The stage is clearly set for dollar strength to continue. In the FT this morning I see articles about the United States becoming the largest petroleum producer, surpassing Saudi Arabia (no need to worry about trade deficits then!), intervention in New Zealand to weaken the currency, and reports about Emerging currency woes. All of these items support the strong dollar thesis, as does the weakness of commodity prices.

In previous blogs, I’ve opined about the expensiveness of equity and bond valuations, well… if there’s one thing that can help justify those valuations, it’s cheaper commodities. Cheaper commodities imply a lessening of the inflation threat which is good for bonds. It also implies cheaper raw materials – good for corporate earnings, and higher disposable income – again good for corporate earnings. Perhaps we need not concern ourselves quite so much in the short term about valuations. Perhaps…

Some big things to look forward to this week. As was mentioned yesterday, Non-farm payrolls is published at the end of the week. As ever the state of employment and wage growth remains key in determining the direction of Federal Reserve policy. The other big thing, potentially even bigger actually, is that we’ll find out more about the ECB’s asset purchase plan on Thursday. The great and the good of Eurozone central banking will be in Naples on that day and we will be given an insight into how the ECB will further its plan to expand their balance sheet by 50%, from 2trn to 3trn. We mention numbers like those these days and I bet none of us even blink! Truly amazing. But.. and here’s the thing.. the market for asset backed securities and covered bonds is not that deep in Europe. I very much doubt the ECB can buy enough of the stuff to even get half of their balance sheet expansion done, and certainly not with the backing of the rich EU governments. Quite a quandary they’re in!

Concerns about the outcome of the ECB’s meeting, may slow the euro’s seemingly inevitable decline this week, but as to the long term, I see nothing stopping such a powerful trend. When you have rationalisations for both sides of the ledger – weaker euro, stronger dollar – it’s hard and completely illogical to try to oppose the way of things.

Today we get employment data in the Eurozone, inflation numbers out of Italy, final GDP data in the UK, and house prices in the US. Risk sentiment appears to be positive this morning. We could be at levels where equities have found short term support, I wouldn’t be shocked if we attempt to rally today. Participants will have very obvious levels that will let them know if they’re on the wrong side of the floor.



Good morning

It was back on the 2nd September I wrote the following: “I have spoken MANY times about this subject. In fact back in July I commented that the USD was due a massive reversal from 1.3750 given the state of the EU. This is now starting to gather more strength and the general feeling is this is JUST THE START. I have further stated (later backed up by Gov. Draghi of the ECB) that the EUR is too strong and is making European manufactured goods “more expensive” and hence less competitive. The bottom line my dear reader, is the EUR HAS TO FALL and fall hard!!! I have no doubt that come December you could quite possibly see the EUR/USD SUB 1.2000.  Sounds like fiction? WHY? Looking at the numbers you cannot escape the facts. Growth, wage growth, retail sales, manufacturing PMI, unemployment, labour laws….the list goes on and on. The biggest problem facing the EU is you have 18 countries (of the 28 EU members states) all pretty much in DIFFERENT levels of healthiness and growth yet all dictated and cut by the same cloth. It is like playing Barnet football club (Conference League) in the same league at Manchester united (I tried to find the best match in terms of ability)”.

The US economy continues to be the bright spot for global growth (together with the UK). Friday’s final estimate of Q2 GDP came in at 4.6%, in line with consensus. But the report showed more investment and less consumption than anticipated. As a result, the USD continued to strengthen against the EUR, JPY, and GBP and most EM currencies on Friday. A number of key FOMC members now putting out “signals” that the FED COULD hike rates as early as Q1 2015 (WHAT I HAVE BEEN SAYING ALL ALONG) rather than Q3-Q4 as Fed futures indicate (and the market).

Later this week,  September Non-farm payroll report should give an updated view on the labor market. We expect a strong report, with a 225-250K gain in payrolls and the unemployment rate to decline to 6%. As Fed Chair Janet Yellen noted at the September FOMC press conference “If the economy proves to be stronger than anticipated by the Committee, resulting in a more rapid convergence of employment and inflation to the FED’s objectives, then increases in the federal funds rate are likely to occur sooner and to be more rapid than currently envisaged”. At the Jackson Hole symposium, she noted that the Fed was looking beyond just the headline payroll numbers to gauge the progress in the labor market. This rhetoric is otherwise known as “verbal intervention” where little snippets are released getting the market ready for the main event. It was just last week that Gov. Carney (BOE) said the same thing, indicating that rates in the UK could also rise earlier than expected given the robust state of the UK economy. When people go to the polling booths next year, perhaps before they decide on where to place that tick, they should look at their bank accounts and feel pretty pleased with themselves. That is all down to the austerity measures initiated and carried out by the Govt. Of course there are other issues when deciding, but as far as I am concerned as long as the ruling party has a “game plan” and will continue to support business, I am voting with my wallet. Look at the recent article published by Alister Heath in the Telegraph newspaper where he specifically makes mention of how business has fallen out of love with Labour.

The upcoming data-heavy week will continue to show the divergence in economic fundamentals between the US and EU, lending more support to the USD and our view of a continuing USD strength. The USD index breaks 85.00 which in itself is a very bullish statement.

The consequence of the above has seen a SHARP fall in EM currencies and Commodity currencies (CAD, AUD). USDZAR trading at 11.2700 (from 11.1400), AUDUSD 0.8720 (from 0.8800), NZDUSD 0.7765 (from 0.7925), USDILS 3.6870 (from 3.6650) all pointing in the same direction. Stronger USD. I cannot say it enough times, the USD is on a roll!! and the roll is likely to stay with us for a medium – long term. We have to get used to the fact that changes are coming and with the prospect of higher rates, it is advisable to start making the necessary adjustments to coincide with these higher borrowing costs. The cat is out the bag. Lets not cry over spilt milk!!

Have a great week ahead




The dollar was mighty yesterday with EUR/USD sinking into the 1.26s briefly yesterday morning before recovering throughout the day, the dollar index made a 4yr high as well. This while risk sentiment nosedived and the S&P 500 took out its month to date lows – thank you very much Apple! Both EUR/USD and the S&P appear to be in range-bound mode this morning as the market pauses to assess the damage. On the data front, overnight, Japanese inflation came in softer, it’s not been as low for 10 months. Anytime inflation slips in Japan, the market is likely to question the Bank of Japan’s resolve to achieve it’s 2% CPI target, and so with core CPI slipping to 1.1% in August from 1.3% in July people notice. We probably need a few more months of data before we can really assess the likelihood of the central bank achieving its stated aim. One would think that the substantial depreciation of the Japanese yen over the last year will give import prices a boost, so the key question is consumer demand which doesn’t seem to have fully recovered from the post consumption tax hike hangover. In any case the market will start to speculate on the central bank implementing additional stimulus measures to boost inflation. That’s a narrative that could assist further yen weakness. We shall see!


Revised US Q2 GDP growth numbers will be published today with some economists expecting an upward adjustment with construction one of the sectors likely to be making a stronger than previously calculated contribution. Strong US data is not considered great news these days, as it only reduces the justification for central bank stimulus, it will certainly be interesting to see how the market takes it.


Going back to currency markets, Emerging market currencies remain uniformly weak, and in particular currencies with resource focused economies have continued to suffer, and you don’t even need to look at developing market currencies to see that resource effect… AUD/USD and NZD/USD are classic examples. Dollar strength will leave a lot of collateral damage in the weeks and months to come! I shudder to think what corporates in resource rich developing economies are thinking if they borrowed dollars in the last few years (the interest rates at which they secured their loans must have seemed like a once in a lifetime opportunity), their continuing health will be very dependent on what their central banks do to counter changing Federal Reserve policy. But the continuing weakness of their home currencies is not helping them at all, let’s hope they hedge properly!


I’m expecting continuing dollar strength today, perhaps we haven’t had a mania of buying yet which will signal a short term top, it’s hard to tell with currencies, no one publishes volume stats. But my sense is that we could see further highs in the next few sessions, but mark my words, we’re very close to a bigger pause in this bull trend. I still maintain that the most recent moves, particularly in EUR/USD have been on suspiciously weakening momentum. As I mentioned earlier.. keep an eye out today on how the markets react if the GDP revision in the US is stronger than expected, that could tell us how extended the dollar already is.


The dollar is making a mockery of my contention that trends need corrective periods in order to remain sustainable! This morning EUR/USD, AUD/USD and NZD/USD have made new lows, and the other dollar crosses have turned back strongly in the dollars favour, none more so than the New Zealand dollar which was helped by an unscheduled statement by the Central Bank Governor calling it’s level “unjustified and unsustainable”. Yesterday Prime Minister Abe in Japan made comments about the pace of yen depreciation.. it’s almost enough to make me nostalgic. Currencies are becoming sexy again, and official figures are suddenly starting to comment! Still… this should introduce some caution to USD/JPY buyers, the currency pair has had a huge move over the last 18 months, and if anything it seems to have accelerated in the last few months.. I would advise extreme caution from here.


We can see the same picture – of dollar strength – in the Emerging market currencies, with the Mexican Peso, South African Rand examples of currencies which are challenging their recent weakest levels against the US dollar. Currencies are not the only assets to feel the strength of the dollar, commodities, particularly precious metals have been victims as well, with gold and silver at their weakest for the last few months.


For the purposes of this blog, I’ll focus my attention on the euro, while there’s no question that EUR/USD has consistently demonstrated the most bearish of tendencies, I remain concerned about the quality of this latest move down. The momentum is very weak, and the longer this persists the stronger my belief that a more aggressive correction will be the eventual outcome. I’m willing to stick my neck out and let the markets continue to embarrass me! Don’t get me wrong, I have a very strong conviction that we’re only at the start of a period (possibly multi-year) of dollar strength, I wouldn’t be shocked to see EUR/USD down at 1.20 at the end of the year, but if everyone is getting short, there’ll come a time soon when the marginal buyer will tip the scales the other way, we’ve all seen it before, and the results can be very painful for those who’ve over-extended themselves. We’ll keep monitoring the situation.


The S&P 500 held above the lows as I suspected yesterday, and bounced almost 1% from where it was 24 hours ago. On the data front we have durable goods orders to look forward to in the US this afternoon, and Italian retail sales later this morning. We’ve already seen Eurozone M3 numbers earlier this morning, which showed a slight pick up of this monetary aggregate from the previous month.


I think we’re likely to see more dollar buying this morning, but I maintain that the risk is rising of a sharp and aggressive reversal. In my opinion, the quality of the buying particularly for crosses that have already had substantial moves in recent weeks (EUR and JPY spring to mind) is questionable at these levels. No doubt smart traders are keeping hold of what they have, but not adding. Don’t fight the trend is the name of the game, but always keep in mind where your optimal take profit levels are.


Risk sentiment has tailed off in recent days with the S&P 500 declining over 2% from the recent record high. At the same time the dollar’s advance has been stalled since the end of last week, this can be seen both in the currency crosses and also with gold’s recent bounce from the lows. It would be, perhaps, inaccurate to lay the blame at the door of US equities though, as the declines in European equity markets have been more aggressive, with the Eurostoxx 50 posting a 3.5% decline from the recent peak, possibly on the back of increasing pessimism about recovery prospects in the Eurozone. However it’s worth noting that after the witching (futures and options expiry on the US exchanges on the 3rd Friday of the quarter ending months) that occurred last Friday, the performance for equities has been historically poor the week after. Sometimes we search too far, trying to attach meaning to market behaviour, it could all be as simple as a post-witching malaise.


There are any number of reasons to be concerned about where we go from here, not least valuations are already challenging historic highs, policy in some of the major central banks stands at an inflection point, US companies would rather return money to shareholders via buybacks than seek out new investment ideas, US legislators clamping down on “inversions” the latest wheez to escape higher US corporate taxes, we have geopolitical instability in the Middle East, Russia/Ukraine, pick one, pick another, pick all of those justifications. But really… where else can you park your cash right now? The same point I made in the summer. The bottom line is, you can’t earn any interest on your cash, so.. equities it is.. for now. I mean.. what else can you do right?


On the data front, we’ve had IFO in Germany which was a bit worse than expectations with a slight decline, along with consumer confidence in Italy which interestingly was a bit better than expected. There’s nothing particularly exciting coming out for the rest of the day. So we can turn our attention to the markets and wonder if the bearish tone will persist today. I’ll be keeping an eye on the September lows on the S&P 500. We were just 4 points away from it yesterday, if that should break then we could be set for deeper declines, but I still harbour some hopes that we hold from here. Still I can’t shake off the feeling that the end of the Federal Reserve’s bond buying programme, and the consequential end of balance sheet expansion could be a seminal moment for markets. We’ll have to wait and see..


As I said early last week it is entirely realistic in a trend that you have periods where markets pullback, this is a necessary requirement for trends to remain healthy. I believe we’re in a dollar up-trend, however it is entirely realistic for the trend to stall for a while as it takes a breather. We may well be seeing that right now, but I have no idea how long this paradigm might last. The currency pairs that could be especially vulnerable to corrections in my view are USD/JPY, EUR/USD, GBP/USD.. there are others but these are the big boys so it’s worth mentioning. It would not surprise me if the speculative community in positioning for dollar strength has pushed the trend further along than is justified, so if we get corrections there may be a short period of financial pain for that sector before we get off to the races again.. I’m just saying!


I am less convinced about recoveries in Emerging Market currencies generally, but a rising water level will carry all boats. They are certainly stronger as a group versus the dollar today. I continue to take a particular interest in the Indian rupee, my suspicion is that it is poised to appreciate, but it’s not yet confirming technically. I’ll let you know if my confidence level increases.


Good morning

Gov. Draghi failed (yesterday) to add anything new to what we already know about the waning Euro-zone economic recovery. As they say, “the cat is out the bag”. We know the mighty EU partners (Italy, Spain, France and to some extent Germany) continue to lag behind the US and UK in growth terms (GDP) and while the ECB plays a dangerous game, investors continue to lose patience with the efforts the ECB are applying in trying to stimulate an asymmetrical EU.

Opening rates: EURUSD 1.2855, GBP/USD 1.6355, EUR/GBP 0.7860/1.2722, USDJPY 108.60, AUDUSD 0.8900, USDZAR 11.1300, USDILS 3.6650, GBPCHF 1.5360…..pretty flat in terms of open/open from yesterday to today in spite of Pres. Dudley (NY Fed) and Gov.Draghi speeches yesterday. Central Bankers generally have to be very careful what they say and how they say it as any “wrong/right” word could spook markets. So they tread carefully and simply confirm what has already been said and known to the general public.

What we do know and what I have been bleating continuously is the strength of the USD and my views of what to expect next. I am finding it more and more difficult to find reasons why and how the EURUSD could mount a sudden recovery and rally above 1.2975 (resistance) en-route to a 1.30 handle (and for that matter GBPUSD to break 1.6525 en-route to 1.6700 handle). As i mentioned yesterday, the market is now focused on fundamentals rather than event risk and these fundamentals offer little in the way of EUR or GBP support. That is not to say that the GBPUSD will move in the same way that say the EURUSD does. I think if anything GBP could very well keep showing signs of life while the EUR gets mauled.

From as early as June this year (EURUSD 1.3700) I argued that the USD will mount a monumental rally into the year end. Already we have seen 6.60% drop in the EUR and my views (reinforced by some large global Banks) remain that the EURUSD will continue to slide into year end, my target being 1.2000. Of course there will be pot holes to manoeuvre around before we get there, but overall my views and opinions are unlikely to change. Furthermore the rally in USD Treasuries (10 year 2.66% high, 2.55% now) is giving the USD a lift and will continue to do so especially as rates traders are forecasting 10 year yield to rise to 4% medium term.

The HSBC China “Flash” PMI was published overnight at 50.50, easing market concerns of a slowdown in China. The AUDUSD was the biggest winner rallying from 0.8850 to 0.8900 given their trading size. China, like the EU, will need to support their economy and cuts are likely, but that is one of the best kept secrets as you can imagine.

ECB President Draghi said that the ECB stands ready to use “additional unconventional instruments” if needed to counter “risks of a too prolonged period of low inflation”. These statements reinforce our view that the ECB will initiate a new asset purchase programme of central government bonds, most likely in Q1 2015.

Bank of Israel kept rates on hold at 0.25% as expected.

USDZAR is likely to remain volatile ahead of the appointment of the new Central Bank Governor. Gold and EURUSD will also continue to weigh heavily on the ZAR given strategic economic importance of those 2 (Gold for obvious reasons and EURUSD given that the EU is SA’s biggest trading partner). The ZAR has recovered somewhat this morning trading around 11.1400….

Wishing you a great day ahead and good luck


Good morning

With the Scottish referendum out the way, the FX markets will now re-focus on fundamentals. Today sees Gov.Draghi talk at 2pm to be followed by FED member Dudley speech at 3pm. While we are not expecting any surprises, these speeches always seem to bring with them some level of FX volatility. I am almost sure Draghi will be pressed on the disappointing LTRO number from last week (82.60bn taken up by the banks) and his thoughts going forward.

As I have noted previously what we are seeing is an unsynchronised global growth recovery, in that the US/UK is powering ahead, while the EU and China have slowed down. This in itself supports further divergence in global monetary policy and interest rate policy in general. The data we have witnessed over the past few months continues to support our view of a medium term bearish EURUSD, not to mention the recent ECB action to do “whatever is necessary” to address the deteriorating economic and inflation outlook in the EU as a whole. The disappointing LTRO last week was (tremendously) lower than expected  and which again highlighted the difficulty the ECB ius facing in stimulating the EURO zone. While ECB interest rates are already at an all time low (Bank rate 0.05% and Depo Rate -0.20%), there is talk that these rates could fall even lower!! Not to mention the fact that over the past few months Gov. Draghi has openly called for a fall in EURUSD siting the strength of the EUR as a reason for the deteriorating economic climate in the EU. For these reasons (and you have to admit they are pretty strong), we continue to recommend being short EURUSD (and EURGBP) our target being 1.2000 and 0.7700 by year end.

FOMC member Dudley (NY Fed President) will deliver his speech later today. A revision higher in FOMC Fed Funds rate will provide further support to the USD this week, building on the theme of generally better-than-expected economic data and gains in short-term interest rates that have seen the USD index appreciate more than 5% since early July. While Dudley is one of the more dovish-leaning members of the committee, we continue to expect the first rate hike in late Q1 early Q2 2015 (versus Fed Funds Futures, which imply September), which reinforces our strong USD view.

With the Scottish referendum behind us, the market will re-focus on economic fundamentals, and relative economic/monetary policy outlook favouring short EURGBP. We saw after the referendum the spot rate fall to the low 0.78 handle (recovering somewhat to 0.7860/1.2722 presently).  The consolidation phase of the past two months has resolved bearishly, in line with the prevailing downward trend and our greater bearish view, and we expect further weakness towards 0.7755, the lows of 2012. A break below there would allow room towards the 0.7700 area and further out towards targets near 0.7250, the former range highs from 2003. It would take a move above 0.8075 – 0.8140 to suggest that the bear trend is running out of steam. Having said that, for the latter to materialise, a move above 1.3000 (EUR/USD) would have to be seen.

In Israel, Bank of Israel (BoI) cut its policy rate in the past two meetings due to downward surprises in growth, however, we expect BoI to remain on hold this time (today 22/9), as the policy rate is already quite low at 0.25%, and USDILS has sold off considerably (3.62-3.66) since August. In our view, the BoI wants even more currency weakness and will likely cut its base rate one more time in Q4 2014 to help the economy and continue with FX interventions. With the fall in the EUR, you will continue to witness depreciating EEMEA (Eastern Europe, Middle East, Africa) currencies given that for many of these EEMEA countries, the EU remains their largest trading partner.

We have also commented on Twitter many times over the past few weeks that GOLD has lost its shine after recent inflation numbers showing a falling trend. We know that GOLD has always been viewed by investors as (1) a hedge against inflation (2) a safe haven. Given that both (1) and (2) and largely under control, we put out a view (Gold was trading at £1240) that the metal will drop to $1025. We have already seen $25 per ounce knocked off the price, with Gold currently trading at $1215 with more to come. The next target remains $1180, after which the flood gates should open all the way to $1025. By the way our Twitter name is @parityfxplc should you wish to follow our tweeting.

Following up our comments Friday on USDZAR “And developing economies with a weaker current account balance will be especially vulnerable, as we saw yesterday with the South African rand which weakened against the dollar following the decision by SARB, the central bank, to maintain the current base rate at 9.25%. It will be worth monitoring USDZAR, particularly with gold prices posting a significant drop over the last month, and general emerging currency weakness, this is a currency pair that is primed for a sustained bullish trend USD up, ZAR down”.  Further BAD NEWS for the ZAR was on Thursday when it was announced that Gill Marcus South Africa’s respected central bank governor, announced she would be stepping down from the post when her five-year term ends in November. No successor has been announced. The bank’s deputy governors, who include Daniel Mminele and Lesetja Kganyago, are likely to be considered front runners to replace Ms Marcus, who was the first woman to hold the post.  USDZAR opened weaker this morning trading up to 11.1400 and we expect further deterioration in the ZAR following a flurry of bad news.

Good luck today and the rest of the week



Well the Scottish people have exercised their democratic will in the referendum, and they see no reason to relinquish 307 years of a fruitful partnership. As politicians on both sides have said in the aftermath, the results will stand for at least a generation. We’re all free to debate what a ‘generation’ means, but clearly any breakup discount in sterling has been vaporised. Cable (GBP/USD) has made a high of 1.6526 and has subsequently pulled back as traders square their positions, so we can assume that the levels we see now fully discount recent dollar strength and indeed any other factors that have continued to influence the markets estimation of sterling’s worth. EUR/GBP as always represents a purer view on the pound sterling and already today we have achieved a year to date low, reflecting sterling appreciation versus the euro, and we’re within touching distance of the 2013 low. In short sterling – apart from a short period in 2013 – has not been valued as highly versus the euro since 2009, a situation which has clearly more to do with the state of the Eurozone economy than the recent referendum uncertainty.


A quick recap of data yesterday. Indian GDP and GNP numbers posted a quite stunning improvement on the previous year on year numbers, 7.7% vs 4.1% for GDP; 9% vs 3.4% GNP! Wow! I’m not sure if that’s the Modi effect already, it would be surprising if it was, but it’s fantastic news for him, as it might create a feel good factor which gives added strength to a much needed economic reform process. The performance of the Indian rupee has been unspectacular so far this year, but the technicals show we are at excellent levels to commence a new round of appreciation versus the dollar. This would be at variance with a number of other emerging market currencies which have continued to weaken against the dollar, some of the moves like that of the Brazilian real have been quite aggressive of late. It has always been our view that any hawkishness from the US Federal Reserve will pressure emerging market currencies and this has clearly been in play. And developing economies with a weaker current account balance will be especially vulnerable, as we saw yesterday with the South African rand which weakened against the dollar following the decision by SARB, the central bank, to maintain the current base rate at 9.25%. It will be worth monitoring that currency pair, USD/ZAR, particularly with gold prices posting a significant drop over the last month, and general emerging currency weakness, this is a currency pair that is primed for a sustained bullish trend (USD up, ZAR down).


There isn’t much on the data front today, we’ve already seen producer prices in Germany which were in line with expectations, there doesn’t appear to be much in the way of positive price growth in the Eurozone’s largest economy, which makes it more likely that Mr Draghi, over at the ECB, will continue to look for extraordinary measures to boost activity via monetary policy. Which is a roundabout way of saying this is likely to reinforce the negative pressure on the euro for the foreseeable future. In the short term, I actually have doubts about the direction of EUR/USD, don’t get me wrong, the trend is down, but… the momentum to the downside has been weakening in September. All trends require corrections, in order to recapture the strength of the move, and I could easily see the currency pair bouncing from here over the next few weeks, with at least 1.3050 – 1.3100 being within easy reach. To be honest, we could be in for a longer period of corrective movement as the trend has been persistent for quite some time. As I said, this is perfectly natural and to be expected.


Apart from some Canadian inflation data, and a leading indicator coming out of the U.S, there’s very little left to look forward to in terms of data releases today. I will however point out that the S&P 500 has made new highs in the last few days, I can see the index blasting upwards to new higher highs over the next few months. It is the impact this paradigm will have on US treasury yields that will exercise my thinking over the weeks and months to come. Higher treasury yields pose a significant threat to emerging market assets, and also to other asset classes like junk bonds. That really matters, and could feedback adversely into overall risk sentiment. Something to watch out for, particularly in terms of how all this reflects back on the foreign exchange markets…



Good morning

FX markets open this morning after spectacular moves post FOMC meeting. the FED’s Yellen added little in the way of the timing of any rate hike in the US, giving the USD and stocks the push they needed. S&P touching new highs, Dow-Jones touching new highs, €/$ breaking lower from 1.2950 at the start of the meeting to touch 1.2850 (recovered somewhat to 1.2880 now), £/$ following down from 1.6330 to 1.6250 (recovered somewhat to 1.6290 now) and $/JPY breaking new highs rising from 107.30 yesterday to a high of 108.87 (currently 108.70). As we have noted on previous occasions, we LOVE the USD and more importantly we like the FED have noted that the US is getting stronger and stronger which will add fuel to the USD’s fire.

FX volatility levels (strangely) have come off strongly in €/$, falling from 7.40 mid to 6.50 mid (1m) as I write this. What this tells me is the market is LONG vol/gamma down here and not wanting to buy any more. When the traders are already long vol, the last thing they want is to keep vols artificially inflated and risk getting given more vol by the street. Granted they will have suffered mark to market losses on the vol reval but their gamma more than makes up for this. Having said this, be rest assured, if the USD continues to march lower, and enter “new” territory, option market makers will start to mark vols higher as we enter a new dawn.

GBP/USD volatility has also come off (as I have noted previously) down from 9.2/9.5 to 8.6/9.2 presently. Now that the Referendum has started it is likely that the GBP will trade sideways today, with (in my opinion) moves (higher) starting to take effect towards 10pm and the closing of the poll. I am (cautiously) optimistic the NO camp will win. However PLEASE bear this in mind (and it is something I have written about many times), if the NO camp wins by a “small” majority, while I still see the GBP/USD recovering, I think it will be a big figure at best before spot falls back to current levels. The reason is while a win is a win, it was not a flattering pouncing. So what we need to see is an impressive pouncing (NO trounce the YES). A result like this is a major triumph and a big boost to the Govt. that the people have spoken and the economy will not be tainted or affected. A good result for the NO’s can see GBP/USD shoot up towards a 1.65 handle, leaving EUR/GBP teetering just above 0.7800 which short-medium term is a target many GBP traders will agree on.

The Fed did not remove the word “considerable” regarding the timing of the first rate hike. Furthermore, Yellen commented that there is still under utilization in the labor market. As noted previously, I see a hike in (Q1) 2015 and an explicit declaration that QE ends in October. All in all there were no shocks to the statement. Stocks and the USD basically loved the statement. Gold on the other hand (again as ParityFX has predicted) fell from $1234 to $1222 (short/med. term target $1025.

The first round of the ECB’s Targeted-LTRO (cheap loans) are expected to be announced today. As it is the first round, the ECB will tread cautiously with a contribution of between EUR150-200bn.  A big take up by the banks, basically means that there is more money in the EU-zone, which could lead to a further fall in the EUR. As it is the first such announcement, we are likely to see increased movement and volatility in the €/$, which as I noted above leaves me a little confused as to WHY the options market has smashed front end EUR/USD vol to such an extent. Given the importance and significance it is my opinion that vols should have retreated a tenth or so, rather than 0.50% (1m). But as noted above, the market must be so long front end vol, there was no other option (given the FOMC event risk was out the way) but to revalue front end volatility lower.

In the excitement of the ECB liquidity action and the Scotland Independence vote, we must not lose sight of other key event risk today. The Swiss National Bank rate decision came out earlier as expected at 0.00%. The ECB has committed to expanding its balance sheet and thereby driving its currency lower. That creates a conflict for the SNB as their job and promise to the market is to keep EUR/CHF above 1.2000 (currently 1.2080). We have seen over the past few years potential attacks on this level only for the SNB/BIS to heavily intervene in the spot market and BUY EUR/CHF. The move will be heavily felt in USD/CHF given the clash between the SNB and ECB on the level of the EUR itself.

Last but not least, under normal circumstances UK Retail Sales would have a say in what the GBP/USD & EUR/GBP does on the day, but then again today is by far not a normal day, therefore I expect the number to be “ignored” for the most part.

Good luck today and go well


Good morning,

What a few days we have in store. (1) MPC vote count 7-2 again, (2) US CPI (1.30pm), (3) FOMC Meeting (7pm), (4) Scottish Referendum (Thursday), (5) market reaction.

We are well in truly back to the good old days where event risk created an environment which traders and the like love to be involved in. Volatility is well and truly back. The fear of the unknown (regardless of the polls/spread betting results) are a melting pot for us traders as we come to terms with the ever changing economic climate. Everywhere we turn changes are taking place, the world’s economies are staging a comeback (well some at least) and things are starting to be clearer.

First came the news about Spain and the EU and their comments about Scotland joining the € and the EU. 5 years minimum if ever was the nuts and bolts of their comments. I sincerely hope people in Scotland are reading these stories because failure to do so will spell catastrophe for them. Then o/n the PBOC (China) will use their Standard Lending Facility to add 500bn in liquidity. This is tantamount to a rate cut or better yet QE (Quantitative Easing) by pumping money into their economy to stir it up. AUD /USD was the main beneficiary of course moving from 0.9010 to 0.9070 currently.

As far as today goes, we think Pres. Yellen (FOMC Gov.) will remove the word “considerable” regarding the timing of the first rate hike, as the US economy shows terrific Resilience and growth prospects. These numbers cannot be avoided, despite the “disappointing” NFP numbers earlier this month. We still believe the US is getting stronger by the day and this in itself is lending immeasurable support for the rest of the world. You know the saying, when the US sneezes, the world catches a cold. Well when the US gets better, the world gets better, it is as simple as that. So for this reason I think the US will hike EARLIER than expected (Q1 2015) and what’s more I am still calling for a EUR/USD rate circa 1.2000 by 31 December 2014.

With regards to the Scottish Referendum tomorrow, I have said so much that I might as well just regurgitate what I have already said previously.  FROM YESTERDAY:  “It is my opinion that the NO vote will prevail and what we are witnessing in the FX markets are common behavioral patterns. The markets is “priming” itself in that it “sells the rumour, buys the fact”. In other words it will drive GBP/USD lower (EUR/GBP higher) ahead of the result, start buying GBP against both the $ and € and then once the polls/results are announced the inevitable knee-jerk reaction ensues which drives GBP higher at an almighty pace. At the same time, GBP volatility will “collapse” as the event risk is now out the way. It was for this reason that last week I suggested BUYING 2 week GBP volatility vs SELLING 1 month volatility. What this would have given you was “gamma” ahead of the election, and post-election allowing you to make money from a move (either way) in the GBP. Once that 2w option expired, and with volatility now depressed, you would have been in a position to buy you 1m (now 2w expiry) option back at a lower volatility level. Classic calendar spread taking advantage of the event risk”.

Now with 24 hours to go, this has exactly what happened. They drove GBP/USD below 1.6200 to a level they felt comfortable, and then they dived in, driving the GBP up to 1.63 handle as we speak.  While today will continue to trade erratically,  the market has to wait until the results are published to rubber stamp their intentions. This is why i LIKED buying gamma (suggested this early last week) as it gives you the opportunity to make money from positive gamma.

Scottish independence is a wonderful thing. However while it could live in fairy tales, in reality I just do not see it happening. Banks, FTSE companies,  global Companies, EU countries and the EU itself ALL coming out in favour of NO camp and commenting on the potential disaster should Scotland go it alone. How people are able to neglect these comments and think they are purely scaremongering is beyond me. It is like me going into the ring with Floyd Mayweather  thinking I have a chance of knocking him out….erm NOT A CHANCE (and I am tough ha ha). I have to listen to my trainer, my friends, fellow professionals and others who know best. I will therefore thank Mr Mayweather for the chance to face him in the ring, concede defeat and know that at least I will have a long and fruitful life. Can the YES camp NOT SEE THIS? Best they remove their blinkers before it is too late.

FX volatility levels remain bid with the EUR/USD 1m 7.30/7.50 (-0.20%), 6m 7.25/7.45 (-0.25%), 1y 7.75/7.90 (-0.25%) — GBP/USD 1m 9.10/9.90 (unch.), 6m 7.20/7.80 (unch.), 1y 7.40/7.90 (unch.) — EUR/GBP 1m 9.10/9.90 (unch.), 6m 7.15/7.70 (-0.15%), 1y 7.40/7.90 (unch.) — Remember it is not about the back end volatility, it is all about GAMMA and the front end which explains why in the numbers above there is little to no movement in 6m+1y GBP vol. Post FOMC and Referendum though, as long as there are no shocks, I think front end vol will come under severe pressure as the markets digest the news and more importantly the “event risk” is passed.

Good luck today