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