Good morning

According to the IMF, the EU is facing a 40% probability of falling back into recession a 30% chance of tipping into deflation. These scenarios are especially severe and their probabilities worryingly high. For the EUR, the market has discounted these concerns to a certain degree given the EUR’s demise over the past 3 months. Yet, the risk to the single currency moving forward – and to the region’s financial health – is that there is still a glut of capital parked in EU’s assets for the higher returns. Plainly put, the money is in the wrong place and needs to be put to work in the right places to spur growth and avoid a recession. I have noted on various occasions that the labour market in the EU is too skewed and needs changing. You cannot rely on Germany to save the EU. Pres. Draghi has but one option, pull you finger out your ears and start a QE/ABS programme that will light a fire in the EU’s belly. It is really that simple!!

Since Friday we have seen the USD pretty much give up all the gains from the extraordinary NFP number. This is NOT to say the USD rally is over. Far from it. It is called CONSOLIDATION. Every market experiences it and it is a way to regroup, re-evaluate and start again. I believe very strongly that this is exactly what we are witnessing. While 1.2700 remain a MASSIVE key resistance level, if we are able to stay under this number and close under this number the USD should get “back on its bike” as early as tonight after the FOMC MINUTES. Talking about the minutes I firmly believe Pres. Yellen will choose her words carefully and simply reinforce what we already know. The US is showing terrific signs of life and positive growth. However there are still pockets of space in the economy that need “filling”, by that I mean spur growth. Wage inflation/growth, employment and a strong USD (kept in check) will go along way in moving the US (economy) to the next level. I am still of the opinion that the FED could “shock” the market and hike as early as (late) Q1, (early) Q2. I am going against the tide here but I believe that if the capacity exists the FED will and can hike rates. The economy will be able to withstand a hike in those circumstances.

To reinforce my thoughts above last night Gov. Dudley  (Pres of the NY Fed) hinted that the FED will be able to begin raising short-term interest rates around the middle of next year and  that this “seems like a reasonable view to me,” said Dudley.  At the moment, a rate hike would still be “premature” given that “the labour market still has too much slack and the inflation rate is too low,” Dudley said in a speech at Rensselaer Polytechnic Institute in Troy, N.Y. Dudley said growth should average around 3% through the end of 2015 but chances of anything stronger were “relatively low” given several negative factors including sluggish consumer spending and the stronger dollar. Dudley said he agreed with the inflation forecast of the Congressional Budget Office, which calls for inflation to rise to a 1.9% annual rate by the fourth quarter of 2015. All in all these policy makers are “prepping” the market for the hike. It is vitally important as any shocks could have the opposite effect.

The JPY continued to post a decline yesterday with USDJPY suffering its biggest back-to-back drop since January. This is the FX market’s more sensitive barometer to the slump in investor sentiment. A global drop in equities and high-yield markets alongside a rise in volatility indicates there is a universal concern. The IMF’s updated growth forecasts played no small part in the downshift. The report assessed that investors may be “underpricing risk” that arises alongside the macroeconomic cool down and the “withdrawal of monetary stimulus in some major advanced economies. In the meantime, the IMF’s downgraded growth forecast for Japan (0.8 percent in 2015) and the BoJ Governor Kuroda’s suggestion that the Yen’s drop is natural will take a backseat to carry motivations. Like what we are seeing in the FX market, equity investors have likewise taken profit and squared positions. While some may argue key world events have led to the collapse in equities, I feel the Alibaba IPO was the catalyst “that broke the camel’s back”. Recent RIDICULOUSLY OVERPRICED IPO’s brings back memories of the internet bubble that burst in 1999. As I have tweeted and commented, how can Facebook be worth MORE than Coke Cola. It is like a Nissan Micra going faster that a Porsche. Consolidation too is the key before we potentially see a reversal of the recent collapse PRIOR to the UK and US (mainly) starting their rate hiking.

Regarding the GBP (USD), we saw a move back to 1.6117 (the rate pre-NFP) though there has been a pull-back to 1.6050 as I write this. Like the EUR (USD) consolidation is the norm for now, though I think this after the FOMC meeting and minutes tonight, a change is on the cards. While Pres. Dudley above commented on the “strong USD” I for one do not believe this is a BIG issue for the FED and they are simply going through the motions trying to simply SLOW the pace of the USD’s rally. Then again would you stand in the way of an oncoming train? Move aside and let the market decide. Only when that move becomes exaggerated should the authorities intervene.

Lastly EUR/GBP – consolidation at 0.7880 my view remains the same, with 0.7700 (1.3000) my short term target.

Have a great day ahead