Good morning

Back on the 16th October I wrote in our blog what I believed to be the 6 reasons for the global meltdown we were witnessing in global stock markets. Since that piece was published, I have pretty much had “egg on my face” and then some.

Here were my 6 reasons: (1)  CPI/Inflation+, (2) German ZEW/Outlook, (3) Ebola, (4) FED ends QE, (5) Oil, (6) Fighting/Conflicts and just as an extra measure, (7) crazy IPO prices. My reasons, while all valid, have been completely ignored and torn to threads by investors who have gone berserk piling back into stocks. The S&P now stands at the years high’s, Japan’s Nikkei rallied 5% overnight, and European Bourses  are trading up over 1.50% as I write this. Stock markets have quite simply gone berserk.

We know the FED have now officially ended QE, but in its place the ECB and BoJ have stepped in to drive up economic growth in their respective economies. No one really cares about the “PROFIT WARNING’S” major companies are announcing to the markets. It is irrelevant. As long as the CB’s continue to print money that’s good enough for the market. As i said above, not only does this leave me totally confused, but the “egg on my face” is now dripping all over me.

The BoJ (Japan) overnight announced further monetary stimulus to fight against falling inflationary expectations and nudged the market that it will do everything in its power to reach that goal. USDJPY was trading sub 109.50 before the announcement and shot up 200 pips to trade up to 111.50 after the announcement.  The BOJ, announced that the monetary stimulus is set to rise to 80 trillion yen. The BOJ is set to extend its bond maturity buys and sees no problem with negative yields. What the BoJ is trying to do in effect is rule out any talk of deflation. The Japanese economy finds itself in a precarious moment of trying to beat deflation. The BoJ is trying to make sure that the momentum pushing up wages, continues. The BOJ furthermore made the assumption that the government will raise the sales tax (VAT) once again (last in April 2013), though that decision is a political one and the BoJ have “no” say in that decision. BoJ gov. Juroda ended by saying he does not see a need to act any further, though that could change should the circumstances require it.

To add egg to my face, the US announced Q3 GDP yesterday at 3.50% reinforcing Gov. Yellen’s post FOMC conference that the US economy is flourishing and steadying itself. Gov Yellen made no reference to the labour market, leaving the door open to dropping the phrase “considerable time” and in so doing preparing the markets for a rate hike as early as June 2015 (as noted in our blog yesterday). Obviously then, the markets are now “saying” they are  comfortable to operate without the help of the FED and that the profit warnings are neither here nor there.

Besides the rally in stocks, the USD has come out the blocks fighting back after the recent bashing. In the past 36 hours we have seen the USD mount a spectacular comeback with the EURUSD 1.2560 from 1.2750, GBPUSD 1.5980 from 1.6160, AUDUSD 0.8810 from 0.8900, NZDUSD 0.7860 from 0.7960 to name but a few. My one saving grace has been my thoughts on the USD overall. Just a couple days ago I mentioned my 31 Dec prediction at 1.2000 being a little “too” aggressive, with EURUSD 1.2200 more likely. Lets not quibble over 200 pips here or there. The momentum seems to be back in the USD’s belly and it is BACK TO NORMAL TRADING, BUYING THE USD.

I would be telling fibs if I said everything makes complete sense to me!!! Then again I am in good company

Have a good weekend.


Truth be told, I’m a little annoyed with myself for being as surprised as I was. The statement by the Federal Reserve was largely what I would have hoped it would be, but not quite what I expected. The statement was what I hoped it would be, because it dealt with the economic reality the US economy is experiencing at the moment – tightening labour markets and robust if not spectacular growth. I didn’t expect this, because so often over the last decade the reaction function of this central bank has seemed to be influenced ty the financial markets, and just a few weeks ago we saw significant market turmoil. I’m annoyed because excepting the recent market turmoil, there really wasn’t anything too surprising in the FOMC statement, and I’ve said all along.. why would a competent central banker care about a sub- 10% correction in equity markets? Clearly these chaps at the Federal Reserve are reasonably competent! Future decisions will be data dependent as they should be.


This was a hawkish statement, no question about it – there was no reference to under-utilisation of the labour force and the FOMC have paved the way to dropping the use of the phrase “considerable time” when discussing the outlook for the currently low level of interest rates. The implication is clear for all to see… if the US economy continues to perform as it is, then the first interest rate hike should be in the middle of next year.


The reaction of the market was fascinating. The dollar rallied sharply, and most of the gains made by currencies like the euro and New Zealand dollar since the start of the month have been vaporised as I sit here typing. This was the trade! But, here’s the thing, equity markets are relatively unscathed by this, as are US bond markets. Have we all been worried about nothing? The concern has been that asset markets would fall in anticipation of normalisation in the US, we saw it with the “taper tantrum” this time last year, but here we are, the Federal Reserve has made its intentions clear, and equities have, so far, taken the news in their stride. What are we to make of this? On the face of it, it seems as if the markets are happy to believe that the US economy is strong enough to function without support, this would be fantastic news, but I’m not convinced. For a start Emerging Markets are now exposed, easy money from the US is ending and liquidity from developed economies could leave at any time. These less developed economies really do now have to justify continued financing at the rates they have been able to enjoy over the last 5 years. I believe the search for vulnerabilities has begun and the markets will be merciless. It’s going to be that much tougher going forward, and the risk of cascading crises is growing. This could be 1994 all over again, but this time on steroids. Be very very careful.


There are a number of flags to watch out for now:


  • Continuing falls in the unemployment rate in the US – this will lead to fears that wage growth is about to take off
  • Evidence of accelerating wage growth in the US – this will be a signal that cannot be ignored, as the US economy begins to experience capacity constraints. You simply can’t operate with zero interest rates in such a scenario
  • Crude oil prices falling below $75 – this is the level at which further expansion of Shale oil production in the US starts to look impractical
  • Signs that Draghi will be thwarted in his attempt to implement quantitative easing in the Eurozone
  • Japan giving up on quantitative easing
  • Further evidence of slowing economic activity in China


Any or all of the above could be the fuel that causes market instability at this point. For now I’m keeping an eye on the equity markets, and they are slowly weakening, there may come a point later on today where markets start to sell off aggressively, but we’re not there yet. For now the clearest change after the Federal Reserve’s statement has been the aggressive recovery in the dollar. This is the path of least resistance, and we fully expect this to persist in the weeks and months to come


Good morning

The FOMC will in all likelihood end bond purchase tapering today and is likely that it keeps its position to hold rates low for a “considerable time”. Now that QE3 is likely to come to an end, the FED has a very important decision to make. Either they will try changing the “considerable time” pledge to something else, or they could change it to mean it is “unconditional” or they could change the wording completely.  We have seen over the past week or so the majority of analysts thinking that the “considerable time” wording will be left unchanged. In my opinion, rather than rock the boat the FED is likely to leave things as they are and then at the December (16/17th) meeting decide whether it is time to change the wording to something else, and by doing so open the door to a rate hike. While the FED made no comment whatsoever to the (stock) market volatility we saw a few weeks ago, I wonder whether they are concerned about another bout of selling pressure. As I wrote in our Blog yesterday, some of the biggest companies in the world continue to announce profit warnings, something which cannot go unheeded and ignored for much longer. Having said that, stock markets globally continue to recover oblivious to world fundamentals and events. It is as though the markets are acting in a vacuum. This has left me properly confused and dumbfounded.   

Something tells me there is likely to be a word or phrase which will lead to a sell off in the USD (EURUSD potentially up to 1.2975). The CB’s are playing funny games, first the ECB announces the EUR (USD) was too strong and needed to fall (which is duly did), and then recently the FED said the strong USD has “hurt” the US economy which in turn sent the EUR (USD) back up. They can’t have it both ways. One will ultimately prevail, and as I have said many many times, given the recessionary/deflationary fears in the EU -vs- the growth in the US, surely it is inevitable that the USD will rally against the EUR sending it ultimately to my target of 1.2000 (Dec 31st). I have another 2 months to get this prediction right, my thinking now is perhaps I was a little hasty and over-zealous. Still even if we get to the 1.22/1.23 handle, I will be happy with my prediction.

GBP/USD rallied in line with its “partner” (EURUSD) despite comments yesterday by BoE deputy governor Andrew Bailey who said that low and slowing inflation and a less rosy outlook for the economy meant that the BoE can maintain its current policy for longer than previously anticipated. “The softening in the pay and inflation data, together with the weaker external environment, for me implies that we can afford to maintain the current degree of monetary stimulus for a longer period than previously thought.” I have noted previously that after seeing inflation dump to 1.20%, the BoE is now likely to hold 0.50% for longer than I anticipated. Given the May election, we could potentially see rates only start to move AFTER the elections. While this could dampen any GBP rally, the fact is the GBP is now moving pretty much in line with EURUSD. EURGBP seems capped at 0.7915 (1.2635).
USDZAR has continued to shine in recent weeks as the EUR remains buoyed. We noted recently that the ZAR could see a move to 10.75/10.80 before settling down. Overnight the ZAR strengthened from 10.95 to 10.83 (as I write this). Gold remains glued to $1230 ahead of FOMC, but if my predictions are right and the USD does sell off later this eve (6pm), the ZAR (and other EM currencies – BRL, MXN, TRY, KRW) could see further windfalls. If one looks at ZAR volatility levels, the drop in front end vol leads me to believe that market makers remain calm on the near/short term prospects for the ZAR and have tapered down their needs to pay-up for “insurance”.


Tonight also sees the NZ CB (RBNZ) announce their rate decision, with the market anticipating no change to the current 3.50% level. Again one should note, that any USD sell off would see NZDUSD and AUDUSD make healthy gains as the market digests Yellen’s comments.

USDILS has not had it all its own way. With the CB keeping rates unchanged at 0.25% earlier this week, the ILS has nevertheless failed to “recover” like other EM currencies. Trading remains cautious given the continued “balagan” (mess) we are seeing with ISIS, Egypt, Syria, and the M.E in general. The Israeli economy and the CB in particular has shown some signs of weakness, with the BoI stating that it wants to observe the full effects of the recent cuts (0.50%) before taking further action. As interest rates have fallen further the ILS will remain on the back foot, aided by a drop in inflation (in line with other major economies) and weakness in Israel’s growth indicators.

Good luck and have a good day ahead


Good morning

Back on the 16th Oct I wrote 6 reasons why I thought the markets were staring down the barrel of a shotgun. Global stock markets have since recovered somewhat (still way off their highs though) but and it is a BIG BUT, I get the horrible feeling that investors are ignoring key issues and burying their heads in the sand. Sure I might be wrong, but surely the evidence and the facts cannot be kept under wraps for much longer.

So what am I referring too you might be asking. For starters, Chinese consumer demand will ultimately undermine world economic growth and in turn lead to a deeper slump in stocks. Unilever, Nestle, Tesco, Coca Cola, Macdonald’s, Rolls Royce and Ford to name but a few have all reported a slump in sales growth and issued profit warnings citing difficult trading condition. I truly believe that stocks are overvalued and a catastrophic correction is on the cards.

The US markets cheered after “signs” that the FED and ECB could act in concert to pump more money into the system after the October sell-off spooked investors (including myself). The “Vix” indicator (“fear index”) that measures market volatility, has fallen back to more normal levels in a sign investors believe everything is ok. The Vix spiked to two year highs in mid-October as growth fears gripped markets. I believe this lull is simply the calm before the storm. UK markets have might have staged a recovery coming back from below 6100 to 6405 (presently) though still some way short of highs of 6,904 in early September. Can investors really ignore these profit warnings for much longer?

While stock markets may have been lulled into a false sense of security by the soothing words from central bankers, investors should take a look out of the window at the brutal reality in the real world. As I  mentioned above, the number of US/EU/UK companies issuing profit warnings in Q3 has reached the highest total since the 2008 banking crisis. Having spent the past five years pushing through price increases whilst wages stagnated leads me to believe that many companies may have (now) hit a profit ceilings. Look no further at the recent UK wage growth numbers and it is all there to behold. It is no wonder that Gov. Carney has cited disappointing recent wage growth numbers as a REAL WORRY and why (together with CPI at 1.20%), the BoE are likely to DELAY raising interest rates until well into 2015.

Whilst the findings (ECB Stress Test) on Sunday showed “only” 25 EU banks likely to fail and requiring a capital injection, can we really assume then that everything is ok and that there will not be a repeat of the “Lehman Brothers” fallout we witnessed. My fear is if the EU and China continue to slump (have I mentioned oil prices!!!) this will have a resounding impact on GDP (economic growth) in the US and UK. Already we saw UK Q3 GDP fall 0.20%. Could this be the start of a continued fall in GDP? As much as it pains me to say it, whilst “cheap money” still exists, it is the ones who need it most that can’t get their hands on it. The banks can borrow from their CB’s at silly rates, but passing that on to the end user, well that’s another story altogether. Try go and get a mortgage now from your bank, and they ask you how much you spend on food, petrol, school fees and entertainment. You cannot honestly believe the banks are doing their bit to pass on that “cheap money” to the end user.

And so to what can only be described as A MASSIVE MONUMENTAL event taking place tomorrow. The FOMC rate decision takes place after UK markets close with confirmation of the end to QE3. It is Pres. Yellen’s press conference after the announcement that has the world biting their nails to the bone. Whilst we cannot know what she and her fellow FED members have discussed and decided, I believe that the results could spell the beginning of the slump (in stocks) that I mentioned above. In turn, the USD could be sold off heavily (to Pres. Yellen’s delight given that she raised concerns recently about the strength of the USD) and give Gold a boost to potentially $1285.

For today then you will probably see stocks enjoy another rally of sorts and the USD trade sideways to weaker. No point slapping on career ending trades until tomorrow at the very least.

You can also follow us on TWITTER (@parityfxplc) where you can find additional daily updates and commentary.

Good luck and have a great day ahead


This is a big week for asset markets as we wait for the Federal Reserve’s statement after their meeting on Wednesday. As it stands we anticipate the central bank will taper their asset purchases to zero, signalling the end of QE3. There have been some calls, given the recent market turmoil, for an extension of the buying programme, but personally I find this hard to believe. The purpose of the programme was to enable conditions for a recovery in the labour market, and as it stands events over the period during which QE3 took place have resulted in precisely the improvements that were sought after. So how can we expect an equity market correction which wasn’t, in the end, up to 10%, to be a justification for extending a successful programme? It simply doesn’t make sense to me. Federal Reserve members surely have to have more about them than watching equity indices! I would imagine there would need to be a new narrative… inflation for example, which could in future inform another round of easing, but there is simply no justification for it right now.


So what are the implications for asset markets in general and currency markets in particular? We have seen a substantial equity market rally over the last 2 weeks and easily more than half the losses have been recovered. In my view any sustained move in either direction will always see periods of consolidation or correction… I think we’re due this. I would not be at all surprised to see a quiet end to QE3, and the markets weakening as a consequence. However, the macro fundamentals in the U.S and also the U.K remain robust, and this should mean that any losses are temporary. Over the last few days we have observed a paradigm where higher equity prices have occurred along with a stronger dollar. While I still maintain that the dollar correction which we saw during the market turmoil has met the minimum requirements for a period of consolidation, there is still the possibility that we could see more. Short term dollar weakness is not our base case, but we are open to the possibility, we do however still maintain a strong conviction that the euro should weaken substantially versus both the dollar and pound sterling. It is probably prudent to remain on the side-lines until we see the exact nature of the statement from the Federal Reserve on Wednesday evening.


The ECB stress test concluded over the weekend showed that most of the larger European banks were sufficiently capitalised, with not much reason for concern in Germany, France and Spain. However Italy looks like the sick man of Europe as nine lenders fell short of the requirements. This news was largely positive and this is reflected in the slightly stronger euro overnight. These Italian banks will however need to raise capital to plug the gaps in their balance sheet. In politics we saw Dilma Rousseff winning the second round of the presidential vote in Brazil, I’m not sure the market will be enthused about that news, and the Brazilian real has already weakened significantly since the first round of voting.


On the data front we see M3 money supply data coming out this morning in the Eurozone, as well as IFO data in Germany. Both are expected to continue the trend of slowing growth, deflationary type data releases we’ve seen in recent weeks. As I mentioned above, all eyes will focus on the FOMC this week. Everything else is secondary…



Good morning

Today at 9.30am,  UK GDP figures will be published. Following last quarter’s figure of 0.90% the market/economists are predicting a slowdown, with output rising 0.7%  for Q3. Currently year on year the number sits on 3.20%, however if the predictions are correct that would move the YoY number down to 3.00%. Should the economists get it right and the number is as predicted, it is likely to further dent the BoE’s rate hike expectations, with the GBP likely to suffer (fall below 1.60) as a result. Needless to say, should the economists get it wrong and the number exceeds 0.80%, we are likely to see the GBP rally as a result. Bottom line, the UK economy continues to outperform the EU (excl US). Long term our projections remain intact for a continued strengthening of the GBP vs the EUR, though ag. the USD it is really at the mercy of the USD. 

If you cast your mind back to last week (15th/16th) and our blog where I listed 6 reasons why the world is no longer “a safe place”, point number 3 identified Ebola.  Overnight it was reported that the first case of Ebola reared its ugly head in NEW YORK. The S&P 500 and European markets have all opened up lower this morning as a result. Reports claimed that the markets were unnerved by swelling contagion fears considering the metropolis is the financial capital of the world (and London). With next weeks HUGE FED/FOMC meeting (28/29th) looming, I think investors will sit on the sidelines and prefer to wait to see what the outcome of that meeting is. It is a well known fact that Pres. Yellen will announce the end of QE which I believe could be the catalyst to send stock markets worldwide on another round of selling. By confirming an end to QE3, the FED’s announcement will make the wind down in QE a reality. If the statement that accompanies the decision does not soften its tone materially, the discount to the FOMC rate forecasts will start to backtrack – lifting the Dollar and weighing heavily on capital markets. We have seen after previous FED announcements when reductions in QE were announced, markets fell as a result. Next week I think will be no different. Furthermore, Thursday 30th sees the US publish Q3 GDP numbers and I cannot stress the importance of this number. Any slow down will be a big blow not only to the USD but to the markets in general and push any anticipated rate hike further down the curve. Then again as we all know, Central Bank Gov./Pres. do have a knack for surprising the markets.

ECB announces Sunday their findings on commercial Bank’s stress test. If the results show too few failures, the test will be considered a hollow review. If the results show too many possible failures the market will have a new worry to add to EU’s recession and deflation fears (not to mention the 6 reasons I listed on the 16th Oct blog). Having mentioned this previously, the ECB needs to stabilize the situation, and so the ECB’s Asset purchase programme which started this past week will likely continue. Details of the purchases will be released Monday and each Monday thereafter. Next week sees a plethora of EU data including Spain’s Q3 GDP, German employment, and EU CPI.

As for today, it is ALL EYES ON GBP. I expect volatility whichever way it goes. I would like to think the UK is still performing at the same levels seen throughout the year, however one has to be conscience of the fact that the slowdown in the EU and China, not to mention lower oil and commodity prices, could hit the UK GDP brakes. While it may be behind us, I think the Scottish referendum HURT the UK and so I agree with the economists, GDP will disappoint.

Have a great weekend and take care


Good morning

One of my favourite movies of all times is the “Star Wars (trilogy)”. I thought today’s subject should reflect my thoughts and feelings towards the recent moves in the USD.

With a “mild” rally in stocks over the past week, it was time for the USD, after falling off the bike, to get back on and get back to normality. Only this morning we saw the EURUSD dip down to 1.2633 before recovering to 1.2665 on the back of better than expected Spanish Unemployment (23.67% vs 24.47%)  and German PMI (51.80% vs 49.90%).  The EUR’s reversal changes nothing as far as I am concerned. What I am absolutely sure about is the FED are “preparing” and gearing up to RAISE rates, while the ECB is “preparing” and gearing up to SOFTEN rates (however that might be). What I am trying to say is this divergence in monetary policy simply plays into the hands of the strong USD/weak EUR camps. Over the past week more and more banks have started to come out and voice their year end predictions for EURUSD (DB 1.25, BNP 1.20). The consensus is the EUR is going to weaken vs the USD. There is just no other way. What could slow it down (as we saw a couple days ago) was the ECB beginning to solidify their position and strengthen their resolve to protect the state of the EU. They simply need to do more, and better yet, they need to “throw the book” at the EU. Unless they are seen to at least be making proper decisions and implementing worthwhile policy, the market will take this as confirmation that they aren’t doing enough and slam the EUR. Our opinion remains intact and like the banks we see the EUR’s trajectory as negative going into year end.

Yesterday saw the announcement from the BoE monetary policy committee. There is still a very small minority in the Monetary Policy Committee of the BoE as once again we saw the minutes of the BoE’s last meeting  which again showed that 2 members (Weale and McCafferty) once again voted for a 0.25% hike to the bank rate. Once again they were overruled 7-2. Despite the persistence of Weale and McCafferty, the rest (7) seems to be growing increasingly wary of their optimism. Evidence showing a slowing pace of growth and weak wage pressures together with last week’s five-year low CPI reading (1.2%) have all added to the need for patience in hiking rates. Simply put the fear is that a rate hike could leave the country vulnerable to shocks. I have written recently that a hike as early as Dec14/Jan15 was possible. That view changed when the CPI number was announced. Given the “political” sensitivity in raising rates, the May 15′ election means that in all likelihood we will only see a rate hike after the elections (Jun/Jul). My BIGGEST fear is if there is a change of the guard at 10 Downing Street. If this happens my first trade will be to SELL GBP. But we still have a few more months before we start to see the polls so we can sleep easy for now. In the mean time though, the GBP will to some degree be at the mercy of the USD and while GBPUSD might not suffer as badly as the EURUSD, the biggest winner will surely be EURGBP (stronger GBP vs EUR). UK retail sales disappoint (3.10% from 4.40%) and tomorrow sees Q3 GDP reported. 

The NZD was battered during the Asian session after a significant decline in the CPI index.  The market was expecting CPI to increase by 1.3% (YoY), however, the outcome missed the mark, as it registered a rise of 1.0% only. After reporting 1.6% at the last count, the 0.60% drop was too much to bear and the Kiwi dollar was immediately sold off as this was a strong bearish call for the kiwi dollar.  The Kiwi dropped from 0.7975 (close UK) to a low of 0.7830. 

The ZAR (if you follow this) has been trading AGAINST the grain (weak EUR = weaker ZAR)….the opposite has held firm over the past few sessions. While there is not one specific reason for this what we do think is: The 2 factors which could be ZAR supportive (1) price of oil has fallen over 25% over the past 6 months, and (2) Treasury yields have fallen which is EM positive and more importantly for countries that run current account deficits, the lower yields makes their funding cheaper. The short term target is then 10.75/10.80 which we think could be the area to sell ZAR for a reversal back above 11.

Have a good day ahead and good luck


You would almost think that nothing had happened over the last few weeks.. almost! The volumes tell us a story, and it’s not a good one. At the peak of this mini crisis we saw moves in the treasury bond futures market, the like of which we’ve rarely seen before, and on the face of it it’s somewhat surprising. After all, we’ve had trillions of dollars of global liquidity foisted on us, surely supply and demand should easily match in a correction that amounted to a 10% decline in the benchmark S&P 500 index? But that wasn’t the case. This was… merely a dress rehearsal to what we will eventually have to face.. policy normalisation. I don’t know about you, but it makes me shudder, and it does force us to call into question the unintended consequences of central bank policy in recent years.


But let’s get to the nitty gritty.. the dollar rally paused, and appears to be trying to reassert itself again. Oil is technically in a bear market and prices hover just above levels that should make oil majors question the viability of further investment in exploration, and expansion, we are certainly far below levels that have been used in the fiscal calculations of certain oil dependent countries – Russia, Venezuela etc. Instability still simmers in the Middle East; the Ebola threat is not going away; Russia-Ukraine; Israel-Palestine; China faces a 3 pronged minority protest (3, if you can call the denizens of Hong Kong a minority!); in addition Xi’s anti-corruption effort gathers pace even as the latest Communist Party plenum has just commenced; and last but not least we have multiple slow burning crisis in the European Union with Draghi battling the German council member Weidmann to effect an ECB version of QE while the UK, France and Italy each separately pose sovereignty questions that challenge the primacy of EU laws. There’s a lot going on!


Despite the complexities I’ve listed, or perhaps because of them, we remain comfortable in our belief that the dollar will continue to rally. It is, after all, the path of least resistance. Let’s not forget why we recently experienced market turmoil… the US economy is doing relatively well.. fact. Policy will need to be normalised in the next year or two.. fact. This is the foundation on which our conviction of dollar strength sits. Meanwhile the case for a weaker euro is no less strong. EUR/USD has GOT to weaken further, this simply has to happen at a bare minimum. It is entirely within the realm of possibility that we will move from todays 1.27 levels to 1.20 by the end of the year. But if the dollar is the solar mass around which other currencies orbit, the euro is most certainly Jupiter. It exerts a tremendous gravitational influence, particularly on the neighbouring European currencies like sterling and Swedish Krone, and so while I believe the UK economy is doing at least as well as the US, I am less confident about where GBP/USD goes from here. What I will say with strong conviction is that I believe EUR/GBP has a very strong case to continue lower. There may well be bumps on the road, even as we await the BOE minutes today where an implied pause in the policy normalisation debate in Britain could knock sterling temporarily. And it would be temporary, as.. and I repeat.. the UK economy is doing very well indeed. Clearly a weakening Eurozone economy has a huge impact on future growth prospects in the UK, but normalisation may occur more quickly from the BOE than the Federal Reserve. It’s tough to make a case for anything other than a weakening GBP/USD rate due to the Jovian gravitational impact of EUR/USD’s descent and the relatively larger impact Eurozone recession has on Great Britain.


Even as the case for a weakening euro remains strong, we see similar support for depreciation in most Emerging market currencies. However it is worth pointing out that the recent falls in treasury yields have lessened the pressure somewhat. It would be a mistake to look at Emerging Markets as a distinctive asset class where all read from the same script. The world as it is presents different markets with different threats and opportunities. For example, even without sanctions, Russia will be under pressure from the decline in oil prices, and the rouble will have to reflect this. However economies like India and Turkey will be beneficiaries of lower energy import costs, thus the Indian rupee and Turkish lira should benefit.. and so it goes on. If you have any specific currencies you’re exposed to, please don’t hesitate to contact us. We would be only too happy to discuss our specific currency views with you.


I’ve mentioned the BOE minutes today. We are also anticipating retail sales out of Canada and inflation numbers from the US, both important pieces to clarify our view of the macro-scope. The recovery in risk sentiment continues, but we’ve moved so far, so quickly. It wouldn’t shock me if we take a breather here.


Good morning

Consolidation and patience. What we have witnessed over the past couple weeks is what can only be described as an “expected and healthy” reversal in the USD’s recent bull run. While Pres. Draghi has commented that the EUR was too strong and needed to fall, Fed Chairwomen Yellen commented recently that the recent strength in the USD has “hurt” the US growth or at least slowed it down. I am of the opinion that the USD, like it or not, is en-route to PARITY (EURUSD 1.000) given the vast difference in growth we are witnessing between the US and EU’s economies. While we can all argue that the strength of the USD (given its global importance) will affect some companies that rely on a weak USD, the writing is on the wall and the trend will come back strongly. Pres. Yellen, in my opinion, made those comments to SLOW things down and I am sure she and her fellow FED members have accepted the USD’s future.

Overnight Asian equities remained flat, while the JPY strengthened to critical support levels at 106.41…driven mainly after China reported Q3 GDP at 7.30% from 7.5% and a strong rebound in Industrial Production to 8% from 6.9%. There is a strong consensus that Chinese GDP could suffer over the next few quarters as a result of a slowdown in Australia and the EU.

The ECB began buying covered bonds yesterday as part of the securities purchase programme announced at its September monetary policy meeting. Average covered bond yields dropped to a new low yesterday after the ECB started to buy covered bonds issued by banks from Spain, France and Germany. The French and German ministers of Finance met yesterday in Berlin to discuss ways to revive growth in the EU. They agreed that Europe needed a boost from investment (ECB), although they remained vague on how to lift investment. The German Economy Minister suggested a target to raise the share of investment to 20% of GDP from 17% in Germany. Mr. Schaüble added that these policies must take into account the state of the public finances. Der Spiegel reported over the weekend that Germany would oppose penalizing France on its budget if the country commits to a precise and ambitious structural reform agenda.

The RBoA (Australia) retained its forward guidance of a period of stable interest rates and remains concerned about rising house prices.The RBoA minutes repeated forward guidance and a “period of stable interest rates”. The board also discussed macro-prudential tools, though these were not disclosed. I expect the RBoA will publish its plans before the end of the year, and think it may introduce these new measures before then too to cool the housing market and increase growth. We believe there is a possibility that a capital charge for investor home loans could be initiated, where doubling the risk weighting for such loans would equate to a rate rise for the housing market entrants/participants.

Gold has been steadily climbing (from below $1200) as the desire for safe-haven demand and the reversal in the USD’s bull run took effect. Recent “FED rhetoric” over the past week has been less hawkish, which has done little to benefit the USD and in turn give support to the metals. Gold and Silver are likely to benefit as long as the USD remains on the back foot and investors decide on their next move. Keep in mind Gold is seen as a safe haven in periods of high inflation, so with a global reduction in inflation I do not see the metal rising above the $1270/75 levels. 

Good luck and have a good day


Good morning

Friday saw a bounce in stocks globally (followed through by Japan and Australia this morning) giving traders a respite after 3 weeks of consistent battering. Having said that, European stocks open on the back foot this morning with the main borses all back in the red in excess of 1% as I write this.

Last week I wrote about the 6 main reasons why stocks are getting battered and more importantly why there has been such a fall in global enthusiasm and confidence. So respected Economists have come out and said there is nothing to panic about and global growth/confidence is still intact. I respect everyone’s opinion, but the facts speak for themselves and so do the numbers. Germany, France and Italy simply put are in a pile of rubble – fact. The ECB have disappointed and the US FED are about to cease QE altogether. Interest rates seem to have taken a back seat after disappointing numbers force Central Bankers hands forcing them to seriously consider delaying hikes. No point adding fuel to the fire. Best remedy sometimes is to hold off until the time is right. We have seen only too well when the ECB made a catastrophic error and raised rates from 1.00-1.25% only to reverse that decision the following month and slashing rates to their current levels of 0.05%. I have repeatedly said it is CRUCIAL from CB Gov. to get the timing right because the consequences could be disastrous.

Economic data this week is unlikely to ease concerns about a slow down in global growth and lower inflation. Chinese activity -GDP-Industrial Production & Retail Sales (Tuesday), US CPI (Wednesday),  German PMI (Wednesday), UK BOE Minutes (Wednesday), UK Retail Sales (Thursday), EU PMI (Thursday) and UK GDP (Friday) are the highlights for the week. We can surely expect some fireworks ahead of the data given that I fully expect some to be worse than expected. US corporate earnings continue this week with all eyes on how they are faring.

With a delay in FED rate hikes, we are likely to see a continued deterioration in EM currencies with the RUB, TRY, ZAR, BRL, MXN and KRW the biggest losers. I HAVE NOT GIVEN UP ON MY USD view with 1.2000 by year end. Given what we have seen in the markets the past few weeks, my predictions for 1.2000 might be delayed a few weeks, but it will get there in the end.

BOE’s October meeting minutes (Wednesday) are likely to be a key focus for GBP in addition to retail sales (Thursday) and Q3 GDP (Friday). However, the risk is that the market will not have discounted the value of the minutes sufficiently, given that they relate to the 9th October meeting and will therefore not include the recent fall in CPI inflation (to 1.20%) as well as the collapse in EU  growth prospects NOT TO MENTION Stocks. In response to these developments, interest rate traders have aggressively repriced BoE base rate expectations over recent weeks and now expect barely +25bp next year, and perhaps +50bp in 2016. As such, I have to push back my interest rate hike to AFTER MAY 2015 (election). Having said that the only other window Gov. Carney might have is VERY early in Q1 so that the shock wears off going into the general election.

It remains our view that EURGBP will continue to fall in line with the distinct economic fundamentals between the UK and EU. While the fall might not be as aggressive given the recent UK CPI data and the hike being pushed into 2015 we still expect GBP to rally vs the EUR and make new lows. As previously commented, vs the USD that’s an altogether different story given how the USD is currently playing out. Overall if the UK continues to perform traders will find it hard pressed to SELL the GBP vs the USD. In fact that is what we are seeing this morning, traders BUYING GBPUSD and SELLING EURGBP.

Have a great day ahead and good luck