Some better than expected Eurozone data this morning. Q3 GDP growth in both Germany and France was marginally better than expectations, and an improvement on the previous quarter. And so it’s not too surprising to see the euro has been strengthening in early trading. As I write Italian growth numbers have just come out… as expected Q3 GDP growth has slowed. Not good! Today is quite data rich with Eurozone inflation data, retail sales and sentiment data out of the US. It’s also worth noting some of the data from Asia, where Indian inflation has slowed more quickly than expected and Hong Kong GDP growth outperformed forecasts. So some good and some bad. I would definitely chalk up the Indian inflation data as a positive. If they can cut rates there and get growth accelerating again, that will be a positive for the global economy.

The dollar has continued its seemingly inexorable march higher overnight, but perhaps the mostly decent macro data this morning has helped because the usual suspects are off their lows versus the greenback. I speak of course of the euro, Japanese yen and pound sterling, but perhaps I’m quibbling. They’re not that far off the intra-day lows. This looks and feels like an environment where trends are going to continue, and the Nikkei making another year to date high is very supportive of this view.

It goes without saying that all is not well in the macro-sphere, and the news out of China continues to be quite sobering. Credit growth was slower than forecast with liquidity injections by the central bank unable to spur a pickup in lending. China has become a credit growth driven economy and so this is not great news. You look at China leveraged economies like Australia and it’s hard to feel optimistic. And recent comments from the Reserve Bank of Australia governor merely reinforce the view – he has suggested that the RBA has not ruled out intervention in the currency markets to lower the Australian dollar.

Before anyone shakes their head and says “just once I would like to hear of a central bank trying to support their currency!”, it’s worth pointing out that over the last month both the Russian and Nigerian central banks have done just that. It really starts to paint a picture of one set of currencies (primarily in developing economies) in free fall balanced by currencies (in advanced economies) which are trying to competitively devalue. And then there’s the mighty dollar: aloof, the benchmark against which all others are compared. It was only a few years ago where everyone wanted to sell dollars to buy… whatever! Even Brazilian super-models insisted on invoicing in euros. I would love to know if Giselle is still doing that… I’m betting not.

I suspect that the Eurozone inflation data and University of Michigan consumer sentiment numbers will be the key focus today. We’ll be keeping an eye on things as usual. Incidentally if you’re a denizen of the twitter-verse, we often tweet following significant events. You can find us at @parityfxplc. Have a wonderful weekend.

We mentioned the counterintuitive nature of the oil price decline in our blog some weeks ago, and it’s worth reiterating it, as the price of Brent hovers just above $80. That level is already a game changer for many Emerging Market oil producing countries in terms of their fiscal calculations. Russia is a great example of this, and so is Nigeria. In Nigeria the calculation for the current fiscal year assumes a $78 average price, and although we’re not quite there yet, we have already observed record lows in the naira, as hot money exits the equity and debt markets (we are currently making yet another record low in the naira this morning). When you consider that West African crude tends to be the sweetest, and thus most highly valued (Bonny light tends to trade at a premium to Brent) it’s fair to assume that there is still some margin between where real concern becomes necessary and where we are now. But it’s like musical chairs, no one wants to be the one without a chair, so you move early. Why do I bring this issue up? Well.. we also need to consider what the breakeven levels are for Shale production in the US… and my understanding is that it’s not that far away. So the question that needs to be asked is, what impact would a sub $70 price have on Shale producers? Admittedly the US economy is far far more than an oil producer, but if production slows and threatens the currently negligible level of oil imports, will that have an impact on the dollar? Possibly, but this is a new industry and we’ll need to see a real live stress test to get a better sense of the sensitivities. What does seem more likely is that we are actually closer to a base level for crude than we may realise. However that base level may not be high enough for producers like Russia and Nigeria to escape without bruising.

The quarterly Inflation Report was out yesterday morning, and the key takeaway is that the probability of rate hikes next year has receded. Inflation and growth forecasts have been trimmed and the GBP/USD weakened to new year to date lows yesterday. All I can say is… if sterling keeps weakening like this, then imported inflation might become enough of a factor to reignite rate hike chatter. Whether that encourages the Bank of England to do anything however is open to debate. Remember a few years ago when they weren’t reversing rate cuts as inflation ramped well above the target.. this is a central bank with an asymmetric reaction function. There was some positive news in the UK as well yesterday.. (quite apart from Ed Milliband’s recent leadership troubles of course!), as wage growth surpassed inflation for the first time in 5 years. That’s the one thing that might add a little backbone to Bank of England discussions next year.. if inflation and GDP do indeed decline as they suggest. Higher wage growth might just convince them that those moves are temporary.

Some Eurozone inflation data came out earlier this morning, with HICP data at the country level. Needless to say, barely any economy is generating annual inflation over 0.5%… indeed Germany looks relatively hyperinflationary with year on year inflation to October at 0.8%!! Mr Draghi has everything he needs to argue for as much monetary accommodation as he can get. This will continue to support the case for a weaker euro. Frankly the only thing that defenders of the euro (are there any?) can put forward at the moment is that the Eurozone as a whole runs a current account surplus. You only have to look at Japan over the last couple of decades.. stagnating economy.. check.. deflationary pressure.. check.. current account surplus.. check.. perceived resistance to aggressively fix structural problems.. check.. and what happened? The Japanese yen kept appreciating. I find it hard to believe that Mr Draghi.. who knows all this as well as anyone.. will permit the same to happen in Europe. But the fact he can’t unilaterally do what he feels is necessary means this view needs to be accounted for.

Not much going on data-wise for the rest of the day. There is an ECB monthly report which comes out shortly, I’m not sure much is expected from that. When I look at the chart for EUR/USD right now, it has the feel of a consolidation within a trend. We could see a bounce up to the mid 1.25s, but it seems clear to me that the risk is that the next impulsive move will be aggressively lower again. Same goes for just about everything else versus the dollar at the moment.

The German wholesale price index was published this morning with a 0.7% year on year decline in October, following a 0.9% decline in September, which to some extent illustrates the concerns the ECB has regarding deflationary risk… that is if you actually believe falling prices are a bad thing! Carrying on the same theme, the BDO Inflation Index in the UK, which predicts cost expectations for businesses over the next 3 months declined, again a signal that deflation could be around the corner. The collapse of crude oil prices over the last few months have been well documented, and no doubt are a significant component of this deflation paradigm. But what does this all mean? Clearly in Europe the reaction function of the central bank is going to be towards accommodation, but I just wonder about economies like the UK and US where we’re approaching full employment. I’m no economist, but it seems to me that the potential for stable or even falling prices in a low unemployment situation could be a great boost to confidence and consumption. Glass half full? Yes I’ll take it!

The Inflation Report in the UK will be published later this morning, with Governor Carney speaking. We will highlight any notable points in later blogs. It remains of great interest to see if the UK will be able to demonstrate the same confidence and resolve with the strength of its recovery that has recently been shown in the US. Clearly the proximity of the Eurozone and its economic importance, to the UK, has led to far more caution recently, but it will be important to see how the thought process of Bank of England board members evolves in coming months, particularly as we have general elections next year.

Over the last few days the dollar has stabilised against major currencies after its recent central bank inspired impulsive appreciation. Periods like this are inevitable in a trend, and indeed are welcome for sustainability of the trend. There has, however, been somewhat more pressure on less liquid developing market currencies, we expect this theme of developing currency underperformance to persist over the weeks and months ahead. Indeed we assert that the likelihood of crises occurring in emerging markets in 2015 is one of the key risks facing a global interlinked economy.

Nothing earth shaking on the data front today. But it’s worth noting that Japanese equities made a fresh intra-day 7 year high today. It wasn’t able to hold up into the close, but a new high is a new high, and this reinforces our suspicion that equities will continue to rally strongly into the yearend. What was more interesting however was the jump in Japanese bond yields as reports came out suggesting that the Japanese government could delay a sales tax hike and call early elections. They are in a really tricky spot and I don’t envy them… on the one hand they are running a horrendous fiscal deficit and have debt to GDP ratios that would force default in a smaller less developed economy. But on the other hand, Japan has one of the lowest sales tax rates in the world, and obviously a raising revenues from a tax hike would be a logical route to reducing the deficit, the only problem is that it will absolutely crush consumption, which is precisely what no one wants to see. The currency is being used as a panacea at a time when it is no longer even clear that a weaker currency actually benefits corporate Japan anymore, but far be it for me to argue with a central bank that is willing to dump the better part of a trillion dollar’s worth of yen on to an undesiring but credulous global market. You do what you have to, and others be damned!

Finally.. on a day when a group of major global banks have been fined a substantial amount for their part in the international FX probe, it highlights the importance and necessity of trust in relationships with those who are responsible for dealing your FX. We at ParityFX consider trust to be essential for good business practice. In light of this, we are delighted with the partnerships we have formed with you over the past year and we are thoroughly excited about the opportunities we see in the future.

Good morning

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

Good morning

The GBP will be in the spotlight this week with the BoE’s Quarterly Inflation Report and employment data on Wednesday. The Inflation Report is generally regarded as a highlight given it may shed further light on the BoE’s economic assessment. The BoE’s forecasts are likely to show a weaker near-term inflation profile and a marginally stronger labour market outlook with growth expectations tuned down given the recent “weaker” data and external factors (EU and China growth). Given the recent data and as mentioned previously, we now anticipate the first rate hike to take place either late Q1 2015 (though this might be way too early) OR after the local elections (i.e., June 2015 – a favourite). Now that the FOMC, ECB and BoJ announcements are out the way the market can now get back to trading the trend and fundamental risk. As I have said repeatedly, the USD rally remains intact and a favourite of ours is the GBP vs the EUR. I expect the GBP to rally not only to 1.30 but well beyond.

China data this week very important to the likes of the AUD and NZD. China Industrial Production on Thursday anticipated to show a slowdown or at least matching 8% from September.  Overall the recent data out of China continues to disappoint though not totally unexpected. This does not bode well for the rest given the reliance on Chinese demand to aid growth. What is quite visible right now is the dichotomy between growth in the US, China, EU, and Asia. What’s more and what WORRIES ME NO END are the vastly different policies being initiated in these regions. It is like one is pulling and one is pushing…with the end result being the elastic snaps or someone ends up on the floor down and out. The spillover effects are going to be horrible. I just don’t trust what I am seeing right now and my gut tells me we are heading into a MAJOR STORM.

The data calendar in the US and EU is light this week, with German GDP, EU CPI and US Retail Sales due Friday being the most important. Forecasts for all 3 show a similar pattern to the last posting and I do not foresee much change either. Overall growth patterns outside the US and UK continue to disappoint with the pattern likely to remain static until the growth from the US start to spill over east and west. I am interested to see German numbers in particular given the reliance the EU puts on Germany coming to the rescue. As we have stated before, labour laws our draconian in some EU countries and before we see the EU get back to growth seen in the US, a major overhaul is needed. Simply put, labour laws need to be uniform across the EU.

I know I mention the ZAR, TRY, ILS etc. (EM currencies), but perhaps one currency that deserves its place among this group in the Nigerian Naira (USDNGN) especially after Nigeria overtook South Africa as the largest economy in Africa (recently). The NGN weakened again (from 162.00 in September) after speculation of a devaluation surfaced and boiled over. Starting the rout on Thursday and spilling over to Friday, the NGN topped 170 Ag the USD before CB intervention brought it back to around 166.25 as I write this. Given the stability of the currency all year (161-163) the fall out from a lower oil price had to play catch up, given the importance and reliance the economy has on this sector. The 12 month NDF (non-deliverable forward) weakened to 198.30 on Friday leaving importers and those with USD and EUR debt (who have not hedged) starring down an empty pit. This is the reason WHY we sent out that piece last week for SME’s and the IMPORTANCE OF HEDGING FX in the face of FX volatility.

Have a good week ahead and good luck

With non-farm payrolls out of the US later today we’re capping off a 10 day period which we may well look back upon in the months and years ahead as DEFINING. What have we seen so far?

1. The end of balance sheet expansion in the US. A statement that was more hawkish than expected from the FOMC, with hikes in the Fed Funds rate by mid-2015 a distinct possibility. Say it with me… dollar positive!
2. A shock announcement from the Bank of Japan with an announcement that the expansion of their balance sheet would be unexpectedly increased, and actions from the State Pension which will shift portfolio allocations away from bonds to more risky equities. Say it with me…yen negative!
3. The ECB and Bank of England keeping rates unchanged at near zero levels, and Mario Draghi announcing the intention to expand the ECB balance sheet by one half, or I might as well say it.. € 1trn. Say it with me… euro negative!

And now today we have the US employment data announcement. If it’s a good one, it will confirm the strength of the US economy, and our expectations for rate hikes next year. Call me cynical, but surely the Heads of the BoJ, ECB and Federal Reserve have been in touch. I smell coordination here. In the end, given the market’s reaction to the FOMC statement, I’m not even sure they needed it, but as they say (at least those of us who like playing chess).. over-protect your strength. We just may get out of this global crisis in an orderly fashion of some sort. Don’t get me wrong, I see troubles in select Emerging Markets on the horizon, and we will all do well to be vigilant, but in terms of the bigger picture this is surely the best outcome.

Looking ahead to the data today, having seen the ISM non-manufacturing employment data jumping up to a 9yr high mid-week, it’s hard not be extremely bullish about employment prospects in the US and the unemployment rate is already at 5.9%. If we start seeing accelerating employment growth the Federal Reserve may even have to seriously consider pre-empting the risk of a meaningful jump in wage growth. That means interest rates higher, earlier, the US consumer potentially resuming the role they’ve played for decades.. saviour of the global economy. And here we were just a few years ago talking about BRICS, secular decline of the US economy etc etc.. we should all be ashamed of ourselves!

It’s no surprise that over the past week, we have seen US equities make new record highs, Japanese equities making multi-year highs, and asset markets in general rallying. Folks, we could be in for a tremendous rally into yearend. There has been a lot of fear, and as this leaks out of the market with massive amounts of liquidity being added/created, there is only one thing to do and that is to buy equities. The big currency trades have official sanction: EUR/USD to go lower, USD/JPY to go higher and these, the two largest currency pairs will exert their gravitational effects on their satellite currencies. We have already seen USD/KRW making 12month highs in reaction to USD/JPY, it’s a reasonable assumption that more is to come.

As in all things human, it can’t all be silver linings. There are dark clouds in emerging markets with the weakness of oil prices. The naira is a case in point, the Nigerian currency is now weaker than it’s been for a decade. A decade! You could say it’s in free-fall, but that’s probably pushing it. But this is what you get when the substantive majority of government revenues are generated by the proceeds of crude oil sales. This is what you get when rainy day funds are squandered before it rains. This is what you get when you have elections within the next year and fiscal expenditures are not as controlled as perhaps they could have been. But Nigeria is not unique.. granted it’s problems might be.. but you only have to look at the Russian rouble or the Brazilian real to see my point. It’s fair to ask the question.. that if weakening of the euro and the Japanese yen is such a good thing for the Eurozone and the Japanese economy why can’t it be good to see some of these other currencies weaken? It’s apples and oranges. These emerging markets have a higher dependence on financing from abroad, and money is flowing out of these markets at a fairly rapid clip. At some point we will have to sit down and figure out when it becomes a serious problem. It might be that the overwhelmingly positive actions we’ve seen by major central banks in the last week will be seen as global growth positive and thus by extension we can have a calmer view of some of these Emerging Markets. But as I’ve said before, some of these markets have their own specific issues that require mitigation from within.

We are now in an era of macro-economic differentiation. There will be exciting opportunities for macro traders. We’ve seen similar times before, but they’re never ever quite the same. Is this 1983/4 or 1993/4? Who knows! For now it’s clear EUR/USD has official sanction to go lower and USD/JPY has official sanction to go higher. Need I say more?

Good morning

I cannot stress enough the importance of today’s ECB meeting. The question on everyone’s lips is, will Pres. Draghi stand up and deliver or will he continue on his present course and face additional criticism and scrutiny by the Germans (mainly).

The ECB meeting later today might turn out to be a non-event. After what we saw the BoJ do last Friday, while I don’t expect additional easing measures Draghi could surprise us with new larger QE measures. On the other hand he could simply argue that the ECB’s most recent programmes have only just started  and they need time to see the results before considering new measures. Draghi is likely to be grilled on the €1tn target to extend the balance sheet. Chances are he will downplay this question just as he did at the previous meeting. If this is the case, the USD could see another dip lower to recent lows. EURUSD has recovered from yesterday to trade just above 1.2500 as I write this and while I do not expect “fireworks” pre the announcement, traders could try pushing the EUR higher before initiating short EUR positions post the announcement.

GBPUSD traded UNDER 1.5900 after yesterday’s poor services PMI number. I wrote in the blog yesterday (pre number) that the writing was on the cards and a dip to a 1.58 handle was imminent. I got my wish. Since then, the GBP has mounted a comeback to trade pretty much at yesterday’s opening levels of 1.5980. Today sees Industrial and Manufacturing production numbers (9.30am) followed by the rate announcement at midday (no change expected). Depending how the EURUSD trades today, the GBP is in all likelihood going to follow suit. I could very well see GBP strengthening towards the ECB announcement before falling back into sub 1.60 territory.

Minneapolis Fed Kocherlakota was one of three Fed speakers yesterday. He repeated earlier comments that the “sluggish” inflation outlook, with inflation expected likely to be below 2% over the next couple years, intimating in effect that “it’s inappropriate for the FOMC to raise the target range for the Fed funds rate at any such meeting.” . Kockerlakota is the most dovish FOMC member and voted against the decision to end QE3. Fed members, Rosengren and Lacker did not however comment on the economy or on monetary policy in their speeches.

AUDUSD and NZDUSD both staged recovered overnight after hitting recent lows against the USD. AUDUSD fell to 0.8554 – a July 2010 low – thanks to yesterday’s strengthening in the USD. Overnight saw decent employment numbers which boosted the AUDUSD recovering some of the losses to trade up 0.16% to 0.8615. Overall my thoughts for the AUD and NZD remain the same, the strengthening US economy, coupled with a slowdown in China will lean heavily on the AUD/NZD and further losses are expected.

The RUB (Russia) continued in its plummet!!, hitting historic lows against both the EUR and USD after the Russian central bank announced that it would be capping the amount that it spends to defend the currency. In a statement released yesterday, the Russian Central Bank announced that: “In cases when the value of the bi-currency basket stays at the operational band’s boundaries or beyond it during the entire trading session, the volume of the Bank of Russia’s intervention will not exceed $350 million on that day,”
The move, which is seen as a further steps towards the liberalisation and free-float of the RUB, saw the currency fall to 45.3575 taking the losses for the year to over 22.5%. In currency market terms, this is BRUTAL. The sanctions and bad blood between Russia and the West continues unabated which is not helping much. I cannot imagine what the oligarchs must be feeling right now, though with falling oil and commodity prices the weaker RUB is going some way to slow the revenue from those sales (in USD and EUR mostly).

Lastly a quick note on the JPY, after crossing the psychologically important 115.00 threshold late Asian morning, the JPY fell back below that level on profit-taking. With the Nikkei falling 0.86%, the USDJPY fallout has been slowed. We are not expecting much change in the USDJPY trend, though caution is advised given the volatility levels in the JPY (1m 10.50%) with traders expecting more fireworks in the coming days.

Have a good day and good luck

Good morning

The USD strikes back, part XXXVVVIII.

Surely that says it all and I can stop writing now!!!

Reuters reported late yesterday that central bankers have started to question and challenge ECB Pres. Draghi’s leadership style. Draghi has been pushing monetary stimulus, though the degree of stimulus could stop (potentially slowing the EUR rout). The sources point to Draghi’s talk of enlarging the balance sheet by around a trillion EUR’s that was not agreed upon. They went further to point out that Draghi’s predecessor, Jean-Claude Trichet,  had a more open style. It would appear that the Germans prefer Trichet’s German style in handling inflation more than they oppose Draghi’s style. “Jean-Claude used to consult and communicate more, He worked a lot to build consensus,” in other words according to the Germans, he listened to them. This sent the EUR up from 1.2520 to 1.2570, though this mini pull back was short lived and with Europe coming in the EURUSD has been sold back to yesterday’s open of 1.2510 (as I write this).

In other news, German Chancellor Merkel said “Euro-zone economy has not developed as we would have wished due to internal factors and geopolitical reasons; no reason to remove economic sanctions against Russia; in long term we want to restore good relations with Russia; seeing continued stable domestic demand in Germany; situation in Euro-zone is still extremely fragile despite some progress; it is wrong to pit austerity against growth.” Ms Merkel is the consummate politician and I am sure she would like nothing more than to see relations with Russia restored to normality and see the EU LESS RELIANT on Germany to restore economic growth. I am afraid to say, neither are in her power to change though friendly coercion will go along way. In the mean-time I am afraid to say the EUR will continue to stare down the barrel of the shotgun.

After falling back yesterday to 113.17, USDJPY has resumed its sell off trading up to 114.50, levels last seen in November 2007. The fall out has set a 115.00 handle in JPY traders crosshairs. EURJPY has exploded over the past 2 weeks rising from 135.25 to trade currently at 143.25. As I said above, it is really all about the USD.

China services PMI came out weaker overnight at 52.90 from 53.50 sending AUDUSD into another bout of selling breaking through the psychological 0.8700 barrier. Trading just below for now, the AUD looks like it has more room to fall especially given the USD’s resurgence.

Following up from our prediction a few weeks ago, Gold  fell sharply this morning as the USD soared in the wake of U.S. midterm results (Republicans are BACK) posting a $20 loss. Closing at $1168, Gold has fallen to $1148 and our prediction of $1025 now seems a REAL possibility. In other words, this is not over by a long shot.

USDILS was trading sideways today at 3.7940. The shekel has gained some ground after being at its weakest in two years against the USD last week, and briefly breaking through the 3.8000 barrier. USDILS has weakened slightly from 3.7850 yesterday, and it would appear that the strength of the USD could push the ILS back over 3.8000 opening up the next target at 3.8150. In line with the ILS, the ZAR, TRY, MXN etc have all retreated this morning in line with expectations and in my opinion, there is more to come.

Last but not least, GBPUSD as mentioned yesterday found it almost impossible to remain above 1.6000 and has since fallen in line with the USD rally to 1.5950 with 1.5925 the next target before we break through into the 1.5800 handle. EURGBP fell back late yesterday trading up to 0.7860 (1.2720) before settling back. EURGBP is not really in the spotlight with all eyes on the USD.

Have a good day and good luck

Good morning

FX, Stocks, Bonds, Precious Metals and Oil markets find themselves awash with news resulting in rising volatility levels and increased uncertainty.

Let’s start with Oil: Oil prices tumbled to their lowest levels in more than two years after Saudi Arabia unexpectedly cut prices for crude sold to the U.S and in so doing paved the way for further declines and adding to pressure on American energy producers. While lower crude prices help consumers by reducing the amount they pay for gas, analysts said falling oil prices will in turn squeeze profit margins at many U.S. energy companies, particularly smaller firms or those with large debt levels. On the other hand, Saudi Arabia raised the prices for its oil in other locations (Asia), where the country had cut its prices for four consecutive months. Market makers had expected the Saudis to either cut prices in every major region, or to raise prices across the board. Asia has been an especially competitive market for exporters in recent months, so the focus on maintaining market share in the U.S. surprised traders, leading market makers to the conclude that these price differentials will ultimately lead to price wars. Bottom line, lower oil prices will add well needed additional income to the consumer. Let be honest, the fall was widely expected in many circles.

Overnight the RBoA (Australia) left interest rates unchanged (expected) at 2.50%. They repeated their forward guidance of steady rates despite the mixed data seen in September. The AUD has fallen over the past week from 0.8880 to 0.8710 presently. Not helping the AUD was the poor data out of China. It seems the AUD (and NZD) are being battered left right and centre. The RBA complaint about the higher exchange rate was toughened up a little, noting “the Australian dollar remains above most estimates of its fundamental value, particularly given the further declines in key commodity prices in recent months”.  The RBA repeated that interest rates have continued to edge lower amidst increased competition to lend. In short, we expect the AUD (and NZD) to remain under pressure vis-a-vis the USD in the near term.

USDJPY, WOW!! Japan returned from yesterday’s public holiday to see the USDJPY rise to a 7 year high, of 114.22 before falling back to 113.65. The JPY continues to be driven down by the BoJ’s unexpected stimulus package announcement on Friday that it would be expanding its easing programme from JPY60-70 trillion annually to JYP80 trillion. Asian stocks rose strongly overnight, with the Nikkei gaining to break 17,000 for the first time since 2007, before closing at 16,862.47, up 2.73 percent on the session. That means over the past 2 sessions the Nikkei has risen just shy of 8% which is quite simply astounding.

Dallas Fed President Richard Fisher said ‘raising the U.S. Federal Reserve’s key interest rate in late-summer of 2015, as financial markets generally expect, would be waiting too long.’

German government spokesman said ‘it is incomprehensive that official Russian voices should recognize separatist elections in Ukraine; current developments in Ukraine rule out premature lifting of sanctions, if situation worsens may need to think of further sanctions; it is up to Britain to make clear what role it wants to play in future in European Union.’

GBPUSD above 1.60 remains tenable despite yesterday’s better-than-expected UK Manufacturing PMI report. As I mentioned in yesterday’s blog, the market is still pricing in stronger economic growth in the USA compared with the UK economy.  As a result GBPUSD is MOST LIKELY to attempt another break below 1.5900 (October lows). The immediate support is located around 1.5925. Like other G7 and EM currencies, the GBP is at the mercy of the USD and expectation are growing by the hour (let alone the day) that further losses are expected. Unless we see (on Thursday) Gov. Draghi of the ECB launch a BoJ style stimulus package, the GBP will continue to suffer vs the USD. On the other hand, vs the EUR the GBP is trading just above the psychologically important 0.7800 (1.2820) level. We tried to take it out yesterday but it failed. I would hazard a guess that someone or something was protecting it. One thing is for certain, if we break that level we could see a 30-40 pip move quickly.

FX implied vol which had started to move higher during September, has gathered steam over the past 2 weeks as the USD makes new moves. The recent turmoil has left implied volatility higher  and implying that we have now entered a new environment in which financial markets are more vulnerable to bouts of panic. over the past 2 days we have seen the following rises, , USDJPY 1m is trading at 10.3/10.55 (+3%), EURUSD 1m 8.10/8.4 (+1.10%), GBPUSD 1m 6.00/6.30 (unch), EURGBP 1m 6.10/6.30 (+0.75%), EURCHF 1m 3.25/3.65 (+0.75%) to name but a few. EM currency volatility has not been sparred with the markets trading up 0.50% in the ZAR and ILS.

Good luck and have a good day ahead

ParityFX Plc is a financial services company that focuses primarily on executing currency transactions,  providing structured FX solutions and currency advice to SME’s, Large Caps and individuals. We aim to:

(1) Provide first class currency execution.

(2) Improve hedging efficiency and timing.

(3) Enhance treasury decision making:  lowering net interest expense; and reducing the volatility of your currency exposures.

(4) Provide a traders’ insight into the macro-economic landscape particularly where currencies are concerned.

Why Choose ParityFX

Over 40 years experience: Having a combined 40 years experience of trading currency and fixed income products, the founders of ParityFX have an extensive network of relationships in the financial community from which to leverage information. As a client you will get more than great execution, you will be provided with an insight into how FX markets are positioned and the key drivers that could impact your currency exposure. At ParityFX you won’t just be confronted with a web-interface or inexperienced staff handling your business. Our priority is to understand your needs and help make your exposure to the currency markets work to your advantage. Tailored Products: We offer a product tailored to your needs. If your business requires timely execution, we will provide it. However there are circumstances when immediate execution may not be optimal. Our knowledge of currency markets are a great asset to you, as our client, and we can assist your company in determining the optimal timing for FX execution. Our aim is to help you make the currency markets work for you. Financial Savings: Do not under-estimate the savings you can make.

Our execution can save you several percentage points relative to what you get from banks (and other MSB’s). But the potential for savings is greater. As a client you can make savings if you time your trades correctly to take advantage of volatile markets. You can make savings from adjusting your exposure to adverse moves that could impact the valuations of your foreign holdings. Over the financial year partnering with ParityFX can accumulate savings that will substantially impact your bottom line, and afford you greater control of your risk.

Foreign Exchange markets are exceptionally volatile as any business in the import/export business will tell you. Only recently Coca Cola and Procter and Gamble recently announced that the strong USD has weighed heavily on their earnings. In fact P&G noted that exposure to FX is expected to REDUCE sales growth by 2-3% for the year. That is a real loss (rather than an opportunity loss) and one that could have been avoided. FX risk management is a reality that cannot be ignored. This is especially true for companies like P&G and Coke in today’s globalised business market and volatile foreign exchange rates.

For any company that trades goods and services internationally, managing foreign exchange is not just prudent, it is necessary. There are a variety of methods businesses can use to limit currency risk; (1) Currency Forwards, (2) Currency Options and (3) Interest Rate Currency Swaps. Options (2) and (3) can be complicated and are leveraged meaning your losses can be exponential. For a company that relies on being financially prudent, I would suggest that unless you fully understand how these instruments work, you should stay away from them. Having said that, if you BUY a currency option your losses (if there are any) are limited to the amount of premium you spent to buy the option, however if you sell an option your losses can be unlimited.

That leaves companies with only 1 option, and that is using FX Forwards. They are easy to use and understand. Simply put, if you buy a forward outright the rate you set at the beginning is the rate you exchange your currency at on settlement date. So if you buy GBP against USD for say 28 November at 1.5997 (spot currently1.5998) then come the 28 November you will sell your USD and buy your GBP at 1.5997 (i.e., $100,000 = £62,511.72). If for example the inter-bank spot market for GBPUSD on the 28th Nov. is 1.6100 you will have made an opportunity profit of £399.92 ($100,000 x 1.6100=£62,111.80) because you had bought your GBP at 1.5997 rather than on the day at 1.6100. The opposite holds true if the inter-bank FX rate for GBPUSD was 1.5900 on settlement date. In this case you will have made an opportunity loss of £381.36 ($100,000 x 1.5900 = £62,893.08) because instead of buying at 1.5900 on the 28th Nov, you are buying your GBP at 1.5997. In other words, a FX forward is a contractual agreement to buy or sell currency at a FIXED RATE on a FIXED DATE.

Despite having a fixed FX forward contract you are still able to “unwind” this contract at any time before the settlement date, AND also “draw down” on your funds. In other words if you fixed the contract to SELL USD ($100,000) Ag BUY GBP for the 28th Nov. and say on the 14th Nov. you needed to sell $50,000 of the total that is entirely possible. By drawing down early it means that on final settlement the 28th Nov. you will only have remaining $50,000 to execute.

As your business grows and you become more and more global you MUST take care to factor in all the necessary risks of globalisation. FX risk as I mentioned above is one of those factors. So what are the things you should consider when dealing in FX? (1) The interest rate deferential between the 2 currencies, (2) the currencies volatility, (3) Fundamental risks (Earthquakes, floods, hurricanes, inflation, unemployment and war), (4) Economic risks (CPI, GDP, PMI, Retail Sales, Interest Rate decisions, (5) Commissions and costs related to transfer of funds, and most importantly (6) the FX rate itself. So many people through no fault of their own, simply ignore these issues to their detriment.

There will always be pitfalls when trading internationally. It is the fact of doing business globally that means you will be subject to the volatilities encountered in the FX markets. No business is immune to currency fluctuations (up or down). However as long as you are able to take the necessary steps to manage your exposure to foreign exchange markets, the volatility can be mitigated and even work to your benefit.

ParityFX charges NO commissions or fees when transacting FX on behalf of our clients. There are no hidden charges OR funny rates. It is really quite simple, we will provide you with a competitive foreign exchange rate quote at which your money can be converted. That is all there is to do!  We do not deal in “cash/notes” like a Bureau de Change, transactions are electronic, and we will make payments, for you, to your suppliers (or yourself) on your instruction.

ParityFX ALSO offers the ability to RECEIVE 3rd Party Payments. This is particularly useful if you sell your products on websites like AMAZON, eBay, ALIBABA etc. Instead of your revenues being converted back into pound sterling at punitive rates with limited transparency, we can receive your foreign currency earnings on your behalf, convert them at a competitive exchange rate and remit the funds directly to your bank account.

ParityFX also writes a DAILY FX COMMENTARY which our customers find incredibly useful. While banks often provide this service, a large percentage of SME’s are not able to access the publications as those commentaries are generally restricted to the large corporate who trades large amounts with the bank. Feel free to check out the blog directly www.blog.parityfx.com or alternatively you can access this information through our website address which is www.parityfx.com

Should you wish to discuss any of the above in more detail please feel free to call ParityFX on telephone number 0207 112 1530 

Alternatively you can write to me at david.rosenberg@parityfx.com

I hope this information helps to develop the best strategy for managing your foreign exchange needs.

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Opinions expressed are subject to change without notice and may differ or be contrary to the opinions or recommendations of ParityFX. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, ParityFX does not accept any liability arising from the use of this communication.