I thought it apt to use this phrase from “Toy Story” as it pretty much sums up everything ParityFX has been saying in recent months about the USD.
It does not matter what your throw at the markets (Stocks and the USD) right now. The trend remains strong, fundamentals are being ignored, economic data is brushed aside, China slowdown so what, QE ended by the FED ye we know that, corporate revenue/profit warning overvalued stocks bothered, oh come on just close your eyes and ignore everything around you and BUY, yes BUY BUY BUY.
While I am not surprised to see the USD continue to rally towards my target set for 31 December (originally 1.2000 revised slightly up to 1.2200), it is the stock market that has left me bruised, confused, dazed and beaten. The “collapse” in October was a BRILLIANT trap set to wash the market of day traders and those lacking deep pockets. It did the job and then some. S&P hitting new highs on a daily basis with no end in sight. Oil and gold getting smocked leaving investors jumping over each other to shore up their stock portfolios. We can make comparisons against what happened in the 90’s 30’s and just about every other decade which saw the bulls in charge. The fact is the world is a vastly different place with the US stepping back from QE and letting the economy drive itself, while the EU and Japan and throwing money around like there is no tomorrow.
The Nikkei ended up ANOTHER 2%, while USDJPY broke through 115.00 o/n to trade at 115.90 as I write this. The market is simply going with the flow. Once we get through 116.05/15 to be perfectly honest there is very little to stop it extending up to 120.00. As much as I would like to write something that could derail this prognosis, there is simply nothing. As a free floating currency, dictated too by the market, that is pretty much what we are seeing. Simply explained, there are MORE buyers than sellers!! There you have it. Japan’s current account showed a larger than expected surplus of 0.43 trillion for September. A marginal surplus of 0.03 trillion was expected. Earlier, Japan’s economy watches index actually dropped from 47.4 to 44 points. The government says the economy is showing signs of weakness. Could this trigger even more stimulus from the BoJ? There are rumours that Japanese PM Shinzo Abe may dissolve parliament on the back of a delay in the second tax hike.
The Russian CB finally completed its transition towards targeting inflation and allowing the RUB to “free float”. It abolished its FX intervention mechanism and RUB basket band. This was initially viewed as positive (of course) but that euphoria was short lived and as I write this USDRUB has broken through 46 handle again. Furthermore the CB has reduced Russia’s economic growth to o% given the friction with the west, not to mention the collapsing oil price. It looks like it is going to be a COLD winter in Russia. I just wonder for how long the elite/oligarchs in Russia will stand aside and allow their fortunes to dwindle. Then again ask Mr Khodorkovsky whether it was prudent to bite the hand that fed him. 10 years in Siberia saw his fortune fall from $15bn to a reported $170m. Welcome to the motherland!!!
On the EM front, the ZAR, ILS, TRY, NGN, BRL, MXN all posting losses on the back of the revival in the USD’s fortunes. The ZAR like the NGN traded softly and quietly under 11.00 and then with one strike it fell like a stone following the downgrade last week and the USD rally. Trading at 11.32 as I write this that equates to a 4.15% drop over the past week or so. Trading USDZAR can honestly be compared to swimming with the great white in Gansbaai. You never quite know when your time is up, though the odds are generally stacked against you. USDILS starts Tuesday on the back foot, comfortably breaking 3.80 (currently 3.82) on the back of the increased tension in Israel and the USD rally. EM currencies are going to be slapped and tickled.
One last comment, EURCHF – BE VERY VERY CAREFUL. As you know the SNB has set 1.2000 has the floor and re-iterated many times it will protect that level come hell or high water. Well the water is rising and with spot trading at 1.2025 as I write this, I would imagine the temperature inside the CB’s building is nearing boiling point. Do not be surprised if we see the SNB attack on a Friday at 5pm when liquidity has dried up and the moves are extreme. I have had the pleasure of being involved when something just like this happened and boy oh boy, did it go.
Have a good day ahead and good luck