Good morning

With less than 48 hours to go before the Scottish Referendum, GBP/USD continues to trade erratically and volatile as polls continue to show the 2 camps neck and neck. While these polls still appear to show the YES vote in the running, financial spread indexes appear to show another side. Specifically the odds on the NO vote winning stands at approximately 81%, meaning there is an 81% chance that the NO vote will prevail.  As I have noted previously, the NO vote must win by a “healthy” margin to reassure the market that at least for now we are a Union and the public has spoken. What is interesting and a subject that has not been debated is WHY THE REST OF THE UK is not able to vote. Surely given the importance of the vote and its effect on the rest of us, surely we too should have been given the right to cast our vote and make our voice heard. You know only too well how I feel on the subject and I should have been given the right to vote too.

Latest polls reinforce the closeness of the vote. The average of polls taken thus far in September shows NO votes ahead 46.1% to 43.6%, but within most of the polls’ margin of error of 3% and with a still large number of undecided voters. Earlier this month the surge in the YES vote appears robust across polling companies, though the undecided vote still holds the key to the final outcome.  Various measures suggest the probability of a YES vote is significant, but below 50%. An average of UK odds makers’ prices leads to a still lower 24% probability.

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.

Apart from the referendum on Thursday, today we have UK CPI and PPI numbers (9.30am) as well as German ZEW (Confidence) at 10am. Tomorrow (Wednesday) in itself offers up some spicy announcements. First we have the MPC vote count (Last month 7-2 votes) at 9.30am followed in the evening by the FOMC decision and statement (on interest rates). I believe Pres. Yellen will make some reference to the timing of the US rate hike which in itself will add further support to the USD. As you are quite aware by now, I am very bullish the USD and have been for many months and continue to look for a break towards 1.2000 by year end. Taking the Referendum aside, these events (above) offer another chance to see how the CB’s are leaning towards rate hikes and therefore bringing with it added FX volatility. Not to be forgotten we STILL have a situation in Ukraine which has not gone away (other world events in the spot light) and that little impending “war” in the M.E that needs sorting immediately.

FX volatility levels remain bid with the EUR/USD 1m 7.50/7.65 (+0.20%), 6m 7.50/7.65 (+0.15%), 1y 7.95/8.00 (+0.15%) — GBP/USD 1m 9.35/10.15 (+0.50%), 6m 7.20/7.80 (unch.), 1y 7.40/7.90 (unch.) — EUR/GBP 1m 9.40/10.00 (+0.25%), 6m 7.30/7.80 (unch.), 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 no movement in 6m+1y GBP vol. If the NO vote prevails as I expect it to, front end volatility will collapse as expected as the “event” risk is out the way. However G-D forbid the YES vote prevails, volatility levels will in all likelihood stay firm and go higher as we enter the unknown or more aptly put the FINANCIAL ABYSS. If you thought your pension was suffering during the financial crisis of 2008-2013, well simply put that would be NOTHING compared to what you are likely to see from the fall out following a YES vote. Perhaps the Scottish public should think more about their financial well being than the importance of having a passport with the name Scotland on it. Truth is when everything is said and done, chances are Scotland won’t even have the money to buy the paper to print their passports in the first place!!!! Welcome back to the depression of 1920 Scotland, hope you happy with your vote!!

Have a great day ahead

Good morning

I remember only too well that day. 16 September 1992 I had been trading FX options for around 9 months (start of my career) when  GBP left the ERM and what later became known as Black Wednesday. Aptly put is was “hell” Wednesday.

Come Thursday (vote), Friday (London trading) – I can assure you we could see history itself should the YES vote win. I cannot impress the importance of the vote and the result. The NO vote must prevail but not only prevail it needs to smash the YES vote into oblivion. I as a rational intelligent person cannot for the life of me see any credence  or economic sense in what Alex Salmond and his team are trying to sell. There is not a Bank, FTSE 250 Company, or financier that has come out and said a YES vote will be good financially for Scotland (not to mention the UK). A union is a union, just like the EU, USA, and Canada etc. Break even a small part and it is the start of a leak that could take years/generations to fix. The YES camp must wake up and realise that their vote will in all likelihood cripple and bankrupt Scotland not to mention their off-springs well-being. This is a game changer make no mistake. There is not much more that can be said by our present leaders both in Govt. and the private sector to prove categorically that the union of the UK MUST STAY INTACT.

GBP/USD has seen some strong resistance at 1.6275. A NO vote will hit the pound so much it will tumble through last week’s Low at 1.6050. A psychologically strong 1.6000 level will probably be tested and broken too. This could open up a run on the GBP falling to mid-1.50’s before the BOE intervenes (they will have to) and with it Black Wednesday all over again. Not to mention stocks!!! Already £17bn has been pulled out the UK market, an amount not seen since 2008 and the Lehman Bros. collapse. On the other hand, positive news (NO wins) will push GBP/USD higher and probably to 1.6460 -1.6575 resistance. GBP/USD If rises above this resistance opens the way to 1.6720. A jump above 1,6720 will signal the potential to soar to 1.6820 – 1.6880 next. Break that and we head back to 1.7190 highs of 2014.

I am “cautiously optimistic” that the Scottish people will put reality before pride. I believe that while they are massively patriotic and would love an independent country, the numbers just don’t add up. Financially they will be ruined. How will this help their cause? Simply put they will vote NO in the booth because the fear of potentially seeing their pensions and businesses go down the tube will be too much to bear. Unless they ACTUALLY accept this will happen (rather than if), they will be making the gravest of decisions. Long live the union, long live the GBP, long live the UK!!!

Have a good day ahead and let’s hope our brothers and sisters in Scotland vote to keep the UK one.

The sterling recovery continues. EUR/GBP hovers near yesterday’s lows, even as GBP/USD hovers near yesterday’s highs. Volatility still remains at levels which can be considered elevated relative to recent history. With the referendum next Thursday we’re likely to continue to experience surges in either direction. While no one can predict how things will go, I can’t help but think that there will be a sufficient number of voters who before they make their imprint on the ballot box will ask.. “Why?”. I don’t get it, but then I’m not a voter in this referendum. I don’t need to get it! But if enough people ask the question, and as I suspect, fail, to come up with a good enough answer, we should see a decisive swing towards No on polling day. Just my gut feeling. The obvious implication for sterling will be an even stronger recovery. I would expect this to be more pronounced against the euro than the dollar.

Equities have been in a corrective pattern for the last week, as the bulls pause to catch their breath. We’ve seen this all before, and to my mind the only question we need ask, is where the appropriate buy zone is? Nothing has happened, no new information has been discovered to alter the current paradigm, so the trend will persist. We live in a world that is moving, at least in economic terms, back towards normalcy, and few things confirm this more than the recent decline in gold. There is less need for safety or a store of value in this recovering narrative, and gold will always pay the penalty in such an environment. Clearly we can’t ignore the impact of a stronger dollar on gold, it cannot be denied this has also been a significant factor in the recent weakening of the gold price.

Continuing with the dollar, while both the euro and sterling have been able to hold their own versus the green back in the last few days, the same cannot be said for emerging market currencies and indeed other g10 currencies. USD/JPY has made new highs every day this week, and AUD/USD has made new lows. Studying a selection of emerging market currencies, the move has been less aggressive, but generally the dollar has been strong. The sheer power of the dollars move, and the breadth of the move cannot be dismissed. This is usually indicative of a major trend. I would be amazed if in a decade from now we don’t observe the dollar at even stronger levels relative to most currencies than we see at the moment.

Some significant macro data coming out today. In the Eurozone we see employment growth and industrial production numbers, and in the US we see retail sales and University of Michigan sentiment indicators.

Good morning

The GBP roller coaster continues. GBP/USD o/n “explodes higher to trade above 1.62 handle at 1.6215 (as I write this). You asking what has driven this, it is simple and I am REPEATING what I wrote yesterday (I hope you managed to read our Blog!!)…here is what I wrote:

“I mentioned a few days ago how questions posed to Alex Salmond regarding the currency an independent Scotland would adopt were neglected and brushed aside. Well we got confirmation from Gov. Carney (BOE) yesterday that “an independent Scotland could not enter a formal currency union to use the pound”.
This is a HUGE statement and one which the YES camp should TAKE VERY SERIOUSLY. If they thought they could simply adopt the Pound as if nothing has changed, then they are in serious trouble. This is what scares me about the YES camp. Have they actually given any thought to the future consequences of their actions. Can they really go it alone and survive? After all the North Sea oil while providing over 300,000 jobs has a limited life span (BP and Shell commented yesterday that by 2050 reserves should start running dry) and when those well run dry, then what…it is high time people put aside their differences (the love/hate relationship with the English) and think very seriously about their kids and their kids kids and how they with fair in the event the YES vote win. Do they really want to end up like the Greeks, Spanish, Irish and Portuguese? Who will bail them out in the event of a financial collapse. I bet not many in the YES camp have given any thought to that.

Adding to what Gov. Carney comments: “a currency union is incompatible with sovereignty”, adding and making it clear that an independent Scotland would fail to meet the criteria of a successful currency union. A proper union would require free trade, banking union, and a fiscal backstop, he said. “You only need to look across the channel to see what happens if you don’t have all of those components in place”, said Mr Carney. The Governor noted the Westminster view of Scottish independence would make creating the conditions for a formal currency union impossible.

Additionally and critical to this debate, use of the EUR has all but been ruled out by European Union officials, as questions over what currency an independent Scotland might use continue to haunt anti-Union campaigners. So as I have written above, I sincerely hope the YES camp do make what could potentially be a catastrophic mistake and vote with their hearts than with their heads.

Major Banks including Deutsche Bank, JP Morgan, RBC, Credit Suisse, ANZ amongst others have ALL come out in favour of the NO camp commenting that an independent Scotland will spell DISASTER a magnitude of which we saw in 2008 and the financial crisis.”

FINALLY this financial issue hit home and resulted in another poll showing the YES camp at 53% -vs- NO camp at 47%. Scottish independence will drive Scotland into a financial abyss, one which will take generations to recover from. Is that what the current generation want for their offspring? Hardship and financial chaos. This is WHY I HAVE BEEN REPEATING myself over the course of the past few weeks. Scotland cannot surely think they will simply adopt the GBP or EUR as a matter of fact. So when they walk into that booth to tick the box, they had better give a lot of thought as to their finances and those of their future generations. Money does not grow on trees in Scotland, nor does it come from the oil wells. With a week to go, the NO camp must now make sure this message hits home and hits home hard.

What this all means and what we have noted previously is a “resounding” no will give the GBP a major boost as it will show that when push comes to shove while the thought of independence is exciting, it does not put food on the table and roof over their heads. For this reason I must put my money where my mouth is and suggest that in my opinion the NO camp will prevail next week by a significant margin, giving the GBP a lift potentially back to 1.65-1.66 driving EUR/GBP potentially to our 0.77 handle. While this may sound far-fetched, I believe this is what we should witness once the dust settles next week.

With regard to EUR/USD, I noted (yesterday) that we are likely to see a pullback in EUR/USD as the market takes a breather before beginning the next leg lower towards my 1.2000 target. There is nothing that leads me to believe that the USD rally is over. It is merely a pause in the inevitable.

EUR/USD volatility remains above the 7 handle with 1m quoted 7.15/7.35, 3m 7.15/7.35 and 1y 7.55/7.85….while we could see the vol market trim the front end if the recovery in the EUR continues into weeks, I am still of the opinion that owning gamma is the way to trade. I suggested to a FX options trader friend to look to trade calendar spreads by selling the front end and buying 2-3 months dates. This will allow you to take advantage of a lull we are seeing yet protect yourself in the event of a sudden move.  Gov. Draghi expected to deliver his speech later today (8pm local) a week after his sudden and unexpected interest rate cut last week.  Tonight we could potentially hear some rhetoric on the proposed ECB “ABS” (Asset-Backed Securities). While I do not think the Gov. will push the subject to the point where the EUR rallies back to the low-mid 1.30 handle (remember the Gov. has often spoken of the UNWELCOME strong EUR) he will nevertheless keep the market guessing to the point where the moves continue but which are less volatile.

The next 24 hours will indeed provide us with more colour.

Good luck and all the best.

Good morning

While FX volatility remains bid and ready for another (much anticipated) move in the spot market, we are witnessing a “rebound” in EUR/USD & GBP/USD. This is not to say the USD bull run has ended or the EUR bear run has ended. I actually wrote JUST YESTERDAY “If you are looking to BUY EUR v USD – wait. However do not be alarmed if we see a rebound before the next leg lower”. FX markets are notoriously known for turning.  In effect what I am saying is this is a GOOD THING as it gives the market a breather and a chance to catch its breath.

As I write this EUR/USD is trading around 1.2940 with an initial resistance at 1.2955 and then 1.3000. I suspect and believe we could very well see a reversal to these levels and perhaps beyond before the next MAJOR move lower. As I have previously stated the move in the EUR/USD has been relentless falling from 1.3750 in July to around 1.2867 lows. That in the FX markets is a monumental move and one which requires a “time out” and some form of consolidation before embarking on the next move lower. So to answer my question above, NO I do not believe for one second that the USD bull run has run its course.

GBP/USD while mirroring the EUR/USD in the ferocity of its move lower, has of course its own reasons for dropping from 1.7190 to 1.6065 low yesterday. Scotland and the USD rally is weighing heavily on the GBP and until we know the results of the referendum next Thursday, the GBP will remain highly volatile and susceptible to further sharp directional moves (mostly lower for the part given the neck/neck the YES/NO camps).

I mentioned a few days ago how questions posed to Alex Salmond regarding the currency an independent Scotland would adopt were neglected and brushed aside. Well we got confirmation from Gov. Carney (BOE) yesterday that “an independent Scotland could not enter a formal currency union to use the pound”.
This is a HUGE statement and one which the YES camp should TAKE VERY SERIOUSLY. If they thought they could simply adopt the Pound as if nothing has changed, then they are in serious trouble. This is what scares me about the YES camp. Have they actually given any thought to the future consequences of their actions. Can they really go it alone and survive? After all the North Sea oil while providing over 300,000 jobs has a limited life span and when those well run dry, then what…it is high time people put aside their differences (the love/hate relationship with the English) and think very seriously about their kids and their kids kids and how they with fair in the event the YES vote win. Do they really want to end up like the Greeks, Spanish, Irish and Portuguese? Who will bail them out in the event of a financial collapse. I bet not many in the YES camp have given any thought to that.

Adding to what Gov. Carney comments: “a currency union is incompatible with sovereignty”, adding and making it clear that an independent Scotland would fail to meet the criteria of a successful currency union. A proper union would require free trade, banking union, and a fiscal backstop, he said. “You only need to look across the channel to see what happens if you don’t have all of those components in place”, said Mr Carney. The Governor noted the Westminster view of Scottish independence would make creating the conditions for a formal currency union impossible.

Additionally and critical to this debate, use of the EUR has all but been ruled out by European Union officials, as questions over what currency an independent Scotland might use continue to haunt anti-Union campaigners. So as I have written above, I sincerely hope the YES camp do make what could potentially be a catastrophic mistake and vote with their hearts than with their heads. Humanity unfortunately can never quite be understood and this is a perfect example of that.

Major Banks including Deutsche Bank, JP Morgan, RBC, Credit Suisse, ANZ amongst others have ALL come out in favour of the NO camp commenting that an independent Scotland will spell DISASTER a magnitude of which we saw in 2008 and the financial crisis. Who will bail the Scots out? The Bank of England? why? As a major Swiss Bank recently wrote: ” In our opinion Scotland would fall into a deep recession. We believe deposit flight is both highly likely and highly problematic (with banks assets of 12x GDP) and should the Bank of England move to guarantee Scottish deposits, we expect it to extract a high fiscal and regulatory price (probably insisting on a primary budget surplus). The re-domiciling of the financial sector and UK public service jobs, as well as a legal dispute over North Sea oil, would further accelerate any downturn. In our opinion, as North Sea oil production slows, we estimate that the non-oil economy would need a 10% to 20% devaluation to restore competitiveness. This would require a 5% to 10% fall in wages, driven by a steep rise in unemployment. Scotland can have a huge banking industry, or it can have independence linked to sterling, but it cannot do both unless the Bank of England props up its lenders as a lender of last resort. Perhaps the Bank will do that as a courtesy gesture, but why should it”?

So there you have it. I hope on the 18th September Scotland makes the right decision, one that will keep its citizens prosperous for generations to come. Failure is just not an option.

Good day to you

Good morning

If you cast your mind back to June/July I wrote: “EUR/USD – Once you get to know me and how I think you will know that at times I am like a dog with a bone. I don’t let go, and so once again I will reiterate what I have said before, I really think Q3-Q4 will all be about the USD and I see the currency moving and breaking 1.3000 by year end. Yes, medium term projections but for me to take advantage why not do a calendar spread, selling 2x 1-2m VS buying 1x 4-6 months and so leg into the trade. If not 2×1 then how about 1×1, but remember you will have negative gamma but positive theta which in this environments works”.

Not only have we broken my 1.3000 target, we have “smashed” it trading at 1.2880 as I write this. I mentioned back in the summer that once the market comes back from their holidays (September) and start to reposition themselves, the USD will mount an almighty push, and this is exactly what we are witnessing, and then some. I have written over the past few weeks that my target for 31 December is now 1.2000 and looking at the trend, I see no reason why this should now materialise. All the recent rhetoric adds strength to my target especially Gov. Draghi who has said openly that “the EUR is too strong and needs to weaken vis-a-vis the USD”.  The world order is changing, Economies globally are in vastly different stages of economic growth and this is aiding the moves we have and are seeing in the FX market.

If you are looking to BUY EUR v USD – wait. However do not be alarmed if we see a rebound before the next leg lower.

GBP/USD, really not much else to add to what has already be written by ParityFX and the market in general. YES-NO are neck and neck and like Quebec in 1995, this vote will go down to the wire. The NO vote has started to enlist the leaders of the UK parties to help swing the vote their way, while Alex Salmond is trying to use his good looks, wit and charisma to woo voters.

A NO win will ultimately see Scotland enjoy more independence and potentially ask for a a new vote in a few years. A YES vote will result in long and tense negotiations leading to independence a few years later….not before the GBP and potentially FTSE takes an almighty knock. There are so many issues that will have to be sorted if the YES vote wins, that it will take years to get back to normality. Scotland is part and parcel of the UK and needs to stay. Having said that they also need to know that they are part of the UK and thus act accordingly.

FX options volatility has leaped over the past week as a result, with the 1m up 1% overnight to 10.15 mid. Be rest assured, as soon as the vote is announced, volatility is likely to collapse (NO wins) and stay on course for a few days at least (YES wins) and see just how much further the GBP drops.

The options market is jumping over each other to buy USD CALLS with EUR/USD, USD/JPY, EUR/GBP, AUD/USD, USD/CAD vol all experiencing impressive gains in volatility levels (front end mainly) over the past 72 hours. We are entering a new phase, a new dawn and you need to have insurance to cover these “event risks” that are upon us. And I have not even mentioned interest rates once above….wait till that rears its head again!!!

FX is alive and well!!!

Have a great day ahead

Good morning

We have all seen the reports and surveys showing that “apparently” the YES vote has taken the lead in the upcoming referendum to be held on the 18th. If one casts their minds back to 1995 and Quebec, there is most definitely some interesting similarities. In the end sense prevailed and the NO vote won by 50.28% to 49.42%

While it is anyone’s guess as to what will happen, one has to think that the NO vote will prevail on the finish line as people’s voting patterns change once they standing in the booth ready to vote. This is a monumental decision, one which will affect many generations to come. I sincerely hope people are giving this a lot of thought because one only has to look at the Maastricht Treaty of 1992 and see the resulting mess the EU is in now. It is all well and fine to say let’s leave and go it alone, but unless they have all their ducks in a row and the “ability” to do it…well failure is just not an option.

We can sit here and debate this subject for hours. We can write commentary until we are blue in the face, but what we cannot do is predict people’s behaviour and thought process. Looking at it head on you have to think if the YES team wins, Scotland could fact years and years of strain suddenly cut off from all Financial and Legislative assistance.  What we do know and what we have witnessed over the past 48 hours (when the latest YouGov survey showed YES in front) is the blind panic within the GBP market. Already GBP/USD has fallen from 1.6330 (Friday close) to 1.6165, while EUR/GBP has gaped from 0.7950 to 0.8010 with FX volatility skyrocketing in line with these moves. 1m GBP/USD paid as high as 9.35 (it was trading at 5.15 1 WEEK AGO). The point is the market is spooked and looking for insurance to cover any fall out from a YES vote. For now exporters (earning in foreign currency) are enjoying a respite after months of GBP strength. In my opinion if you are looking to buy GBP, chances are you WILL get a better opportunity. If you are however on the other side of the coin, needing to sell GBP, I would recommend doing some now and then seeing what happens on the 18th.

If you asked my opinion, I believe and think the NO team will prevail and GBP will make a rebound, one of which we have not seen since 2008. Perhaps the NO team should have enlisted someone BETTER than Alistair Darling  to run the campaign. One just has to look back at his time in Treasury. Time to start talking tough.

On another note,  Friday saw disappointing NFP numbers (+142k, vs +200k expected).  Further disappointments came from a lower participation rate and a slow rise in wages. It gave some currencies a chance to recover against the dollar, but the euro only temporarily bounced.Additionally a breakthrough in Ukraine with peace talks and a cease fire which as we write this is in general still on. There is suspicion on all sides, so new sanctions are still on the cards. The breaking news about a permanent ceasefire came out of Kiev and were followed by a denial from Moscow. Markets will continue to react positively to more of this news.

As far as the USD is concerned, while a bounce of some magnitude is possible, the overall short to medium term synopsis is for the USD to continue to make new highs vs the EUR & JPY especially. Al eyes might be on the Scottish Referendum, but make no mistake traders will take advantage of this to position themselves for a much bigger move which we expect to happen. The only thing that worries me is the speed and ferocity of the move. Remember only 6 weeks ago EUR/USD traded at 1.3750 and GBP/USD at 1.7180 ….

Good luck and go well

Yesterday the ECB cut the main policy rate from 0.15% to 0.05%, and the deposit rate further into negative territory. It also plans to begin a programme for buying private sector assets. Needless to say the euro was substantially weakened following these announcements and we saw a decisive break below the 1.30 level in EUR/USD. Indeed looking at the charts at the moment, with spot around 1.2940, there is no obvious support before the 1.2740 – 50 area. It is clear we’re in the most impulsive phase of the bear trend – the 3^rd wave to Elliott Wave practitioners, and it means this is a great time to buy euros if you HAVE to, but if you can wait, well.. you should be able to get them cheaper in the next few days.

Euro weakness has been evident in most of the crosses. However I’m uncertain about whether the EUR/GBP bear trend has resumed or not. A new low, and price action below that level for some time would be what it takes to convince – that has NOT happened yet. Clearly sterling is being dragged along for the euro’s ride, and while the recovery narrative in the UK is still in force, the weakness of wage growth might be enough to give the Bank of England pause for some period of time. If that’s the case then perhaps there is no immediate reason for sterling to appreciate substantially against the euro. Still… as far as I can see… it’s just a matter of time.

The euro cross I find more interesting however is EUR/JPY. The chart looks quite bearish to me, and this would be consistent with my suspicions that USD/JPY is due a correction in the near future. Thus if the Japanese yen has an excuse of its own to temporarily strengthen, while we’re in the midst of an impulsive weakening of the euro, it means EUR/JPY lower. Something to monitor over the next week.

It’s that time of the month again. In the US the key focus will be on the unemployment numbers as Non-farm Payrolls and the unemployment rate are announced. Economists are expecting a modest acceleration in job growth as well as a slight reduction in the unemployment rate. I would guess that as the dollar bull trend is very much still in force, any disappointment is unlikely to seriously harm the dollar, but a positive employment surprise could give it another boost and put further downward pressure on EUR/USD. At this point, particularly given the run up we’ve already seen in US equities, such a positive employment surprise might well set back major equity indices in the short term. They look due a correction of some sort in order for the bull trend to sustain, therefore I wouldn’t be at all surprised to see a move back down to about 1986 at the minimum, and possibly even 1978, but that should (in my view) represent a buying opportunity for a fresh push to new record highs.

Good morning

EUR/USD is trading around 1.3140 as I write this, buoyed by a strong German factory orders numbers and waiting tentatively for the big event: the decision by the ECB and the subsequent press conference by Mario Draghi. The questions on everyone’s lips are will we see another cut and what about QE? or worst case scenario do we hear only the same rhetoric.

• What will the ECB do? Since Draghi’s Jackson Hole speech, expectations are sky high for more monetary stimulus to try kick start the EU’s economies. Some expect the ECB to cut rates even further (not our opinion), while others (including ParityFX) expect the ECB to announce far reaching and effective QE measures. The question we must ask is NOW the time to put forward these measures, or is it worth holding off for a couple more months to see how things pan out. The problem with that is are they simply delaying the inevitable and could this add extra pressure to an already critical problem.
• Breaking news o/n was Russia considering a ceasefire. FINALLY President Putin seeing the light.  While the presidents talked, nothing is really changing on the ground.  President Putin laid out a 7 point peace plan, that will be on the table in a meeting between him and Ukrainian president Poroshenko on Friday. Stocks globally reacted positively with this news and it is our sincerest hope that this actually happens and peace comes to the region. The world does NOT need an aggressive Russia. Russia has a golden opportunity to cement its place as a world power and friend. They must not lose this opportunity.
• NFP out of the US tomorrow: expecting around +200,000 would be welcome, anything extra would be a bonus.

So today will be a proper GAME CHANGER. Any QE offer will probably be (initially) EUR positive, however as we all know the old saying BUY THE RUMOUR SELL THE FACT I personally think we will start to see a continuation of the USD rally.

On a slightly different note Japan left rates unchanged (as expected).

And so to Scotland and the referendum on leaving or staying. GBP has been mauled in the markets. Monday opened at 1.6645, today we trading at 1.6450, EURGBP opened Monday at 0.7900 today we trading at 0.7985. 1m GBP/USD vol on Monday opened at 4.85, today we trading around 6.10 …. traders are nervous, Whitehall is nervous, pretty much everyone is nervous. Cast your minds back to October 1995 when Quebec tried the same thing. I remember that time clearly and how the market went berserk trying to buy “vol insurance” against a possible split from Canada. Luckily the vote went to the wire in favour of the NO (50.58 vs 49.42) and the market rebounded handsomely. While I HOPE this happens in Scotland there is nonetheless the feeling of trepidation of the prospect of a YES vote.

A “No” vote should lead to a one-off unwind of any pre-referendum positioning and return realized volatility to its prior low level (sub 5%), while a “Yes” vote will likely lead to a FURTHER sharp sell-off in GBP and create a manifold increase in uncertainty, thus raising both realized and implied volatility. The latter does not bear thinking if I am honest. The fall out from a “Yes” vote will be so far reaching and endless that it will create a period of tremendous volatility in the GBP exchange rate. Importers and Exporters will trade highs and lows, and it for this reason that you should SERIOUSLY consider your options in the lead up to the referendum and make sure you are hedged or at least partly hedged. While we still think the “No” vote will prevail, who knows how voters will react on the day.

Good luck today

Good morning

So….there we were on Monday GBP/USD trading at 1.6645, EUR/GBP trading at 0.7895 and things looking good. Then we have a disappointing Manufacturing PMI (52.50) and a survey that says the NO vote loses ground to the YES vote in Scotland (+6bps) and all hell breaks loose. GBP TUMBLES into Tuesday trading as low as 1.6448 (vs. USD) and 0.7985/1.2525 (vs. EUR).

I sit here scratching my head. While I, in my personal opinion,  support the NO vote as in the long run Scotland will be financially and economically better off staying in the UK, the market was spooked and started an almighty sell off in the GBP.  The results of the poll also triggered the biggest rise in sterling volatility (1m up from 4.85 to 6.15) in three years, as traders rushed to insure their positions against the risk of a Scottish secession. With just over two weeks until people in Scotland vote on independence, the YouGov poll put the lead for the no campaign at six points, down from 14 points in the middle of August and 22 points early last month. Including undecided voters, 48pc said they would vote no to independence, while 42pc planned to vote yes and 8pc remained undecided.

There is a debate that could run and run about the merits of staying or leaving. But my argument is will the Scottish economy be able to stand alone considering they have no Central Bank, nor the offer to join the EU and the EUR in general. There are so many anomalies and unknown factors which the yes vote has not given supporting arguments leading me to believe that the whole process is wrought with potholes and potential disasters. The Scots will not be allowed to keep the GBP which will add an enormous amount of strain on the economy considering the amount of money Parliament gives to Scotland. So I found it interesting that as the YES vote closes on the NO vote this would be seen as negative GBP. I personally would have thought if anything it was good news and would free an enormous amount of money. Yes there are the North Sea oil fields (revenue) and a strategically important Naval base in Scotland …. but the latter would not be dismantled anytime soon. Like I said this debate could go on and on but I think I have made my point.

As I write this GBP/USD has recovered to 1.6485, though the next 2 weeks will undoubtedly bring volatility and insecurity. For this reason we are likely to see GBP vol remain bid to insure against any and all eventualities.

In EUR/GBP, again 0.8035 remains the pivot/break level which if broken could see the EUR rally to 0.8085 before we see another evaluation of the playing field. I for one do not see this happening and in fact I believe GBP will regain its lost ground against both the USD and EUR. Sentiment remains “on a knifes” edge and if you are looking at covering, I would give yourself a little more time and perhaps leave a stop order should we see another bout of GBP weakness.  In other words, leave a stop and let your “profit” run. I believe you will get better opportunities.

Asian stocks were firmer, led by China-related stocks, giving a super boost to European Stocks and later to the US market.  Asian equities rose despite the fact that US equities closed marginally lower although the S&P 500 held above 2000 while most European equity markets registered small gains. Asian equities were supported by a rise in the private sector measure of China’s services PMI, which rose to 54.1 in August from 50.0 in July. Australian Q2 GDP also beat consensus expectations, increasing 0.5%. There are three central bank interest rate decisions today from Canada, Poland and Brazil. We do not expect any of the banks to shift policy settings.

And do not forget tomorrow, BOE (unchanged) and ECB (definitely some reaction/change) will in all likelihood bring an extra amount of volatility to an already spooked market. Gov. Draghi must not disappoint after his recent comments at Jackson Hole….failure to deliver on his promise will bring serious demise to the EUR and the EU in general. It is time to put his money where his mouth is and spend. Holding back any longer will just add to an already depressed Eurozone.

Good luck and have a good day