20141128 – OPEC WEAK OR SMART?

Well the OPEC meeting came and went and there will be no agreement on a cut in production. There are two ways of looking at this.. 1) OPEC is weak and the cartel is no longer the worlds marginal supplier of oil 2) The Saudi’s are long term strategic geniuses. Nothing needs to be said about option 1, but the reason I pose option 2 is that the cost of producing all that shale gas is probably in the $65 – $75 price per barrel range. If that’s the case then we are approaching levels which might be uneconomic in the US, so why not cause them some pain? It may be that we are already close to base levels for the price of oil, it would be an odd choice to make a stand here. Perhaps I give the cartel too much credit, but it does merit further investigation. Another interesting question that could be posed by recent events… the tax share of pump prices in the US is negligible to say the least, especially in comparison to the 75% we see in major European countries, even Turkey’s tax take from a litre of petrol is around the 70% mark. I’ve often seen this as almost indefensible on the part of the United States, which leads me to my point… we’ve just seen a near 30% decline in pump prices and the US has a huge fiscal deficit… would this not be a great time to increase the tax share of pump prices while the consumer is getting substantial relief from cheaper oil? At one stroke this would probably solve the fiscal issues in the US, and why would the consumer grumble.. pump prices would still be lower than a few months back? President Obama, why don’t you do this? I’m not sure there’s much that can damage your approval ratings anyway, so why don’t you do something for your legacy? For the environment you claim to care about, and for the future Americans who’ll have to pay back all that government debt? Common sense right? There are many developing economies who could phase out subsidies at this point as well, but to my knowledge India is one of the few who’ve done this. Well done Mr Modi, Nigeria are you watching?


Back to the currency markets, not surprisingly the oil rich currencies didn’t take the OPEC news too well yesterday. For example USD/RUB made new record highs yesterday and USD/MXN also made new year to date highs. Expect continuing depreciation pressures for currencies with high exposure to oil production.


Overnight the inflation data coming out of Japan was disappointing if you’re a board member of the Bank of Japan, but only slightly so, with slightly lower growth in prices, albeit largely what was expected. The unemployment rate was slightly lower though, but weaker than expected retail sales and slower industrial production are a counter to that happy employment news. Japan is definitely not one of the shining lights in the global economy at the moment, that’s for sure.


Speaking about unemployment rates, Germany published its numbers yesterday, which were in line with expectations. And more importantly Eurozone sentiment data, both for businesses and consumers was somewhat better than forecast. Not bad given all the doom and gloom! Unfortunately retail sales in Germany have come out this morning and while expected, it does show a bit of a decline, we can only hope that German consumers will get into the Christmas spirit in the coming weeks. At least the Spanish and Swedish retail sales data which have also come out this morning has been more positive… at least in absolute trend terms. However while Swedish data was better than expected, the Spanish data was a bit worse.


The dollar gradually strengthened yesterday against the majors. As I mentioned, we were at levels where a return to trend in EUR/USD and GBP/USD was possible, but USD/JPY showed signs of a more assertive dollar as well, something I had less confidence in (see yesterday’s blog). As they say, a high tide carries all boats. We remain unclear about whether this is just a ranging move with a continuing period of consolidation, for now we would need some sort of impulsive move to signal the dollar trend is in play again. Until then, I prefer to monitor the situation with a lower degree of confidence in the near term path than I would generally like.


Today is likely to be a fairly slow day, there is an assortment of macro data coming out, but nothing of huge consequences. Furthermore our cousins across the pond are likely to be sluggish in the aftermath of all that turkey stuffing yesterday. Volumes are likely to be less than normal, so of course there will be an outside chance of non-standard moves, but I’m not anticipating much excitement among the major currencies, and probably expect continuing pressure on some developing market currencies… especially those belonging to the more resource blessed economies.


GDP growth in the UK was exactly as forecast at 3%, and the same as the year on year comparison at the end of the last quarter. That’s decent I say. And this morning those solid numbers have been followed by better than forecast growth in Spain with the year on year comparison to Q3 now at 1.6%, the expected improvement from the prior periods 1.3% gain. There might be some concern at the accelerating falls in prices highlighted by the -0.4% inflation release which was more than had been forecast, and a lot more than the -0.1% shown at the prior period. I’ve said it before, and I’ll say it again.. I don’t see what’s wrong with falling prices. Yes there are specific circumstances where it might be a cause for concern, but I’m not even sure if the situation is ever properly assessed on its merits these days. This will be further ammunition for Mr Draghi as he seeks to expand the ECB’s balance sheet with further asset purchases. A little later on this morning we will get employment data from Germany and Italy, sentiment data for the Eurozone, and perhaps most important of all the Bundesbank President will speak just after noon. It’s no secret that there is a difference of opinion between German monetary authorities and Mr Draghi, it should be interesting to hear what Mr Weidmann has to say. No data out of the US, as today is Thanksgiving Day. Markets should be relatively subdued as the big boys across the pond dig into their turkey.


The oil price continues to fall, with Brent priced for January delivery below $77. The squeeze on those resource rich markets will continue as Saudi Arabia and its neighbours appear reluctant to cut back on production. We’ll know more later today as an OPEC meeting in Vienna will provide further insight into the thinking of the cartel. When I started in the markets years ago, OPEC meetings were market moving events. I can’t honestly say I recall the last time I even noticed when OPEC was meeting! I question whether they are even the key marginal producer anymore. Shale gas and fracking in the US have done tremendous damage to the pricing power of the cartel, and we will start to understand more about the global implications in the months and years to come. I suspect there are consequences we haven’t even considered yet, not least middle east peace prospects, but it is what it is. For most of us, lower energy prices are unquestionably a good thing, and I remain very positive about the boost to consumption we should expect over the next half year. If there is one negative, it’s the opportunity that will be given to major central banks to further delay rate normalisation. Interest rates MUST start to go up in economies that are recovering robustly in my view. In both the United States and the UK there is a strong case to allow the market to clear on its own terms, and end this prolonged period of financial repression. The longer it’s delayed the more painful the endgame will be. The way I see it, there are businesses and individuals who are borrowing at favourable rates that would not be making such decisions if interest rates were at proper levels. This is not a good thing. How will they cope when rates normalise? The world has gone bonkers in my view and the sooner central banks stop behaving like ostriches the better all our lives will be!


The dollar remains in consolidation mode, which is not a bad thing in my view. A good rest as the market absorbs the moves over the last few months is just what is needed for a healthy trend to be sustainable. One could argue that both EUR/USD and GBP/USD are approaching levels where the bearish trend can reassert itself, however I have questions about USD/JPY. I think this pair is quite extended and I wouldn’t be shocked to see a move down to 116, perhaps even 115 before any real recovery gains strength. Japanese CPI data tonight could elicit moves in one direction or another, so that could be an interesting risk event. In developing markets USD/MXN continues to trend higher, but we’re approaching multiple resistance zones. There was a time when the Mexican peso was more influenced by US equities than oil, but those times are past apparently. Still a cheaper more competitive currency and robust growth being experienced by its northern neighbour are just some of the reasons I remain bullish about economic prospects in Mexico over the next few years. The period of respite for the Russian rouble also appears to be over, it’s already weaker by about 0.7% this morning. No doubt another victim of happenings in the oil markets. We’ll continue to monitor events for you, and we will tweet (@parityfxplc) during the day if there is something we consider particularly noteworthy.


Strong US GDP growth numbers yesterday were well in excess of expectations, and risk markets agree, with the S&P 500 hovering around record highs. The year on year number to Q3 was up 3.9% versus economist forecasts averaging 3.3%, and the previous number at 3.5%. Today we get GDP numbers in the UK, and we’ll get to see if Cameron and Carney have merely been talking down sterling or if there is a genuine reason to be concerned about the headwinds from Europe. Year on year numbers to Q2 showed UK growth at 3%, and economists expect the same again. If, like the US, the number outperforms we could see some capitulation by traders who have accumulated short positions in pound sterling. One suspects however that the move will be felt more in the crosses than against the dollar, with EUR/GBP the most likely to fall.


The Nigerian Central bank effectively devalued the naira yesterday, moving the midpoint for the currency from USDNGN155 to USDNGN168. They also widened the band around the midpoint from a previous +/-3% to +/-5% in a welcome move to introduce greater flexibility, and perhaps a first step towards a freely floating currency. The aim is clearly to avoid depleting foreign exchange reserves, and hiking interest rates from 12% to 13% will help realise that goal. All in all this was a smart move as reserves have fallen by $2.6bn in the last couple of months. Other measures to try to drain liquidity from the system were also announced, but the reality is that if oil has another significant price fall, they may need to do more of the same. Oil remains a key part of the Nigerian economy, and although it’s a smaller share than previously thought it is the number one generator of foreign exchange in the Nigerian economy and responsible for the vast proportion of fiscal revenue. USD/NGN has since stabilised (for now) around 177. We will see other economies faced with similar tough choices as the dollar continues its seemingly unstoppable rise.


It is worth noting that even the usual suspects – Russian rouble and Brazilian Real – have stabilised in recent days. Perhaps the markets are taking a breather, it’s always dangerous if things move ahead of fundamentals. For my part, I continue to maintain a pessimistic view about developing countries in general (Mexico being an exception due to its fortuitous proximity to the United States) and I expect that the unwind of the dollar carry trade (even if it’s supplanted by yen and euro carry trades) will cause disruption in select economies. We would all do well to be vigilant.


Finally in terms of other data today, we should see durable goods numbers in the US, and personal income data, this should provide us with an update on this robust US recovery. It certainly looks like there is nothing on the horizon which will alter the prevailing view that the Federal Reserve will raise rates next year. I have been so impressed with the recovery in equity prices after the bond wobble in October, but at some point one would think this rally will end. With that in mind I’ve been trying to get a sense of what it would take to cause a reversal of this equities euphoria. I increasingly suspect that something we’re all hoping for – accelerating wage growth – may be one of the catalysts for a reassessment of current valuations. Over the last decade corporations have grabbed a larger and larger share of the pie. This is not sustainable in the long term, and how society enables employees to fight back and secure a more equitable share of the wealth pie is something I will continue to look at. On the one hand this will make any recovery more sustainable, but on the other hand it will be difficult to continue to justify current valuations in the equity markets. The fact that things like this take a considerable amount of time to turn around gives me some comfort that we shouldn’t see any collapses in the near term, but it’s certainly food for thought..

20141125 – ALL EYES ON U.S GDP

Good morning

At 13h30 (GMT) we will find out whether or not the US economy is continuing its present course or is it too suffering with the rest of the global economy. GDP for Q3 is expected to come in at +3.30% (3.50% for Q2). One has to think if the number is indeed as expected or better of course, the USD should/will renew its attack below 1.2355 lows, while if the number is lower than expected and a slowdown is in effect, the USD will weaken potentially through to 1.2525 (EUR) and 1.5850 (GBP). Excluding China for the purposes of writing this article, the U.S is the fastest growing western economy right now and as we all know from past experience, it is imperative that the U.S leads the way in global growth. The spin off effects for the rest of us are plain to see. It was only 3 months ago traders were betting the UK would jump the gun and raise rates in December/January. How quickly we forget and choose to forget. The FED is now proudly leading the pack again and I fully anticipate they will indeed be the first to pull the trigger on raising rates. However as the FED has repeated over and over again, they will not jump the gun and they will allow the markets to normalise and grow organically without official intervention. In other words the FED do not want to restart QE!!!

BoI left rates unchanged at 0.25% yesterday (as expected).  In line with global inflation, Israel’s CPI remains below their 1-3% target and the recent depreciation in the ILS will (hopefully) push inflation higher and more importantly help exports (as I mentioned yesterday). The CB is hoping that GDP numbers will rebound in Q4 given the cessation of conflict. What it certain is the Israeli CB is generally very proactive and therefore if in the new year inflation is still too low, do not be surprised to see ANOTHER rate cut (to 0.05%) allowing the ILS to weaken further in order to achieve their desired outcome. The issue all western economies are facing now is low inflation. So allowing your currency to weaken is certainly one way to fight back….

What about the GBP, well in 30 min (10h00) the Inflation Report is published by Gov. Carney. It is likely to have a major impact on the movement of GBP/USD if it comes out different to expectations. Inflation has been falling in the UK, and therefore his comments today could very well set the landscape for the rest of 2014. Tomorrow at 09h30 sees U.K GDP published at 09h30. U.K GDP has been stead over the past year (look at the strength of the GBP vs EUR) and the market is hoping for much of the same with a reading of 0.70-0.80% expected. Same outcome as I described above if the rate comes in above, below or as expected. I still feel very strongly about the medium to long term prospects for the GBP vs the EUR (NOT the USD!!!).  If I am completely honest, I think the way the GBP has fallen against the USD has been somewhat OVERDONE and as if it was being “manipulated” (there I said it). Are things really that bad that the GBP has fallen 10% against the USD in 3 months? Me thinks NOT, but then again what can I do about it other than write what I think.

Have a good day and good luck


Good morning

Stay SHORT EURUSD. Basically stay LONG the USD.

That’s all for today, have a good week and bi for now.

Only kidding. The big news over the weekend was in China. The first rate cut in over 2 years (July 2012) took some people by surprise. China cut the one year lending by 0.4% (to 5.60%) and the deposit rate by 0.25% to 2.75%. In addition, they raised the deposit rate ceiling to 20% above the benchmark from 10% beforehand. It also said that it advances reforms on interest rates. More stimulus in China implies more demand for Australian commodities (main trading partner). This comes amid a slump in prices of copper, iron ore and gold. The cut saw the Shanghai bourse rally 2%. We have been saying (frequently) how the data coming out of China has been disappointing and soft and that something was needed. Just like the BoJ and ECB, the PBoC have pulled the trigger to stem the bad news, or at least to slow it down.

Friday’s comments from ECB Pres. Draghi  that he deems inflation expectations ‘excessively low’ at shorter horizons. Additionally, he highlighted again the latest low reading of core inflation (0.7% y/y in October), underlining that low inflation was becoming more persistent while some temporary factors ( low oil prices, etc.) continue to be at play. Draghi’s dovish comments spooked the EUR which fell to 1.2358 before recovering to 1.2400 as I write this. I am afraid to say, but in reality since July this year, the writing has been on the wall for the EUR. They are going to find it more and more difficult to stabilise the situation and turn the corner. While the US is expanding, China and most of the rest of the EU’s partners (excl UK who are also slowing but still growing) are faltering.  Remember my target for 31 December (originally 1.20, amended to 1.22)….not far to go now. German IFO at 09h00 sees another slowdown expected (prev 103.20). There is just too many factors pulling the EU in different directions making Draghi’s job that much more difficult. What is not difficult then is to see how the EUR has fallen from 1.3750 in July to 1.2400 today (and more to come).

The pullback from 0.8025 (1.2460) to 0.7915 (1.2635) was a welcome break for UK importers (from the EU). The move was exacerbated by the break down between EURUSD and GBPUSD. That seems to have “come back” from the brink and I am expecting “normal” trading to resume and for the GBP to re-establish its dominance over the EUR. 0.7700 (1.3000) remains the target for most GBP traders, at least in the short term. Long term, well the sky is the limit. But let’s not worry about long term. Too many unknown factors.

As for GBPUSD, there really is not much I can say that will help boost the GBP. The market will continue to drive the USD stronger and therefore it is with regret that if you are selling GBP to buy USD, you should SERIOUSLY CONSIDER TAKING OUT A FORWARD HEDGE TO LOCK IN YOUR RATE. We will not be hanging around 1.56 (handle) for much longer!!

BoI likely to keep rates on hold at 0.25% later today. Weak data plus the deterioration in the ILS 3.8650 from 3.8000 last week is a significant game changer for the CB. Deflationary fears and worrying times in the EU and China has meant the CB must consider their next steps very carefully or risk plunging the economy into a recession. Of course the mid-east conflict (which never seems to want to go away despite years of trying) is weighing heavily on investors who have opted to jump ship into safer regions.

Have a good day ahead



Another day of push and pull between dollar sellers and dollar buyers generally. USD/JPY being a possible exception, as the candlesticks for that pair hints at an imminent reversal. This doesn’t need to be about the dollar, indeed I suspect in recent weeks following Kuroda’s efforts to push ahead with greater amounts of quantitative easing the market has been encouraged to take on a larger short position, than perhaps fundamentals can justify in the near term. Suffice it to say, I wouldn’t be shocked to see USD/JPY drop back towards 115 before it launches itself towards higher highs. We’ll need to see the price action today, but if we end the week looking like an evening star (strong up day 2 days ago, followed by indecision yesterday, followed by a strong down day today) then I would expect to see positions trimmed as the pattern is confirmed.


The S&P 500 made new record highs yesterday. These days I hardly know whether to bother making this point, it happens frequently enough! But it is worth noting that the market seems very comfortable with the reality that normalisation is likely to occur in mid-2015 in the United States. I’m being rather cautious by stressing “likely”, however I would probably assign it a higher probability than the market is doing right now, because I suspect the beneficial impact of lower oil prices will be keenly felt in the Eurozone and China in particular. Possibly less so in Japan, as the rate of depreciation of that currency is likely to dampen the impact of lower oil prices when translated into Japanese yen. For all the talk of the aggressive measures being taken in Japan, I still can’t get my head around who is actually supposed to benefit. I read an article in the FT yesterday where the point was made that since 2000, Japanese GDP per head has actually risen faster than in the United States! We often forget that when looking at aggregate numbers, demographics matter. And now we have policy in Japan which is unlikely to benefit the world’s oldest demographic. Call me naïve but QE might benefit the indebted Japanese government by reducing the real value of the debt, but I’m not so sure about the population. As for corporate Japan, can someone please explain to me who benefits? Large companies have already moved a sufficient proportion of their operations abroad that they are largely indifferent to the level of USD/JPY, and smaller companies don’t really export, in fact they tend to import more, so their costs are going up! Wonderful isn’t it? I’m sure there’s a clever reason for this (other than the obvious one I’ve pointed out), but I’m not seeing it…


The ECB has published the legal act for purchasing asset back securities (ABS), and the process could start as early as today. It’s worth noting that Eurozone bond yields are at record lows as inflation expectations continue to drive ECB fears about deflation. Indeed Mr Draghi has been talking about the anchoring of inflation expectations this morning in Frankfurt, as he talks up the ECB’s intention to purchase ABS. No doubt this is part of the reason EUR/GBP has dropped as I write this blog. It’s worth noting that this EUR/GBP move is consistent with my view that the pound sterling should outperform the euro as the bearish trend re-asserts itself.


On the data front there isn’t much to look forward to today. Perhaps Canadian inflation data can help us build up a picture of where global inflation is going to, and we get some fiscal numbers from the UK later on this morning. All in all, nothing too dramatic. We did see stable inflation data out of the US yesterday, with core numbers if anything slightly stronger (this was expected). This looks like a week that will end positively in terms of risk appetite. It’s just possible that the inception of ABS purchases in the Eurozone could provide the push to get the dollar rally going again… if only because it provides an incentive for players to start selling euros again. We’ll know more later on today. But it certainly makes EUR/JPY look bearish in the short term..


We got to study the minutes of the last FOMC Board meeting last night and there were a few things:


  • There was a broad consensus to end QE


  • While aware of the deterioration of economic conditions outside the US (China, Japan, Eurozone), members were reluctant to mention it in their wording for fear that the market might assume a higher degree of concern than would have been justified


  • There was a balanced debate about how long to keep the phrase “considerable time” with regards to the low Federal Funds Rate. They ended up adding language that indicated that rates could rise earlier or faster depending on the economic data


  • There really only seem to be two board members – Kocherlakota and Bullard – who remain firmly ensconced in the dovish camp. Yellen must be considered a neutral with a more pragmatic mind-set that will be governed by the evolving situation


The dollar rallied after the publication of the minutes, while equity markets are broadly the same. Treasury bonds did weaken a tad though.


This outcome is broadly in line with what we expected. If anything, the determination not to allow fears of China or Eurozone slowdowns to impact their generally positive view of US growth prospects is a reinforcement of how robust they believe the domestic situation to be. I see nothing here to change our view that the dollar can continue rallying in the weeks and months ahead.


On the data front this morning, composite manufacturing PMI has just come out of the Eurozone, and the numbers are weaker than previously, and certainly weaker than expected. German and French PMI data which came out a bit earlier was surprising in that the French data improved slightly while the German deteriorated. The key point being that, on the whole, Eurozone data continues to worsen. Later on this afternoon we can look forward to US inflation data with the core data expected to show a slight uptick.


Chinese PMI data also came out overnight and that was disappointing, further evidence that declining house prices are continuing to take a toll on the economy. This more than anything else I’ve mentioned will continue to put pressure on commodity prices generally. Life will stay tough for resource rich Emerging Country exporters – Nigeria, Russia, Brazil et al.


Looking at major currencies, USD/JPY is the clear standout that continues to forge ahead making new highs. The euro and pound sterling remain more range-bound than trending at the moment. It’s worth noting that the pound has suffered somewhat in comparison to the euro in recent days, but this might be coming to an end. I wouldn’t be surprised to see EUR/GBP start to get back into trend now as it seems to have done enough corrective of its bearish trend. For all the “hating” of sterling in recent weeks, it’s worth pointing out that economic conditions in the UK remain encouraging. Indeed the dark clouds are entirely due to fears of a spill-over from the continent.

20141119 – DEATH AND TAXES..

It’s become clear over the last few days that the dollar is consolidating against its main counterparts: EUR, JPY, GBP. How long this continues is difficult to determine at the moment, but we may have to wait sometime before the dollar continues to push ahead making new high after new high. This is happening with a backdrop of equities continuing to rally higher. I’m tempted to say that we are seeing the most orderly adjustment of a carry trade. Ever since the Global Financial Crisis (GFC) the dollar has been the funding currency of choice, but now the euro and Japanese yen are being used as funding alternatives while borrowed dollars are being bought back. This is consistent with a static Federal Reserve balance sheet while central bank balance sheets in the Eurozone and Japan are aggressively expanded. Perhaps fears about what will happen when the Federal Reserve starts to contract its balance sheet are overblown, if others are willing to step in and provide seemingly endless liquidity? Indeed it seems that there is nothing standing in the way of a continuing rise in equity markets in this benign scenario of rising equity markets and rising dollar. Perhaps. But those of us who can’t help but peer forward into the murky future will inwardly shudder at what’s to come… granted such an endgame is months if not years away. What is it they say though? Death and taxes? Perhaps there are other things we can’t escape from!


Later on this morning we’ll get the latest MPC minutes, which should shed some light on voting patterns for the recent Bank of England no rate change decision. Expectations are for the balance on the board to remain the same at 7 (no change) – 2 (hike). This is all somewhat overshadowed now by Governor Carney and Prime Minister Cameron’s recent comments. But it will still be interesting to see what happens to the pound sterling, as events like this can sometimes shed some light on where market positioning is. This seems to be the most significant thing we are waiting for on what is quite a data light morning and afternoon. The FOMC minutes at 7pm London time is obviously the big show. Despite the disappointing industrial production numbers I suspect that retail sales will have more of an impact on the thinking of Fed participants. In my view nothing much has happened, domestically, to cause much of a change in the belief that the US recovery is gathering pace. I will however, be interested to see if concerns about the less cheery macro picture in the Eurozone, China and Japan is used to caution investors about the likely speed of normalisation in the US. That would not be good for the dollar.


One other thing.. it’s been interesting observing gold over the last week. Rumours about its demise have been somewhat exaggerated. From an Elliottician’s (Elliott Wave Theory practitioner) this has not been a great surprise to me, but the fundamental argument for lower gold prices has been compelling. Perhaps for now with the dollar consolidating, demand in Asia and a Swiss referendum to force the Swiss National Bank to begin gold purchases, there’s just enough of a case to stop gold investors from dumping the yellow metal. Talking about the Swiss… EUR/CHF has been slowly trending lower and is now at 1.2012. A mere 12pips away from the magical 1.20 level where the SNB in recent years has aggressively defended the franc (from further appreciation). Clearly this move lower is in anticipation of the referendum. Keep an eye out for happenings on 30th November, because no matter what the outcome of the referendum is, there will be some movement. Remember before SNB intervention EUR/CHF was trading closer to 1.05. It feels like an awful lot of money is betting on the 1.20 barrier being discarded. I find it fascinating… in a world where the ECB is trying to expand its balance sheet and the BoJ is being even more aggressive doing the same thing, how can the SNB be expected to give up on the 1.20 level? If they do get ready for the most rapid appreciation of a currency… ever! As I said.. fascinating times!!


Good morning

So let’s quickly recap, Japan is back in a recession, PM David Cameron at the G20 meeting announces the world is facing the potential of yet another recession (Global conflict and Ebola – See our blog 20141015 where we discussed these and other reasons), CPI at 6 year lows, France and Germany narrowly escape recession, China data dreadful and a slowdown is plain to see, global corporate’s announcing profit warnings and England still has not beaten the Springboks since 2006 are just some of the events taking place around our beautiful globe.

So imagine you are a student studying economics, your lecturer is looking through the history books and the lecturer says events like these have led to investors flying out of stocks and into “safe haven” investments. I am afraid to say you might as well throw the books out the window and look at the reality of what’s happening. Big deal the Nikkei dropped 2.9% yesterday after GDP numbers were published, it rebounded back today as if yesterday was a dream. Japan’s Pm Shinzo Abe is holding a press conference at 10h10 GMT to potentially announce what they have decided with regard to (1) putting off another increase in sales tax till 2017 (scheduled to happen next year) and holding a snap election. USDJPY hover at 116.75 as I write this and another crack at 117.00 is looking likely not to mention 120.00 target short-medium term.

Basically my friend, global events have to a large degree been ignored. Given the all time lows in interest rates, bond yields are rubbish which leaves 2 avenues for investors to flock to (1) stocks, (2) property & (3) USD. I have tried to convince myself time and time again that stocks are overvalued and each time I get slapped in the face. The FTSE is trading just shy of 6700 while the S&P is 2041 and holding onto gains. No doubt October was an anomaly and can for the most part be ignored as a blip. A bloody frustrating one at that!! With the FED hike likely to happen in June/July 2015, investors are becoming more and more confident that equities will continue to perform well (especially in the US). Low inflation, falling unemployment are all giving stocks a lift. Global events therefore are irrelevant. It is all about the numbers right now and cheap money is driving investors to pile in to stocks. On a normal day this would scare the living daylights out of me (1999 crash). Then again today is just another day.

ECB Pres. Draghi announced that an expanded ECB purchase programme could include govt. bonds gave another lift to EU bourses. German Economic Sentiment due out at 10H00 GMT is pretty important as it will give us further evidence of the state of the EU’s largest economy and what potentially lies ahead.

At 09H30 this morning UK inflation numbers are published. Last month saw inflation drop to 1.20% and a poll of economists forecast 1.20% again. GBPUSD dropped below 1.5600 on Friday are US numbers boosted the USD. While we have seen GBPUSD rebound to 1.5720 in Asia Monday morning, the “Loony” has fallen back trading around 1.5655 as I write this. We are likely to see days when the GBP rallies back against the USD, but if I am perfectly honest, the writing is on the wall and given that the UK is now likely to hike rates AFTER the US, the GBP I am afraid to say is heading for the exit. It is strange (somewhat) because the UK economy is performing ok (better than EU, Japan, but slightly worse off than US) and so I expected GBP weakness but not at this rate. The GBP has even lost vs the EUR trading up from 0.7825 to 0.7975 as I write this.

So to sum up….BUY USD’s , BUY STOCK’S and bye bye fundamentals.

Have a good day and good luck


The dollar price action on Friday was intriguing, as we expected following some consolidation, the dollar strengthened on the back of stronger than expected Retail Sales in the US, and further reinforced by improving consumer sentiment as described by the University of Michigan consumer sentiment data which came in at the highest reading since July 2007. Consumer confidence is certainly picking up in the United States. But that was it.. as soon as the data was out the dollar rally ended with EUR/USD and GBP/USD achieving new highs for the day. When I look at weekly charts for these currencies in particular one could argue that we have strayed into oversold territory, however it often looks like this when a very strong trend is in place. For now we can say that the jury is out, and some caution is warranted as the technicals are no longer so clearly on our side.


Overnight 3rd quarter Japanese GDP growth revealed an unexpected deterioration in the 3rd largest economy in the world. Japan is now technically in recession. Perhaps now it’s easier to understand Governor Kuroda’s aggressive expansion of their quantitative easing programme now. It’s certainly difficult to see how a further increase in the sales tax can be pushed through in the short term, following the increase in April from 5% to 8%. The odds of an early election grow as Prime Minister Abe will need to reaffirm his mandate to push ahead with his policies to fix the problems that have ailed the Japanese economy for the last few decades.


In Emerging Markets the currencies of Brazil, Russia and Nigeria in particular, remain under pressure as a mixture of politics and lower oil prices have dramatically reduced confidence in these large economies. Things aren’t likely to change anytime soon as the price of Brent is now firmly established below $80. Indeed the current $78 price is at the precise level the Nigerian government has used for their fiscal calculations this year, while obviously their calculation is based on the average for the year, it does illustrate the difficulties the economy will face next year. The estimation used next year should be considerably lower than current levels which implies a substantial decline in government expenditure and a consequent major headwind for growth in 2015. No surprise that forward prices for the naira anticipate a further 15% depreciation of the Nigerian currency.


We expect trade data for some Eurozone economies to come out shortly with an improvement in the net trade numbers. And later on we look forward to Empire Manufacturing Index data in the US, as well as Industrial production and Capacity Utilisation data. The production data might soften a little if expectations are right, but the manufacturing index should post a strong improvement. The general theme remains in force with solid numbers coming out of the US, and data elsewhere likely to be on the disappointing side. This continues to support our view that the dollar will continue to strengthen in the weeks and months ahead, but we will keep a close watch on the technicals, the weekly chart as I mentioned earlier may be warning us that the dollar rally has moved further and quicker than is currently justified. It will take some time for us to determine if this is the case or not. But clearly we shouldn’t be shocked in the near term if we get a more range bound market with opportunities both to buy and sell the greenback.