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