So Draghi announced his plans to purchase asset backed securities yesterday at the Naples meeting. But first I should start by just mentioning that rates were left unchanged – it’s not like they had much room to do more with that policy lever anyway! The overall impression was that the plan was vague. There’s no hard number in terms of the size of the purchases, and the ECB Governor appears to be backtracking from expanding the balance sheet of the central bank by 1trn euros. The net result? The euro rallied after his speech. From about 1.2615 when the ECB was all everyone was looking towards, EUR/USD bounced as high as 1.2690 before starting to tail off again. Analysts believe the hawks in the council won this battle, preventing the doves (Draghi included) from announcing anything too specific and bold. For now, the market has no choice but to doubt the ability of the central back to stop the balance sheet from continuing it’s gradual contraction. We’ll know more in November, but there doesn’t seem to be the requisite political support for the type of programme that would guarantee they achieve Draghi’s aims, you need France and Germany on board, and neither seem to want to play along.

Price action yesterday wasn’t just about the euro however. In the bigger picture the dollar weakened across the board. USD/JPY has been particularly interesting, with the possibility that we’ve seen the highs on that pair for the next few weeks, and possibly months. In addition to this, or perhaps because of this we also so swings in the equity markets with the S&P making a low in the late afternoon (a roughly 4.6% decline from the recent record high), before later making a recovery of sorts. Generally we’re continuing to see mild reversals from the extremes of yesterday this morning as positions are squared in front of the big data out this afternoon. For those who don’t know already it’s the first Friday of the new month which of course always means we get employment data out of the US. Employment growth, and more specifically earnings growth remains key to the Federal Reserve’s decision making process. While the employment data has been decent all year, members of the Reserve Board are unlikely to view the recovery as sustainable until workers are able to bid up wages, and thus boost demand in the US economy.

This morning we also expect retail sales data for the whole Eurozone. The expectation is for a slight decline in the year on year number, albeit growth is still anticipated. Disappointment here will do nothing to aid the health of the single currency. I must say that I’ve been expecting a recovery of sorts in EUR/USD for some time now, and it may yet happen, but it’s remarkable how resilient this trend has been to date. As I’ve mentioned before when both sides of the pair have themes backing their respective moves it’s hard to slow the trend.

Good morning

Stocks globally have taken an almighty pounding aided in part to yesterday’s weak US ISM Manufacturing index. Truth is this was just one reason among many that can be attributed to the recent turmoil in global stocks. Ebola, Ukraine, ISIL, ECB, US Secret Service, Bad hair day, a disappointing economic number, CRAZY IPO prices (Alibaba etc.)…the list goes on and on. Journalists (writing about it) and traders (trading it) alike are using any excuse to trim positions and take profits. The moves have been nothing short of spectacular with the Nikkei down a whopping 2.6% o/n in line with the rest of the world. S & P down 3.50%, Dow down 4.5%, FTSE down 4%….list goes on and on. After an eye watering rise, the markets have rebelled and found reason to unwind. Commentators and experts alike have all commented on the recent fall, and what we can expect to see next….but truth be told no one really knows. With a 10 fold increase in geo-political risk and uncertainty, as the saying goes, cash is king!! Maybe that the one and only reason investors are moving into cash.

Fed policy normalisation vs. continued or further easing from the BoJ and ECB are themes that have been widely responsible for the shift in investments. However, it was really in September that the market started to price in the divergence story more seriously. During July and August, the effect was largely confined to FX and rates, with the dollar rally picking up pace and short-end rates edging higher. However, following ECB easing in September, we started to see a clearer market reaction to the divergence theme. US and EM equities, the indices considered to be more sensitive to Fed normalisation, sold off. The dollar rally also became more broad-based, rallying against EM FX, as well as the majors such as the EUR, JPY, AUD, CAD, NZD & ZAR. As I have noted above, global uncertainty is forcing investors out of stocks (and to a degree bonds) and into cash and more specifically the USD. Even this morning after everything we have seen the USD is trading at EURUSD 1.2625 (high 1.2675), GBPUSD 1.6200.

Talking about the ECB, I CANNOT STRESS the importance of today’s meeting and resulting press conference. So much is riding on what pres. Draghi will have to say and more importantly what they at the ECB propose in terms of policy and Asset Backed Securities (ABS) repurchase. So what can we expect today:

1. Details on ABS: Draghi may lay out a timetable, and offer the market more insight into what instruments they will dive into.  I would imagine he might give us an idea about the SIZE, though I should warn that If he does mention a number and it’s big, the result is likely to be EUR positive while small size (recent LTRO of €85bn) is EUR negative. Without a number, the markets will probably be disappointed and sell the EUR.
2. View on inflation: Inflation is at rock bottom levels. Draghi is likely to continue denying deflation because any hint of it and the EUR gets hit
3. LTRO: In Spain, a better lending environment is already reality. However as we all saw, the disappointing TLTRO take up sent the EUR lower and so he must tread carefully
4. View on the EUR: Since June, EURUSD has fallen over 9%, and over 5% vs the GBP. Draghi is probably smiling inside (after all he did say the EUR was too strong and needed to fall). However, the ECB doesn’t officially have an exchange rate target, and Draghi is likely to be very careful here. As he has stated (AND PARITYFX MANY TIMES) a lower EUR is necessary to lift inflation, lift exports thus making EU goods more competitive and reducing the need for QE.  ParityFX has called for EURUSD value of 1.2000 by DEC 31, and I for one DO NOT SEE this as being an issue for the ECB to stomach. Draghi is letting global events and a re-positioning of global assets (including ECB LTRO and monetary policy changes) to drive the EUR and in so doing help his cause.  

Overall then it is my opinion that stocks will start to bottom out, with hot money investors likely to start looking for opportunities to turn the recent red tide around. Furthermore while the EUR could see occasional signs of life, the writing is on the wall and a continuation of the USD rally will continue until my target has been reached. That my dear reader means GBPUSD sub 1.6000 and EURGBP topping 0.7700 (1.3000). Looks like your holiday to Europe just got 5% cheaper since the end of the summer….6% -8% if you deal you FX with PARITYFX!!

Wishing you a good day ahead

Good morning

The USD index hit a new 4-year high of 86.218!!! I should just leave it there as that statement says it all.

What can be written that has not already been said over and over again. The USD trend remains strong, resilient and most of all persistent. Whenever we think there might be a pull back it falls flat and fails to materialise. Speculation grows unabated that the US economy is improving at such a pace that the FED will HAVE REASON to INCREASE interest rates sooner than the market anticipates. How many more times can I say this (I would like to think I was first)…rates WILL RISE in late Q1 early Q2 2015 (probably the former). While FED futures say something else you cannot escape the strong numbers we are witnessing on a daily basis. Non-Farm payrolls on Friday will re-confirm what we already know, the US is coming back strong beating all expectations. The fact is reader, when the US gets stronger the world gets stronger. Fact!!!

The EUR fell Tuesday and hit a fresh two-year trough. Data showed EU annual inflation cooled to 0.3 percent in September from 0.4%, intensifying the case for the ECB to offer more stimulus. The common currency fell as far as $1.2570 before managing a bounce above to $1.26 level. The euro lost 3.82 percent in September – its biggest decline in over two years. More importantly since JUNE WHEN PARITYFX CALLED FOR THE EUR DEMISE, the EUR has lost 9.13% and counting!! The ECB is forecast to hold interest rates at its meeting tomorrow, after unexpectedly dropping them to record lows back on the 4th Sept. Still, Draghi said last week policy makers “stand ready to use additional unconventional instruments” if necessary. He had better start using these instruments or face an even greater collapse. Having said that and having said this previously, Draghi is probably rubbing his hands in glee watching the EUR fall. After all he openly admitted the EUR (at 1.35) was too strong and needed to fall to make European goods more attractive internationally. You REAP WHAT YOU SOW.

USDJPY broke the psychological barrier at 110 (high 110.07) with the BOJ spokesman commenting “the weak Yen needs to be monitored”. As if!! You honestly think they will stand in the way of a moving freight train? I think not my dear reader. Like the EUR, it pays to have a weaker currency considering the importance of the export market to the Japanese economy.

Australia’s AUD slid to an eight-month low after retail sales grew less than economists forecast. The Aussie slid versus most of its 16 major peers after the statistics bureau said retail sales grew 0.1% in August, compared with the median forecast for a 0.4%. The Aussie fell to 0.8663, the weakest since 24th January 2014. Home prices in Australia’s capitals rose only marginally in September, slowing after three straight months of strong gains, with five of eight cities recording falls in the month. The slowdown should actually be welcomed by the RBA which recently has become concerned that a surge in borrowing to buy investment properties could lift prices to unsustainable levels.

USDZAR continues to track the weaker EUR trading at the days low of 11.3365 given that the EU is SA’s biggest trading partner. Coupled with a fall in GOLD (AGAIN PARITYFX CALLED THE DROP FROM $1240) the ZAR will feel the pinch and trade in line with the EUR. EEMEA currencies will in all likelihood feel the heat (even more) from a strong USD as investors switch out of risky EM trades to safer G7 trades.

GBPUSD really has not recovered after the Scottish Referendum. While initially rising to 1.6530 it has been one way traffic trading around 1.6200 and if I am completely honest I think we have seen the back of a strong GBP (vs. the USD) and we should now accept that it will trade, while not necessarily as bad as the EUR, in line with the hunger to hold USD. Vs. the EUR the GBP continues to shine trading through the psychological 0.7800 (1.2820) barrier currently trading around 0.7780 (1.2855). As noted previously we are looking for a short term target of 0.7700 (1.2987-1.3000).

Last but not least, my TARGET for EURUSD remains 1.2000 for year end with 1.2500 the next big psychological level.

Have a great day ahead