated for now. There is some serious firepower behind GBP that much is obvious from the price action we have seen in this week especially.

Have a great weekend, good luck and take care


Good morning

With the impending ECB meeting and conference (thereafter) and NFP out of the US, the FX market is gearing itself ahead of the 4th July holiday tomorrow. While I am not expecting any fireworks from either, I do expect Gov. Draghi to comment on jobs, inflation, interest rates and finally the “strength” of the EUR and perhaps its implications on the Eurozone in general. While it is rare to actually come out and say it out loud, i do nevertheless think there will be some reference to the FX rate and what it implies. For this reason and this reason alone, I think the FX market will be looking to BUY the $ vs the € and the £. I have stated previously I thought it was too early to do this, now I am thinking (especially today and US holiday tomorrow) there will be profit taking today and squaring of positions. In other words I see EUR/USD and GBP/USD going south (EUR/GBP slightly weaker).

I am not shifting stance here. As many traders will agree any US holiday generally means volumes are down and currencies generally trade sideways. There will be many traders squaring up and locking any profit they have away allowing themselves respite and a chance to enjoy the long weekend (hey we traders are human after all).  EUR/£ 1.3660, appears to be ready for a correction perhaps down to the figure, GBP/USD 1.7160 also correcting down to the figure, leaving EUR/GBP pretty much where it is, 0.7960 or slightly weaker to around 0.7975/0.8000 area.

Momentum still strong in EUR/GBP and the expectation is that GBP will continue to make advancements ag the EUR given the better economic growth seen in the UK.  Having said that the market has had a pretty decent move over the past 48 hours so some kind of reversal is generally always welcome and expected (in some way). I still recommend (as an importer) if you are in a position that you need to hedge, you would be well advised to do at least 25% now and lock in these favourable rates.

Overnight, Dovish RBA Gov. Stevens resumes talking the currency down. Speaking this morning in Hobart, Governor Stevens unexpectedly spoke at length on the economy and monetary policy. His main message was that the RBA was comfortable with keeping rates steady for an extended period, while he resumed talking the exchange rate down, warning of a “significant” fall as he made the most expansive comments on the currency. AUD/USD fell from 0.9445 to 0.9360 after the comments. This is a lesson for all CB Governors. Sometimes you need to come out and SAY IT. Not to talk in riddles, just come out and say, hey our currency is to weak/strong and something needs to be done. The market will in turn do that for you. The ECB and Gov. Draghi should say just that. The EUR will collapse and save him the trouble.

I read a great article this morning in the Telegraph newspaper regarding an interview with FED Gov. Yellen and interest rates. Here is the link

This morning Nationwide revealed house prices rising at fastest pace in 27 years. You know what, forget about raising interest rates, instead drop the amount a bank can loan you against your salary (currently 4x), stop cheap rates, and most of all require a minimum of 50% deposit. JOB DONE!!! yes there are certain people who will still be able to afford that, but on the whole how many really. That will stop things in their tracks and slow this housing bubble in one swoop of the wand. Will never happen of course but hey at least when Gov Carney reads my blog he will think…that’s not a bad idea…

Have a great day ahead and good luck