Good morning

Of all the comments made by ParityFX over the past few months, the one that has stood the test of time and been confirmed over and over again has been the prediction and thoughts regarding the USD. Since June/July this year when we started on this BUY THE USD journey, the market has been hell bent on driving this trend. We have seen some degree of consolidation and pull back recently (EUR pushed up to 1.2760), but that all came to an abrupt end last Wednesday evening when the FED officially ended QE (3). Since then the EURUSD has been as low as 1.2446 and as much as I try to find reasons to the contrary, it appears that the USD is now on the next LEG of its monumental journey. As you have read over and over again in this blog, my target for 31 December was 1.2000 (I did change that ever so slightly to 1.2200 as I thought I was a little too confident), the point is we are pretty much on track and baring a “horrific” Non-Farm Payrolls (NFP) number Friday or a surprise by the ECB on the Thursday, it looks like my prediction is getting warmer and warmer with each passing week.

The AUD started the week off with a beating, falling as much as 0.7% on average against its leading counterparts (AUDUSD down from 0.8815 to 0.8750). The drop followed a disappointing Chinese Manufacturing PMI reading released over the weekend (50.40). The report showed factory-sector activity growth unexpectedly slowed to the weakest in five months. The slowdown in China continues unabated. The BoJ stimulus package announced last Friday risks a currency war between China and Japan which could in turn engulf not only Asia but also the rest of the world. While it is all well and fine to “do whatever is necessary” to prop up one’s own economy, if by doing so you risk affecting your neighbours economy, these actions can a do end up causing rifts and counter-measures which over the long run can have lasting after-effects. That is why so many respected commentators were “shocked” by the extent of the BoJ’s QE package. It is as though they had complete disregard for those around them. Like our friend in Russia, it never pays off when you alienate your friends and trading partners. 

FED Pres. Yellen noted last week that “labour market conditions improved somewhat further, with solid job gains and a lower unemployment rate”. Furthermore she added “although inflation in the near term will likely be held down by lower energy prices … the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.” Whilst this somewhat hawkish tone surprised some commentators, it said what it had to say. Third quarter GDP (+3.50%) last Friday simply reinforced what we already knew that the world’s largest economy is continuing to expand at a healthy level. As i mentioned above, this Friday’s NFP number could very well be the “icing on the cake” in that a strong employment number/low unemployment number will go a long way to strengthen Pres. Yellen’s comments and drive the USD even stronger to EURUSD target levels.

This morning sees the UK Manufacturing PMI numbers. I would not be surprised to see further evidence of a weaker PMI number, adding further pressure to GBP vs the USD (especially). Whilst EURGBP continues to drive towards the lows of 0.7760 (1.2885), it is really GBPUSD that is currently being torn apart. For this reason I am afraid to say, GBPUSD will follow the USD’s lead and over the short-medium term I would not rule out seeing GBPUSD trading in the VERY low 1.50 handle. It is really all about the USD right now, and neither the GBP, EUR, AUD, NZD, JPY, ILS, ZAR, RUB etc will be able to stand in its way!!

USDILS continues to get pummelled trading just shy of 3.80 as we speak (having already broken that level on Friday before profit taking ensued). Following the BoI’s interest rate decision last week and comments by the central bank, ILS market makers have decided enough is enough and have driven the ILS to its weakest levels since 2012. The Israeli market like all other EM markets are prone to sudden volatile movements and given the trend in the USD right now, the ILS will join the list of G7 and EM currencies getting a USD whipping. Israel’s export industry must be rubbing their hands in glee right now. With Israel’s recent gas finds off the coast and high-tech industry that is USD based, at least the CB can be assured of raising its reserves.

Have a great week ahead and good luck