Apologies for not writing the Blog over the past couple days…..
What a disaster!!! yes that is exactly how I would describe the state of GBP right now. So the wage growth numbers weren’t spectacular and perhaps they won’t raise rates until Q1 2015 instead of Q4 2014…so what!!! I think the market was SO LONG GBP that everyone decided to head for the exit door at the same time and liquidate. I still see this move as a temporary reaction to yesterday’s numbers and the desire for the market to clear out the longs before reaching a level where it will be time to get back on the horse. Bear in mind as well that we are in the height of the European Summer and historically during these months there is not a great deal of demand to hire and add staff. Come September I believe things will start to change dramatically and we will see the growth numbers that Gov. Carney is looking for.
The current level of 1.6680 represents an initial support level, a break will lead us down to 1.6625 which if it does get there represents as far as I am concerned is a GREAT level to get back in. I think the momentum (weakening) has slowed down and I think we could start to see a turn-around as the markets begins to build GBP longs and more importantly levels which I believe local exporters should be chomping at their arms to hedge and even take profit (after the recent GBP strength to 1.7190)
I for one do not believe the current weakness in the GBP will persist. It is not that I am talking my “book” but rather all other indicators remain GBP positive and more importantly one bad wage growth number will not stop Gov. Carney from potentially pulling the interest rates trigger towards the end of the year. Truth be told the longer he waits the MORE difficult it will be given that 2015 is an election year and NO sitting Govt. wants to see potentially vote loses from this move. So as far as I am concerned I see no reason why a hike can’t still happen AFTER Xmas.
EUR/USD takes a back seat trading in a narrow 1.3350-1.3400 range all day. Option Volatility has obviously suffered as a result with the front end of the curve off 0.25 in recent days. Again I must re-iterate my previous comments, EUR/USD is going south. When exactly is of course pure guess work, but I believe in a fortnight we will start to see some attempt to test the 1.30 handle. At the same time I think the GBP starts to recover leaving EUR/GBP back through 0.8000 en-route and back to test the 0.7900 levels we have spoken about on many occasions on this Blog. In EUR/USD 1.3300 (last hit Nov 2013) is my first pivot, followed swiftly by 1.3100 (last hit Sept 2013) on the way to break 1.3000. The next move will be swift (in my opinion) rather than a gradual tick by tick move lower. We are so “close” I see no reason the market will not have a go.
It seems tough to find a narrative that’s supportive of the euro at present, and the threat of an escalation in sanctions is not helping growth prospects in the Eurozone’s powerhouse – Germany. As one would expect other European currencies have followed the euro’s lead, and sterling, in which positioning was most certainly long vs the euro, has been a major victim. The rush to exit longs over the last few weeks has compromised the bearish EUR/GBP trend, and indeed late last week it looked like a bullish head & shoulder bottom had formed with the possibility of a bounce to 0.81 in prospect. The bullish reversal has not been in evidence, at least yet, making me question its likelihood – after all head & shoulders patterns tend to work as reversal patterns roughly two thirds of the time, the other third it’s a continuation pattern. I’m starting to question if we’ve already seen the high for the next few weeks in the cross. In the first instance, I’m happy to maintain a bearish view, but it will be jettisoned if we exceed last Friday’s 0.7997 high. My energies will be focussed on identifying appropriate levels for the bear trend will re-assert itself.
In Europe, this week, the big news will be the BoE August Inflation report and employment report which is published on Wednesday. While we continue to expect downward pressure on the unemployment rate, weaker wage growth may add some uncertainty to the central banks thinking, although it’s hard to see anything but a hike at some point nearer the end of the year.
Risk markets generally have made fairly strong bounces from the troughs we saw last week. However, Japanese equities look a bit uninspired today, but one suspects that a renewal of Japanese yen weakness will solve all problems there. The correction we have seen over the last week in USD/JPY looks to be just that… a correction. That said, I’m not sure that we’ve seen the end to the recent excitement, it’s hard to say how much war risk has impacted sentiment in the markets, but as we’re not out of the woods, where the Ukraine or Gaza is concerned, some caution is warranted. Besides I continue to look ahead to Jackson Hole at the end of the month, to put prospects for risk markets into the end of the year in their rightful context.
I’m not expecting much excitement from US data this week, although we do have Empire and Michigan confidence numbers to look forward to. I just find it hard to see what could come of that to stir the pot. For now I remain distrustful of risk markets generally, with a preference to wait on the side-lines.
EUR/USD passes without much of a glitch after yesterday’s ECB conference. While Gov. Draghi expressed some concern over inflation in general, he went on to explain why the euro should fall against the dollar. This is exactly what we have been commenting on over the past month!!! I guess even Gov. Draghi reads our BLOG!!
Draghi said that the fundamentals regarding the EUR have changed and detailed:
- Monetary policy divergence means the US will tighten way before the ECB will. He already hinted in the past that rates will not rise before end 2016.
- June’s ECB measures (negative deposit) have been successful. Basically, banks are “punished” for depositing money with the central bank.
- Speculation has changed: increased EUR FX shorts. Draghi quoted known data.
- Flows into the euro zone have weakened: less short term capital in-flows. Money entered the zone chasing high yielding peripheral bonds. These bonds are not so cheap anymore.
Gov. Draghi expressed their concerns over the high unemployment rates that continue to plague countries like Spain and Italy. EUR/USD traded around 1.3370, in a relatively limited range around the press conference. Draghi commented that inflation will eventually return inside the range and the lack of worries about weak growth, resulted in the EUR climbing higher to 1.3390. Support for the EUR stands at 1.3325, with critical support at 1.3295 – the November low. We do not feel the slight move higher has dampened our overall expectation that the EUR will eventually break through support levels en-route to the 1.20 handle!!
As expected, the Bank of England held rates firm at 0.5% and did not release a statement from their August meeting. GBP/USD gave up gains trading as low as 1.6802 forcing EUR/GBP higher to 0.7965 presently. The market was disappointed with the lack of colour from BOE Gov. Carney and decided it was time to take profit. This is somewhat disappointing given what we thought was the start of a rally in the GBP (vis-a-vis) the USD. It will be interesting to see what comes next and if traders stop the rot and start to buy the GBP back.
Finally, geopolitical events in Ukraine persist as Pres. Putin took a bold step yesterday slapping import bans on an array of food goods from the U.S. and Europe. The restrictions include all cheese, beef, vegetables and other dairy products as Pres. Putin looks to strike back at sanctions over the conflict in Ukraine. This on-going war poses a serious threat to any European recovery and yesterday’s actions by Pres. Putin should cause great concern for European leaders. As I noted yesterday, this is a pointless move and will in all probability hut Russia more than it hurts the West. These games remind me of when I was back in school and the silly antics us kids all got up to. It is totally unnecessary and in effect what they are trying to do is DEFLECT THE SPOTLIGHT away from the downing of flight MH17. I was always taught that what makes a real man is when you can stand and take responsibility and apologise for your actions. Unfortunately this will not and does not work in politics and therefore this problem is simply not going to go away.
My best advice in times like this is stay out until the dust settles, but if you want to get involved be strict with your stops!! Greed is sometimes good, but it can also come back and bite you on the…Have a good weekend!!!!
Take care and good luck
Central Banks (CB) take centre stage today with the BOE and ECB both in all likelihood expected to leave rates unchanged. The ECB has a scheduled conference following the announcement at 12H45 (GMT) though we are not expecting any major fireworks. Truth be told after Italy officially entered its THIRD in SIX years there is very little that the ECB can do but stay on its present course. If anything they should be “happy” to see the USD making headlines as this in effect helps make European goods more attractive. As I stated in my commentary yesterday, the best thing the ECB could do is allow the EUR to weaken vis-a-vis the USD to allow European Corporates to convert their foreign earnings at more favourable rates (remember they are BUYING EUR). So, going back to what I said above, Gov. Draghi will make some comment about Italy (and France) and confirm that for now things must follow their present course of action and hope things pick up going into Q3-4.
GBP/USD remains glued to the 1.68 handle (1.6840 as I write this) from the multi-year high of 1.7190 that was hit just three weeks ago. After that high was established, which was just short of its original 1.7250 upside target, the currency pair followed the USD and reversed course to make a sharp decline (-2.05% decline). That decline broke down swiftly below the key 1.7000 support level and the 50-day moving average in late July. GBP/USD is currently trading between the 50 and 200-day moving averages, which are both still pointing up and indicating a solid bullish trend (for the time being). At the moment, the recent drop can still be considered simply a pullback within the context of a strong, year-long uptrend. The pullback could turn into something more substantial if GBP/USD is able to break below major support around 1.6700. This level is not only a key support level, it is also where the 200-day moving average currently resides, a key 50% Fibonacci retracement level & a major psychological level.
The escalation of possible conflict in Ukraine that started yesterday afternoon has gathered momentum, causing investor sentiment to continue its collapse as market participants flight into safe-haven assets this morning. Yesterday’s warning from Poland’s foreign minister that the risk of Russia invading Ukraine has increased as Russia amasses military troops in battle formation along the Ukrainian border, in addition to the reports Putin was readying counter-sanctions against the West, culled risk appetite and sent global equities lower, with the resulting movement out of high-yielding assets. Equity markets globally have not been spared, with the majors all in the red. Not helping matters in the European Union was the fact that manufacturing orders decline 3.2% compared to May, which had also seen a 1.6% drop from the month prior. The disappointing industrial order number is likely a result of a pause in orders as the conflict in Ukraine festers, but also confirms the Bundesbank’s caution that GDP growth in Germany stalled during Q2.
While I stated above that FX traders are waiting for the rate announcements later today, it is really the Ukraine issue that is now taking centre stage. Any escalation in that conflict will see further flight to safety, further deterioration in stocks and ultimately a delay in the recovery of that region. No doubt the geopolitical landscape has and is changing. Russia for reasons I cannot fathom are isolating themselves more and more when in fact they should be forging closer relationships with the West. Ukraine doesn’t offer them anything they don’t have already, so as far as I am concerned this is simply the Russians trying to show the world they can’t be pushed around. I thought the cold war was behind us.
I am still of the opinion that FX markets will continue in the current trend. EUR/USD lower targeting 1.3000, GBP/USD higher targeting 1.7000, EUR/GBP lower targeting 0.7900 in the greater scheme of things.
Have a good day and good luck
As previously commented, the USD continues to look strong vs the majors (excl GBP for now) as economic numbers and fundamentals all point to an early recovery in the US economy. We have seen over the past few months how the FED has consistently reduced their QE purchases in lieu of this recovery gathering steam. Talk is starting to heat up about WHEN not IF they are likely to raise rates. Though we need to reiterate that pulling the trigger too early could hamper the recovery and set the US economy back, thus delaying the inevitable. It is vitally important that before such a move the economy and job market in general finds itself not only maintaining a positive momentum but also growing. Remember the worlds economies are reliant on the US recovery so supporting it is imperative.
For this reason, and as I have previously stated, EUR/USD will test 1.3000 (in fact some people have started to call for PARITY – EUR/USD 1.0000). While this is not impossible by any stretch of the imagination, let’s not get ahead of ourselves. Remember baby steps!! So let’s get the USD through 1.3000 to start with. There is still a great deal of work to get to 1.2000 let alone break it. As I said above, the US economy must grow by itself through higher demand (amongst others). The last thing we need is for the USD to rally to high too fast making US exports less competitive and thus slowing manufacturing output. As any economist will tell you, a sure way to help drive any economy is to allow ones currency to slide making exports attractive (as earnings are in foreign currency) and imports less attractive. So what I am saying is in my opinion below 1.2000 (EUR/USD) American companies will feel the pinch as they receive fewer USD on their sales. Trust me when I say this, the FED are well aware of this and will take the necessary actions. As I have said over and over again, currency markets are in some way manipulated by Central Banks to keep control.
GBP/USD rallied all yesterday after strong PMI numbers. Currently trading at 1.6865, it is bucking the trend vs the USD. The UK economy continues to show amazing recovery under the present Govt. No doubt the old saying cut your cloth according to your means runs deep in Conservative circles. You cannot simply print money to get out of a pickle. The economy must be run like a business. This is what is happening and the results are there for all to see. Business is back!!! It is imperative then that the Conservatives hold onto power next year so that they can continue on this path. Any alteration no matter how small could have severe repercussions. I am cautiously optimistic that come next May business will realise this importance and keep the Conservatives in power thus maintaining the economic growth.
As for the FX Options market, volatility remains subdued with 1m GBP/USD 4.50/4.70, 1m EUR/USD 4.60/4.70, 1m EUR/GBP 4.7/4.9. Again the market finds itself drawn to offer “Vega” rather than be forced into buying “Vega” and paying “Theta” (time decay-premium). While I must admit the price action over the past few days has been reassuring, if one looks at historical volatility that paints another picture. It is for this reason and the desire to manage ones negative Gamma that is forcing volatility to remain offered. I for one do not see any major change UNTIL we get closer to the EUR/USD 1.3000-1.3100 levels. Only then will market makers start to cover in anticipation of the next big move. Keep stops tight, and stay on the trend. EUR/USD LOWER – GBP/USD higher – EUR/GBP lower….all points to GBP being the ultimate winner…for now.
Have a good day ahead
Well well well!! Interesting start to the day.
EUR/USD through 1.3400 and GBP/USD at 1.6885 (EUR/GBP 0.7935 from 0.7980). While I wrote yesterday USD IS KING, I did say that GBP on its own remains a crowd favorite given the superior economic conditions and the flight into GBP.
EUR PMI 54.2 from 54.4 / GBP PMI 59.1 from 57.7 (8 month high) again reinforcing the UK’s strength in comparison to our European neighbours. This is NOT a USD move but rather a EUR/GBP move and again reinforces our thoughts that as things stand Europe still has some way to go before catching up (economically) with the UK and US.
GBP traders will (in my opinion) continue to buy the pound vs the eur and will in all likelihood test 0.7900 (1.2658) psychological levels again. Having spoken in length to the aforementioned people, they are in agreement and are in fact positioning for an even greater move below these levels. The FX Options market remains in limbo with vols remaining at the previous lows with little desire to own gamma as things stand. Opt traders prefer to remain sellers of vol and use the spot market to “do the talking”.
The positive data added to indications that the economic recovery in the U.K. is deepening, fueling expectations that the Bank of England will raise interest rates before the end of the year. We do however expect them to keep rates on hold going into this Thursday’s meeting.
Looking at some of the Options numbers, vols have for all intents remained pretty “quiet” over the past few weeks. Despite the recent USD strength, the options desks have remained net sellers of options (earn premium). The reasons remain quite simple, there is just not enough daily volatility to warrant buying vol right now. We are now firmly in the middle of the summer and this in itself is adding to recent malaise. What’s the point of buying insurance when you are still in a position to control the risk adequately. As I have noted previously, it is only once we start to test the 1.3000 mark that I expect vols to pick up and for the overall perceptions to change. Granted this will start around 1.31-1.32 but we still have 200 pips to go before we see this change.
ECB meeting on Thursday (incl. conference) will be interesting. Again we await Draghi (ECB Gov.) comments on what they are prepared to do to re-ignite the Eurozone. They are going to find it challenging at best given that they really need to see the USA and China boost their Economies (consistently) before that trickles over to Europe. So for now I do not expect much change in his rhetoric and game plan.
This week we switch from Fed watching to four other major markets: Australia (RBA), Eurozone (ECB), Britain (BoE) and Japan (BoJ). By far the most interesting will be the ECB, but I’m not sure it’s time for Draghi to take further steps yet, particularly considering that the euro move is exactly what they’ve wanted. So… was the dollar the driver of last week’s move, or the equity markets? It seems to me the dollar was the leader, as we’ve been seeing signs of dollar strength for the last few weeks. Initially we saw emerging market currencies stall, then both the euro and the Japanese yen started to fall, taking out key technical levels. On that basis, it’s difficult to read much into the equity market declines of last week, and this is reinforced by how relatively uninterested some Asian equity markets have looked during this unwind. At the end of the day.. the employment news was counter to exit strategy fears, so why should we persist with a bearish equity view? Personally I have a hard time seeing the S&P achieving new highs, but I’ve been having difficulties with the bullish trend for some time! I’m keeping a careful eye on the nature of any bounce back. If the pattern looks corrective, I would be looking for opportunities to get short at better levels, but this process may take weeks to develop.
As for today, time to sit back and observe? The dollar was so strong last week, and risk sentiment was poor. The question everyone is asking, is.. does this negative sentiment have any legs, or was it just a pull back? For me… EUR/USD looks unambiguously bearish, and USD/JPY bullish. However I could see EUR/USD re-testing former support at the 1.3480ish level before we see more weakness. EUR/GBP also looks like it could re-test the 0.8000 level before the downtrend re-asserts itself. With some emerging market currencies bouncing back from recent weakness over the last few days, the picture is a little mixed.
Yup… definitely time to sit back and observe!
USD rally somewhat halted after “disappointing” non Farm Payrolls (+209k vs +270k) and the unemployment number rose from 6.1 to 6.2%. All in all this caught traders by surprise given the superb GDP number (+4%) earlier this week.
If you remember what I wrote a few weeks ago, I kept going on about how we felt the USD was due a spot in the limelight. OK I raise my hands and admit I got the timing a little wrong but at least the thought and view was there. I remain confident that the USD will continue to drive higher (vs the majors) given the bounce we have seen recently in economic numbers. We knew after FED Gov. Yellens’ recent comments that they were looking very seriously about the timing of the next rate hike. All in all these numbers just add fuel to the fire and reinforce our view that the hikes (incl the BOE) will happen sooner rather than later. Inflation and stagnation remain a thorn of course, but a thorn that is becoming less of an issue.
So while the market anticipates a continuing of the status quo we must nevertheless remain vigilant. There is still the problem of negative and stagnant growth in Europe and a slowdown in China. Having said that a recovery in the worlds biggest economy, the USA, will indeed provide the kind of support (globally) to help the aforementioned grow as a result. Like any good Central Bank Governor knows, one great number doesn’t quite “hack it”. There has to be sustained and consistent growth coupled with greater EPS from companies in general. Their growth spurs others and in effect creates a snowball effect which is something we have all been waiting for since the Financial Crisis of 2008. Finally there is some light at the end of the tunnel.
As for the currencies, do not be surprised if the EUR does manage a bounce from the current levels (1.3420) brought about by profit taking and the ability of the interbank market to squeeze the market higher. 1.3380 remains a sticky level while 1.3475 is my bounce level should it happen.
GBP/USD has been utterly roasted, falling over 2% over the past few weeks (high of 1.7180) on the back of the USD rally. Once again the USD shows us who really is king. I for one do not believe that the GBP will necessarily suffer as much as the EUR, AUD, CAD, NZD etc given the strong position the UK economy finds itself in. So while we have fallen to 1.6835 (currently) I feel we should see a recovery potentially back to 1.7000, keeping in mind that 1.6980 remains the key level.
EUR/GBP been on the back foot all day rallying from 0.7930 to 0.7970 currently. Again this is due to the recent USD rally and the fact the vs the GBP, the USD has been more vicious. While I do not think the GBP rally against the EUR is over, like I mentioned above any pull back is always a healthy one, and this is exactly what we are seeing here. It is for this reason I see a stronger rally in GBP/USD than I do in EUR/USD which will in effect strengthen the GBP vs the EUR.
Have a great weekend ahead