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