For all the blood and thunder in the markets over the last few weeks, when you look at the monthly chart of the S&P 500 index, the moves we’ve seen barely register as even a correction. It’s important to remember this as we live in a central bank mandated world at the moment, and they don’t look at hourly charts and probably not even daily ones. Even so, some of the price action has been extraordinary with record volumes in Chicago just a few days ago. Speaking to some of my colleagues in the banking fraternity it wasn’t unusual to hear comments about difficulties handling the activity, and systems being pushed to extremes. This was primarily in the futures markets, which is not surprising given the multiple standard deviation events that was the move in the treasury future. But let’s put all this into context.. as we speak the S&P 500 is down about 7% from its peak, the dollar is barely 2% weaker relative to its recent high, yes US 10yr yields are 50bps lower as the probability of 2015 Fed hikes is unwound, but oil prices are significantly lower (25% lower roughly speaking over the last 6 months). This is not terrible news, sure the macro data has been disappointing, but all in all growth in the US and UK continues to trend albeit slower than the ideal while Europe and China are concerning. There hasn’t been a meteor strike people.. the global economy is sick but not dying.

Put that way, there are reasons for optimism, but there are also reasons for concern. The optimism is the tremendous boost to consumer disposable incomes from lower commodity prices, the easier monetary conditions implied by lower long term rates is also a positive. But a slight negative would be the fact that the moves, at least in the equity market, have not been substantial enough yet to cause any policy maker action. That could all change of course if the S&P 500 and other major indices were to fall another 10 – 15%, but that’s certainly not my base case view, the fear is that the market might try to force the hands of policy makers. Personally I think we may already have seen a near term bottom, although I wouldn’t be at all surprised if we had one final dip down before the markets start to snap back. One thing that may well have changed though, is that up until this turmoil there were reasons for the dollar to rally and for the euro to fall, making the bearish EUR/USD trade a one way bet. At the margin this still remains the case, but it’s just a weaker proposition now, because the Eurozone economy still sucks, but there is less imminence to the Fed hike paradigm. Don’t get me wrong as soon as wage growth starts to pick up Fed hikes will happen, but when will that be? No one knows and when it does happen we will need several months of data to confirm. For now the Federal Reserve will view continued dollar strength as a de facto tightening in any case.

So what does this mean for currencies? I still maintain that the path of least resistance will be dollar strength, particularly versus the euro and the Japanese yen. We will need to monitor the aftermath of this turmoil for other currencies, but for the life of me I can’t see why sterling should not make at least an attempt to claw back some of its recent losses, after all, there now appears a greater chance than before that rate hikes will happen in the UK first… better wage growth permitting of course! That means EUR/GBP should restart its downward trend in the near future as pound sterling starts to appreciate versus the euro again. How sterling does against the dollar is somewhat dependent on the pace of further euro weakness against the dollar, as always the cleaner trade is betting on EUR/GBP lower. Funding for emerging markets have received a tremendous boost in the last few days with the fall in treasury yields, this should make currencies a bit more attractive, but on the other hand the higher volatility regime we’re in now, is a negative for risky currencies. Still.. if I had to give a view right now, I would think that there’s room for some select emerging market currencies to stabilise here.

The next few weeks will be critical to this stabilisation view. Moves like this can often do tremendous damage to specific banks or investment funds. As long as no one is forced to liquidate positions we should see calm start to return to the market place, let fear recede and some good old fashioned greed back in to the house..

Good morning

Have you ever heard of “RED NOSE DAY”? If you were in the financial markets yesterday that’s pretty much how your nose looked as you made your way home after what can only be described as a BLOODBATH!!

I did have a wee laugh when someone on Twitter said the ONLY reason for yesterday’s collapse was Ebola. I have to agree and disagree. Only YESTERDAY I noted 6 reasons WHY we are seeing a routing of stocks globally. Perhaps a quick reminder of what I wrote yesterday (to refresh your memory):

As I said to my business partner, the “straw that broke the camel’s back” was the ABSURD RIDICULOUS IPO valuation of Alibaba not to mention the ABSURD RIDICULOUS price paid by Facebook for WhatsApp. In fact I have written in our blog recently how on earth could Facebook be worth MORE than Coca Cola. It was the former IPO that started the latest free-fall and which has been exacerbated by a number of other CRUCIAL factors which put together has made me VERY VERY worried indeed about the future. Sure the US has shown us in recent weeks that their economy is growing and employment numbers rising. But hidden behind this is a growing concern that could ultimately DERAIL the US recovery and in so doing send us back to 2008 and a recession. Let’s delve a little deeper into what the other factors are (I will be brief):

(1) UK CPI/Inflation – yesterday’s data showed inflation in the UK had fallen to 1.2%. This basically derails my recent rhetoric that rates could rise in December/January….with a target of 2%, yesterday’s number all but puts an end to that (though history has taught us that it is still possible to hike rates in the face of low inflation). That means with an election due in May 2015, the BoE might indeed have to wait until AFTER the elections before raising rates. This spells DISASTER for GBPUSD (ignore vs EUR for now) and therefore I am expecting a deeper correction in GBPUSD over the coming months. The GBPUSD rallied to 1.6080 after US retail sales fell 0.20% and spooked the USD. It has since fallen back below 1.60 and as I noted above I am still looking for a DEEPER correction over the coming months.

(2) GERMAN ZEW/OUTLOOK – yesterday further saw the publication of the German outlook/confidence indicator (ZEW). Last month reported +6.9%. Expectation for yesterday was +1.00%. Reported -3.9%. Germany is the powerhouse and workhorse of the EU. A slowdown in Germany is like taking the coffee out the cappuccino. Tastes terrible and not worth drinking. The ongoing slowdown in the rest of the EU led by the most powerful economy (Germany) followed by France & Italy is testament of the slowdown. The situation in the EU is nothing short of grim, exacerbated by recent Russian sanctions and weak demand for exports. Simply put the EU relies on Germany, France and Italy. A recession scampers any chance of a recovery. European stocks got absolutely obliterated yesterday. Truth is I get the feeling the game plan Pres. Draghi has in mind in just not the right one. Today sees the publishing of EU CPI with 0.30% expected. Inflation is becoming a thorn in all Central Bankers sides no doubt being helped along by falling commodity prices (food) and oil. Consumption is dropping meaning if we combine all the above, we are pretty much staring down the barrel of a shotgun. EURUSD might have recovered to 1.2885 on the rally yesterday but trading just below 1.28 as I write this. I still think overall while there is now likely to be a delay in US interest rate hikes, the trend for the USD remains intact.

(3) EBOLA – Coming to a City near you!! It was obviously not taken seriously enough, and with the movement of people (unlike the last outbreak), Ebola is now a global phenomenon and one which none of us can even try to understand. Not only coming to a City, but also a town near you. Remember the movie “Outbreak”…if only reality was like a movie. I am afraid there is no sick monkey this time, rather a sick world.

(4) FED ENDS QE – The gradual ending of QE in the US (ending this month)  isn’t new and we all knew it was coming…but it is coming at a time when it is NEEDED MOST. The global economies always want more QE given their seemingly endless appetite for cheap money. While there was QE in the US and UK (ended) – we are now awaiting the signals that the ECB is going to plug that hole. So far they have disappointed. Regardless of the consequences politically or otherwise, the EU states NEED it. They need to stop playing silly games and pump that QE hole. There has been a lot of rhetoric that once the Fed announces (29th Oct) that QE is finished, stocks should start to recover. That’s fair enough BUT the baton has to be passed to the ECB to ramp up QE on their side, and from what we have seen lately it is too little too late. School boy error if you ask me. 

(5) OIL – I went to fill up my scooter the other day and still paid 1.2590/L. As my daughter says (and she got this from Tom and Jerry) – WHAT THE HECK. With oil languishing at $80/barrel sure I was expecting to pay less but with all the other factors going on around us the oil companies need to be making money somewhere. As usual you and I are the victims. I am no expert on OPEC and what goes on behind the scenes but what I do know is the pumps are still pumping yet the “thirst” and need for oil is dropping on the back of a slowdown in global demand. Be under no illusion here, the drop in oil prices will have SIGNIFICANT effects. Further falls overnight, Iran said it will continue pumping…however the Saudi’s need to pull the plug if they want to slow the price drop. Global consumption is falling and with it the need for oil. You cannot flood the market with cheap oil and still hope to make a profit. It is time to cut back. I feel sorry for the royals though, how will they pay for their super yachts, fancy cars, private jets, palaces, champagne and caviar. My heart bleeds.

(6) FIGHTING/CONFLICTS – Ongoing conflicts in Ukraine and the M.E is not helping and investors remain cautious and jittery. The increased conflict could very well see a resurgence of 9/11+7/7 terror attacks on the west which will simply EXACERBATE current turmoil. One thing history has taught me, is that fanatics NEVER go away. They are like bears, they hibernate and wait for a better time to come out to play. I am terrified that events in the M.E will spill over and create havoc  elsewhere. Guerrilla warfare is the most difficult to win. You have no idea where the enemy is and more importantly the enemy moves around so much you are playing catch up. Just look what happened with the recent football match between Serbia and Albania. Why can’t people just grow up and stop this immature behaviour.  

So later this morning, we will find out the EU’s CPI data for September. The US Treasury Department cautioned yesterday that the EU might fall into deflation as the recent policy measures taken by the ECB have failed to raise consumer prices. How many times have I said this. The ECB are playing funny games and adding fuel to the fire. In the UK, BoE member Martin Weale urged the BoE to consider raising interest rates, citing improving domestic employment conditions. While I was calling for a rate hike in December-January, after the drop in CPI and recent global turmoil (as per above) a delay in raising rates might be the correct decision for now. No point trying to catch a falling knife. 

Have a great day ahead and good luck today

Good morning

For the past few days I have been writing about the recent collapse on a monumental basis of the world’s stock markets.

As I said to my business partner, the “straw that broke the camel’s back” was the ABSURD RIDICULOUS IPO valuation of Alibaba not to mention the ABSURD RIDICULOUS price paid by Facebook for WhatsApp. In fact I have written in our blog recently how on earth could Facebook be worth MORE than Coca Cola. It was the former IPO that started the latest free-fall and which has been exacerbated by a number of other CRUCIAL factors which put together has made me VERY VERY worried indeed about the future. Sure the US has shown us in recent weeks that their economy is growing and employment numbers rising. But hidden behind this is a growing concern that could ultimately DERAIL the US recovery and in so doing send us back to 2008 and a recession. Let’s delve a little deeper into what the other factors are (I will be brief):

(1) UK CPI/Inflation – yesterday’s data showed inflation in the UK had fallen to 1.2%. This basically derails my recent rhetoric that rates could rise in December/January….with a target of 2%, yesterday’s number all but puts an end to that (though history has taught us that it is still possible to hike rates in the face of low inflation). That means with an election due in May 2015, the BoE might indeed have to wait until AFTER the elections before raising rates. This spells DISASTER for GBPUSD (ignore vs EUR for now) and therefore I am expecting a deeper correction in GBPUSD over the coming months.

(2) GERMAN ZEW/OUTLOOK – yesterday further saw the publication of the German outlook/confidence indicator (ZEW). Last month reported +6.9%. Expectation for yesterday was +1.00%. Reported -3.9%. Germany is the powerhouse and workhorse of the EU. A slowdown in Germany is like taking the coffee out the cappuccino. Tastes terrible and not worth drinking. The ongoing slowdown in the rest of the EU led by the most powerful economy (Germany) followed by France & Italy is testament of the slowdown. The situation in the EU is nothing short of grim, exacerbated by recent Russian sanctions and weak demand for exports. Simply put the EU relies on Germany, France and Italy. A recession scampers any chance of a recovery.

(3) EBOLA – Coming to a City near you!! It was obviously not taken seriously enough, and with the movement of people (unlike the last outbreak), Ebola is now a global phenomenon and one which none of us can even try to understand.

(4) FED ENDS QE – The gradual ending of QE in the US (ending this month)  isn’t new and we all knew it was coming…but it is coming at a time when it is NEEDED MOST. The global economies always want more QE given their seemingly endless appetite for cheap money. While there was QE in the US and UK (ended) – we are now awaiting the signals that the ECB is going to plug that hole. So far they have disappointed. Regardless of the consequences politically or otherwise, the EU states NEED it. They need to stop playing silly games and pump that QE hole.

(5) OIL – I went to fill up my scooter the other day and still paid 1.2590/L. As my daughter says (and she got this from Tom and Jerry) – WHAT THE HECK. With oil languishing at $80/barrel sure I was expecting to pay less but with all the other factors going on around us the oil companies need to be making money somewhere. As usual you and I are the victims. I am no expert on OPEC and what goes on behind the scenes but what I do know is the pumps are still pumping yet the “thirst” and need for oil is dropping on the back of a slowdown in global demand. Be under no illusion here, the drop in oil prices will have SIGNIFICANT effects.

(6) FIGHTING/CONFLICTS – Ongoing conflicts in Ukraine and the M.E is not helping and investors remain cautious and jittery. The increased conflict could very well see a resurgence of 9/11+7/7 terror attacks on the west which will simply EXACERBATE current turmoil.

I am sorry to be the bearer of bad news today, but one must face the music.

Have a good day and good luck

Good morning

Another day and another NEW low. As I mentioned in my blog yesterday, global stock markets are in a state of meltdown. From Ebola to the EU slowdown and just about any other bad headline, global markets are in turmoil with investors scurrying for the exit door. Perhaps the time has come to clear out the cupboards square things up and wait and see how the next few months play out.

We are nowhere near the light at the end of the tunnel. Ebola is slowly making its way to Europe and the US, the EU remains in turmoil, the Italians are looking for a referendum about whether to stay in the EUR or not and that little problem with ISIS/ISIL is giving world leaders an extra sleepless night.

Equities continued to fall last night with the S&P 500 down 1.65% at the close and the USD staging a late sell-off into the New York close. The S&P 500 has now broken the key 200-day moving average support at 1905 which is a very bearish signal and may fuel further losses in the broader trend. Dallas Federal Reserve president Richard Fisher made remarks on the weekend about a delayed rate hike because the international slowdown is putting some pressure on the USD. 

Today sees the announcement of the UK CPI data which is set to guide the BOE and when they are likely to raise rates. The GBPUSD continues to experience weakness having failed to break 1.6117 and trading back towards the key 1.60 handle. This morning’s data will clearly indicate just how much room for manoeuvre the BOE has in regards raising rates.  EURGBP jumped above 0.7900 after last night’s crazy moves, but I feel that this move is temporary and a move back below 0.7900 is warranted. A clear break of 0.7925 will dispel that notion for now.  

Probably one of the most important releases for today is German ZEW economic sentiment, which is expected to decline from the previous reading of 6.9 to 1.0 (forecast). This could trigger another decline in EURUSD as economic sentiment registers a reading of 1.0, would be the lowest level since September 2013. The EUR could come under serious pressure after the release and might damper hopes of a recovery in the near term. This number will further reiterate the important decisions Pres. Draghi has to make with regards ABS and QE. I think it is high time they open that cheque book and start pumping money back into the system. Sitting on the side-lines and offering crumbs is just not going to hack it anymore. It is high time they get out the big guns. Failure to do this will add immeasurable pressure to an already fragile/near breaking point economy.

EURUSD continues to tread water in the range – pushing sharply higher last night and making the EUR bears nervous. The closed market in the US exacerbated things and from the price action this morning it would appear that the move has to be taken with a pinch of salt. The EURUSD is trading below 1.2700 and as I mentioned above, while we “expect” the ZEW to be nothing short of HORRIBLE, the market might nevertheless SELL the EUR fact. 

So for this morning it is the UK CPI vs  GER ZEW. Let’s play it out and see who the ultimate winner is.

have a good day ahead and good luck

Good morning

Stocks markets battered. No other way to put it. It would appear the slowdown and recessionary fears in the EU have finally caught up with investors globally resulting in a mass exodus from stocks.

The USD began the week  on the defensive having closed strongly on Friday after Fed vice chairman Stanley Fischer made some rather dovish comments over the weekend that underlined the data dependency of the Fed’s policy. Stanley commented that weaker conditions abroad could feed back into Fed policy: “If foreign growth is weaker than anticipated, the consequences for the US economy could lead the Fed to remove accommodation more slowly than otherwise.”  US Treasury Secretary Lew warned G7 and G20 nations to “adhere steadfastly to their exchange rate commitments. G7 countries should stand by their commitment to orient fiscal and monetary policies toward domestic objectives using domestic instruments and not target exchange rates…” In other words: we don’t want currency wars, which obviously is becoming a greater risk to global economic conditions which has seen a downturn for the worse. Regional Fed presidents George of the KC Fed and Fisher of the Dallas Fed both agreed that the risks of keeping Fed rates too low for too long could be counterproductive. I have said in this blog that the FED would in all likelihood raise rates EARLIER than anticipated given the growth of the US economy. Having said that the weakness in the EU could hamper this or delay it a couple months until the EU shows better growth prospects. To add salt to the wound, S&P lowered the outlook on France’s sovereign debt and lowered the actual rating on Finland’s debt to AA+ from AAA.

Today is a banking holidays in the US in which banks and the bond markets are closed, but equity markets are open –  interesting because of the DISASTROUS close on Friday, with the S&P 500, our most important global risk benchmark reversing gains and trading under 1900. The stock markets are in free fall posting yearly lows and adding pressure to investors to act. While I see this theme continuing for now, any positive numbers out of the EU will see the markets start to rebound and shrewd investors looking to pick up “cheap stocks”.

Well.. here we are, 24 hours after my last blog where I stated that EUR/USD could not correct too much further. I postulated that the low 1.28s would cap the rally, and lo and behold we got to 1.2792 before suffering a severe bout of vertigo, it’s now trading at 1.2670. This is all well and good, but I suspect some Federal Reserve committee members will be looking at the price action following their minutes and scratching their heads! It’s not exactly what they wanted, if you remember, one of their concerns was that weakening economic growth in the Eurozone and China, combined with a strengthening dollar is negative news for economic growth in the US, the domestic economy will need to power forward on its own. I can’t say I have too much sympathy though, the dollar has been cheaper than its long run average for years now, and despite this nascent secular rally it’s probably still lower than the average level since the end of Bretton Woods. It’s time for the greenback to do some of the heavy lifting for the global economy in my view. It’s not going to be easy for them to weaken the dollar, not that they’ll try, there really isn’t a justification anymore.

From a technical perspective, the overbought conditions for most dollar pairs have moved back to neutral levels and there is nothing to stop the bull trend extending, I can quite easily see most of the dollar highs getting taken out before the end of the year, in some cases it could happen as early as next week! But for now, the dollar may not even be the main story in town. US earnings season started this week, and we’ve already seen decent numbers from Alcoa the aluminium giant – there’s nothing stopping strong reported earnings for this last quarter, but it’s the future that matters. I wonder if we’ll start to hear forward guidance raising concerns about dollar strength? It’s possible. Global equities have performed poorly over the last week. I actually think the s&p 500 could go another 2 – 3% lower before this correction is done, I don’t know whether earnings season will be the cause, but in the context of the secular rally we’ve seen since 2009, this is a barely noticeable dip. As with the dollar, so with equities, bull market need corrections to maintain a sustainable trend.

This bearish sentiment in the equity markets is likely to impact currencies. The dollar does well in this environment, but emerging currencies like the South African Rand and Mexican Peso do not. We may well have this dollar bounce stall for a time during the day today, but I could see it gathering pace into the close tonight. At some point we will need to consider the social implications a significant dollar rally will have, particularly on developing economies.

On the data front today we’ve seen more disappointing numbers out of Italy and declining consumer confidence in Japan, apart from that there’s not much of significance, although Canadian employment data might be worth studying when it comes out. It all sounds rather gloomy, but consider that oil prices are now lower than they have been for a few years, this will feed into higher consumer disposal income in the months ahead. It’s not great news for OPEC and Russia, but they’ve benefited from high prices for many many years now, we can only hope they took advantage of their good fortune and used the money wisely. Ok ok.. I don’t really believe that any more than the rest of you…

The dollar correction is in full swing, it’s what I’ve been expecting, but I must confess to some disappointment in my timing! Even a stopped clock is right twice a day as they say. The fight against the greenback was given added impetus in the aftermath of the FOMC minutes being published last night, so I’ll focus on the minutes to begin todays blog.

It appears some members of the committee were concerned that their recent guidance is vulnerable to misinterpretation. Specifically, now that asset purchases are ending this month and their employment targets are largely achieved, the market is assuming rate rises next year… indeed the only point of discussion appears to be which quarter of 2015 will see the first rate hikes. There was a desire from some members to ensure that financial conditions are not prematurely tightened, and a part of this relates to the strength of the dollar, and also the rather dismal economic news we’re all seeing outside of the US. For my part I don’t envy the Fed members, they have acquired a massive balance sheet that will lose a tremendous amount of value when rates go up. The bottom line is that over the next few meetings the Fed will go through contortions to find the right wording to fit the current circumstances.. a situation where the US economy is doing well, but is potentially vulnerable to a slowing Europe and China, and to an appreciating dollar. They will be keen to convey an intention to tighten policy if.. and only if.. inflation becomes a problem, wage growth starts to pick up, and of course the US economy continues to grow strongly.

But, even if there’s no active intent to tighten financial conditions in the US, we know that the ECB, if anything, wants to find a way to ease conditions in the Eurozone. So in our view, this rally in EUR/USD cannot go very far. It is a correction of a bearish trend, and as I’ve said before, it is a necessary condition for trends to remain sustainable. From a technical perspective a rally up to the low 1.28s may be sufficient. At those levels I become cautious, and my expectation is that EUR/USD is likely to turn lower again, or at least it could struggle to get much higher than that. I would be similarly cautious about the recent bounce in EUR/GBP, it’s conceivable it might go as high as 0.7950 in the next few days, but there again, I see the euro as too vulnerable, and the currency pair is susceptible to fall back into its recent trend decline. These next few days should be great for sellers of euros, it might be some time before such a beneficial opportunity comes around again!

Other currency pairs have experienced similar moves – appreciation vs the dollar – over the last few days, and in general I would be cautious about how far their moves can go as well. USD/JPY might be an exception, but I will need to do a bit more research to understand the dynamics in that pair. Some of the comments from senior Japanese officials in the last week, have appeared hostile to further yen depreciation, but again.. these comments might just have been focussing on the pace.

Emerging market currencies like the South African Rand and Mexican Peso, if anything, saw even more aggressive appreciation against the dollar following the minutes, my guess is that there have been traders steadily accumulating short positions in these types of currencies in recent months. Those chaps are probably sitting at their desks this morning wondering where it all went wrong. Still I doubt this has led to outright losses for them, it’s more likely to be a significant reduction in their profits on the trade. The question needs to be asked though.. what happens to these currencies now? This is a different question to the euro. If the Fed is telling us to be more considered about when rates will need to be hiked, do we need to be as concerned about the financial stress Emerging economies are likely to experience? In my view, yes. It’s going to happen, rates will go up, maybe a bit later than the market has anticipated until recently, but as sure as taxes, they will go up. We should still have the same concerns for Emerging economies, laugh in the face of anyone who tells you that this time it will be different, it might not be an Asian crisis, or a Tequila crisis, but there will be some crisis, so some caution is warranted, we should just be a bit more discriminating this time as there are economies out there, which are still called developing that really aren’t!

We have the BoE rate decision today. Don’t expect much there. Perhaps more members will consider the possibility of hiking, but if the FOMC is any guide, the recent data out of the Eurozone might temper their positive view of the British economy’s prospects next year. Not much else to look forward to today, but really… isn’t all this enough?

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

Good morning

Bank of Japan held rates unchanged overnight which saw USDJPY drop to below the psychologically important 109.00 level. This is on the backdrop of the comments made by Japan’s Prime Minister Shinzo Abe saying weaker yen can hurt small companies and households, which led the JPY to strengthen against the USD. We are likely to see the USDJPY trade between 108.00-110.00 which has been the range of the past few weeks.

ECB’s Draghi (last Thursday) refrained from action, but also refrained from giving us any details. A timetable for the ABS (Asset Backed Securities) was all we got, but with the absence of a size for the ABS and without a clear mention of QE, markets got the impression that Draghi is not ready to do more just yet and the EUR reacted by rising through 1.2600. However, not acting doesn’t mean resolving the situation, and the EUR’s gains faded after touching a high of 1.2660. Draghi speaks later in the week.

The Australian Bank rate remains at 2.50% (unchanged) once again and the Bank reiterated that a period of stability is “prudent”. Inflation is expected to be consistent with the Banks target. Regarding the AUDUSD, the RBA repeated its stance that the currency “remains high by historical standards” despite the fall in September. RBA Governor Glenn Stevens has a dilemma: the economy is slowing but the housing sector is booming. Concerning the latter, Stevens says that “dwelling prices have continued to rise over recent months”.  There has been no hint of rate hikes nor other tools to curb the rise in Australian home prices. Regarding the job market, the central bank noted that recent jobs data has been volatile given the recent rise of 121k in employment numbers. However, it will take some time before unemployment falls consistently. RBA painted a balanced picture and left the Bank rate unchanged.

It is important to note that NO specific headline caused the USD to sell off late European session yesterday, rather it was a case of profit taking and the “hangover” effect from Friday’s strong NFP number. Basically we are back at the levels seen Pre-NFP numbers and in my opinion this sell off was widely anticipated given the recent strong rally in the USD. The TREND IS STILL INTACT, the market simply taking a breather in preparation for the next leg in the USD’s rally.

The USD’s recent strength looks to be being tested as major levels show some reluctance in breaking. The 110.00 level in USDJPY was rejected again yesterday for the second time, this on the back of no major news flow. GBPUSD also recouped the 1.6000 level and EURUSD also improved following the USD sell off. But many are likely to see this move as temporary and a possible buying opportunity. While further dollar weakness is possible and a further squeeze of the USD bulls cannot be ruled out. We then have to ask the question, what economic or fundamental indicators/events could see a sustained sell off in the USD (especially given the fact that the FED is priming the market for a rate hike in early 2015).

USDRUB briefly broke the 40.00 level before retreating to 39.77 as the wider USD weakness also affected the RUB. The move remains significant as we have seen the RUB suffer its biggest quarterly drop since Russia’s economic crisis back in 1999. The crisis was further exacerbated by rumours of capital controls being initiated in response to the selloff of Russian assets (cash/stocks/bonds). What we do know is further restraint in Ukraine will go a long way to bringing things back to normality.

So for today we continue to watch the USD closely to see if there is a continued USD sell off. US Redbook and Chain Store sales later will go some way to reinforce the USD’s positive sentiment.

Good luck and have a good day

Good morning

What a week for the USD. Powering ahead without any compunction for the rest. I have been saying it in just about EVERY BLOG we have written that the USD is unstoppable as the FED and ECB both (in their own ways) add fuel to the USD’s fire.  The numbers don’t lie. The rhetoric cannot be disputed. The trend cannot be broken. The USD is fast becoming the place to park your cash.

ECB once again disappointed last week. The US employment numbers on the other hand surprises positively. The USD attacked the strong employment number with vigor moving from (EURUSD) 1.2620 to 1.2520 and (GBPUSD) 1.6117 to 1.5985. This is a significant step taken towards our TARGET for EURUSD at 1.2000 for 31st December. I know I have said that many times, and I will continue to write it until it has been reached. And we still have the best part of 3 months to go.

So, after last week’s disappointing ECB meeting, where the Draghi provided little detail on the current QE program or potential expansion, the market will look for further colour in his speech on “the latest developments in Europe and in central banking” in Washington on Thursday. The ECB will have to extend its asset purchase program into European Gov. Bond’s by Q1 2015 to return inflation back to the close to 2% target over the medium term and to keep medium-term inflation expectations well anchored. This will in itself add support to the strong USD and reinforce Draghi’s call for a continued weaker EUR. There can be little debate about the merits of a weaker EUR, as it supports EU manufacturing and ultimately EU growth. Why fight a losing a losing battle. Let the EUR decline and with it strengthen the balance sheets of companies that ultimately need a weaker EUR.

The Reserve Bank of Australia rate decision (Tuesday) is widely expected to leave its policy rate unchanged at 2.5%, but there is a growing risk it may drop its forward guidance of a period of rate stability given recent declines in the AUD.

The Bank of England  is to meet on Thursday and is widely expected to leave the Bank Rate unchanged at 0.50% and therefore issue no statement. We continue to forecast significant GBP outperformance versus the EUR given the UK’s solid economic prospects and continue our call for earlier-than-expected rate rises from the BoE. As noted by MPC Members McCafferty and Weale in their dissents at the August and September MPC meetings, survey measures of wages show rapid acceleration, while firms appear to be absorbing GBP strength into higher margins rather than passing it on to consumers in the form of lower prices. However, the deterioration in the EU economy, the UK’s most important trading partner, represents a downside risk to GBP.

GOLD (as previously suggested by us), continues to FALL trading at $1193 as I write this. I was only a few weeks ago that I suggested (at $1240) that Gold was due a severe drop with a target of $1025!! So far SO GOOD!!!

This week will in all likelihood spring surprises and volatility. The Central Banks will continue to do “whatever it takes” to strengthen their economies and build growth numbers. Words will be carefully chosen, but what is certain is the market will drive the FX rates in line with the vastly different economic patterns we are witnessing. The USD will be the ultimate winner, but let’s not forget about the GBP and its own little tussle with the EUR. Target 0.7700 (1.3000) remains our short-medium term target. As things stand things are looking pretty good given our calls in recent months. We continue with our projections given any economic indicators to the contrary.

Good luck and have a great week ahead