The fall in equity prices last week reached levels that force me to reassess the significance. This is because it is the largest weekly fall (I’m referencing the S&P 500 which in my view is the most important equity index to follow) for quite a few years, when that happens you have to at least do your due diligence and ask why it’s happening. I’ll leave fundamentals to the smarter fellows, but from an Elliott Wave Theory perspective I am starting to wonder if we have completed wave 3 of the bull market rally since March 2009. I will have to do some more technical analysis before I can increase my level of conviction that this supposition is correct, but what this could mean is that we are in for a correction which could target the 1740 – 1850 zone (for Ellioticians this is the price territory of wave iv of 3). This would be a 10 – 15% correction, no small thing, but as I said a bit more analysis is required before I change my view that we should still attempt to recapture the highs by yearend. We have the years final FOMC meeting on Wednesday, it’s entirely possible that the smart money has been anticipating a change of wording and is de-risking in front of the announcement.


Japan’s Prime Minister, Shinzo Abe’s Liberal Democratic party cruised to an election victory over the weekend, strengthening his mandate to continue with his aggressive policies to force Japan out of deflation. The fact that year on year inflation in Japan has been above 2% for some time is no reason to exclude the narrative! This is likely to mean that the Japanese yen will continue its weakening path for the next few years. Expect to see USD/JPY at 130, even 140! Currency wars here we come. We can’t all have trade surpluses, but it seems everyone’s trying to achieve this. Good luck!


Oil prices are attempting to bounce this morning, unfortunately no one has told the Russian rouble which is already 0.7% weaker. The Financial Times reports, this morning that, Russian dollar denominated debt is now commanding yields slightly in excess of that experienced by Rwanda, clearly there are severe stresses impacting Russian assets, and a major crisis is unfolding, I have no idea what the endgame is, but it certainly doesn’t look like a pleasant outcome. Perhaps there are sensible reasons for diminishing risk sentiment after all!


For now the equities up-dollar up (equities down-dollar down) paradigm remains in force, which shows the US dollar is the poster currency for positive growth prospects. If my supposition that we are about to see a decent equity market correction is right, then we could also see the US dollar pullback versus other major currencies as well. There is no clear pattern this morning where the US dollar is concerned versus other major currencies. Up slightly versus the euro, but down against pound sterling; up against the New Zealand dollar, versus down slightly against the Australian dollar. No clear pattern, I’m afraid. The Japanese yen is slightly stronger versus the US dollar, which could be viewed as an interesting outcome, considering Prime Minister Abe’s electoral success. In Emerging market space the Russian rouble, Turkish Lira, and Indian rupee are all weaker against the dollar, but spare a thought for the Indonesian rupiah which is now weaker than it’s been since 1998. As I keep saying, the Russian rouble is by no means alone feeling the heat of falling commodity prices and imminent US interest rate normalisation.


We have Empire Manufacturing data later on today, which is expected to highlight robust conditions in the United States, as well as some US industrial production data, and CBI Industrial trends orders data in the UK. All in all a fairly light day for macro data. For my part I am focussed on the FOMC in a few days, that will really set the tone for the next few months.

20141212 – UP THEN DOWN, THEN..?

Risk sentiment is getting more and more interesting as we head into year-end, perhaps more importantly as we head into the final FOMC meeting of the year. After a strong bounce from a new low of the week yesterday, the S&P 500 promptly reversed in the London evening, and here we are now, making yet another low of the week. From a short term trend perspective, the signs aren’t great, it’s never a good thing to see a chart making lower highs and lower lows, anyone will tell you that’s bearish, and that’s what the S&P is telling us at the moment. Yesterday afternoon, after prices had ranged near the lows, equities impulsively bounced, perhaps inspired by strong retail sales data out of the U.S, but then as news of another collapse in oil prices and what looked like a Democrat revolt in budget discussions, all of the gains – 1.5% of them – were flushed away. And despite lawmakers voting to pass the spending bill and avoid another federal government shutdown in the United States there was no recovery in stock prices.


For oil watchers the price of WTI crude for January delivery is now trading below $60. I haven’t seen a breakdown of the yesterday’s sector performance of the S&P 500 yet, but I’m guessing energy stocks didn’t fare too well! I’m almost afraid of boring you about this.. but the Russian rouble continues its descent into worthlessness – in early September you needed 35 roubles to buy one US dollar, and now this morning after another 2% fall, you would need more than 57 roubles to buy that same dollar. Russia is one of the ten largest economies in the world with a gross domestic product in excess of $2trn, a 60% depreciation of its currency will have serious consequences for the global economy, not least for its major trading partners… think Germany, and think what the secondary impacts will be on Germany’s Eurozone dependents.


As usual the dollar and equities seem to be moving roughly in step, with the US dollar appreciating while equities recovered, and pulled back while the reversal happened. I am keeping a close eye on EUR/USD as I mentioned, but I no longer consider 1.2344 a key level. This is because from the lows on Monday EUR/USD has completed an impulsive move higher, reversed somewhat, and today appears to be moving even more aggressively higher. If we make significant new highs for the week today, which would involve levels well into the 1.25s, I may be forced to reassess what the recent price action means. For now I will say, that there is a chance we are seeing the start of a strong correction in the US dollar, which could see EUR/USD trading into the high 1.20s, it’s too soon to say that with any degree of confidence, but the probabilities are rising… first we need to make a new high for the week, surpassing 1.2496. Please note that this dollar correction is really only versus its major partners, Emerging market currencies are in their own unfolding nightmare.


In China, retail sales positively surprised, while industrial production disappointed. In a way, this is what the leadership wants – a rebalance from investment to consumer led growth, but somehow I doubt this will be welcomed as warmly as should be expected given the decelerating overall growth numbers in China. Emerging markets will continue to get squeezed on multiple fronts. The main ones being:


  • Falling oil prices
  • Slowing demand from China
  • Stronger US dollar augmenting dollar denominated debt
  • Exit of foreign investment funds


Later today we get more employment and industrial production data from the Eurozone; and consumer sentiment data in the United States. We will also get producer price index data, which may be of interest at the margin, to the Federal Reserve. I continue to maintain that oil prices are close to basing for now, but I can imagine bearish sentiment and fear is rampant at the moment. Perhaps it’s worth listening to Mr Buffett who once said something like, “I’m fearful while others are greedy, and greedy when they’re fearful”


After the recovery the day before yesterday, US equities reversed again and made a new low for the week. Not really what I was expecting, but given the pattern of equities up, US dollar up, and my concerns that the greenback might be due a correction, I guess I shouldn’t have been too surprised. It’s difficult to tell which is the tail and which is the dog with respect to equities and the dollar, but the relationship is holding firm with EUR/USD up slightly today, and USD/JPY has been as low as 117.44 this morning although it’s back on a 118 handle now. There is certainly no feeling of disorderly markets out there, but under the surface we are seeing moves and levels that take our minds back to the 2007 – 2008 period, which of course was when the global financial crisis happened. Whether you’re looking at Middle Eastern stock exchanges, or in Greece, or the volatility spike in Shanghai, there is something interesting happening, it’s obviously not under the surface, but it has the feeling of a wind that comes out of nowhere then dissipates, before a bigger storm. I’m not saying anything big is about to happen, but these aren’t quite the same markets that we had a year or two ago. Markets that were absolutely convinced that central bank largesse would continue indefinitely, these are most definitely not those markets.


Lots of inflation data coming out today in the Eurozone, so far we’ve seen year on year HICP is up 0.6% in November, and 0.4% in France for the same period. Swedish year on year CPI down 0.2%, and while not a Eurozone economy it is inextricably linked and exposed to the same forces. More ammunition for Mr Draghi then! Meanwhile, elsewhere in the world the IMF has warned that South Africa needs to address structural problems that have led to a disturbing collapse in its potential growth rate, while Prime Minister Modi in India has announced plans to sell stakes in state backed banks… could India become a more dynamic economy? Definitely going the right way about it!


These days our blogs wouldn’t be the same if we don’t at least comment on energy prices.. brent crude made new year to date lows yesterday and we remain below $65 this morning. Perhaps it’s not all doom and gloom however, because I am starting to see signs of momentum divergence now, a recovery of some sort is not far away. I wouldn’t hold out too much hope for anything significant, but at least some relief from new daily lows would be welcome respite for energy producers. Will that be enough to inspire recoveries in the currencies of oil producing economies? Colour me sceptical, once the vulnerabilities of these economies has been exposed by collapsing oil prices, don’t be surprised if other issues come to light.


Over the last 12 hours we’ve seen no change in the policy settings of both the RBNZ and SNB, the central banks of New Zealand and Switzerland respectively. But the Norwegian central bank has just weighed in with an unexpected cut, moving the benchmark rate from 1.5% to 1.25%. This is a surprise, but then again perhaps it shouldn’t be, Norway while a very advanced economy is also heavily oil dependent. Perhaps this move is a reaction to the collapse of energy prices, the Norwegian krone has just fallen 2.3% versus the euro, further evidence that the market has been blindsided by Norgesbank.


Later on this morning we will see GDP data for the Irish economy which should be impressive… Ireland really is the poster child for taking your medicine after years of profligacy, if only it was so easy elsewhere in Euroland. The other data of note this afternoon will be retail sales in the United States, I don’t believe the numbers should be dramatic either way, and I certainly don’t anticipate something that will have much of an impact on asset prices. What is of far more interest to me today, is whether developed market equities will be able to form a base today? We are getting close enough to the FOMC meeting next Wednesday that I am starting to question if a strong recovery is possible before it. Let’s remember that the wording of the Federal Reserve statement next Wednesday is likely to be the last really significant macro event before the end of the year. Will they make changes to their guidance? Will we get a better idea about when the process of normalisation will start? These are huge questions and will impact activity in the first quarter of 2015. These questions will also most certainly influence where equities and the dollar go from here to the end of the year.


As I’ve said over the last few days, that I am concerned about the state of the dollar trend. EUR/USD trades near 1.2450 at the moment, and the trigger level (in my view) for new lows is some way below at 1.2344. We’ll tweet during the day if that level gets taken out, but it’s really hard to imagine it will be…


Chinese inflation continues its downward trend according to published numbers this morning, and producer prices remain entrenched in negative territory, as the disinflationary impact of the real estate slowdown persists. Looking at the global impact of what’s happening in China, we see the other side of the two fold reason for pressure on oil prices. We’ve talked about the supply side, with the Shale gas revolution in the United States eliminating US energy dependency on OPEC (indeed we expect the United States to become a net energy exporter!), but we also have the demand side with China the huge energy importer requiring less oil in a slowing economy. When you consider the near future the demand side looks to be more at risk at the moment. Yes, if oil prices go much lower, many of the higher cost producers in the U.S will probably have to slow production down significantly – my understanding is that production costs range from as low as $40 to as high as $90. Already we have so called extreme oil bears, talking about $40 crude oil, it must make OPEC members shudder! I don’t want to bore you, but the likes of the Russian rouble and Nigerian naira continue to hover near their year to date (and record) lows, this will continue until there some respite for energy prices.


Looking at the major currencies, yesterday brought respite from the dollar trend with currencies like the euro, Japanese yen and pound sterling strengthening versus the greenback. As I mentioned then, we are now at interesting levels in the dollar trend, I have observed signs of momentum extremes and divergences…. What does this mean? It means that there is a very real risk of the dollar correcting lower (at least versus the other major currencies) in the near term. This certainly doesn’t mean an end to the bull trend, but the move could be of reasonable significance. The frustration is though, that the possibility also exists – in a powerful trend – for a continuation higher for the dollar, I really don’t know where we go from here. One of the key levels I am monitoring now is 1.2344 in EUR/USD, if we can hold above this level today then my conviction of a dollar correction will increase somewhat. However if we go through this level, then from an Elliott Wave Theory perspective, the risk is that we make new lows with the possibility of another 4 – 5% decline. This is what we’re talking about, we’re at key levels that could imply 4 – 5% moves either way. On the horizon the only event I can see that will provide us with enough impetus, one way or another, is the FOMC meeting on Wednesday 17th December. There isn’t much to look forward to data-wise today.


As I mentioned yesterday I didn’t see much reason for sustained falls in equity prices despite the frothy price action in China; and the bear market conditions in some of the more oil rich developing market bourses, and sure enough we saw some recovery in US equity prices. I would expect this to continue into yearend, absent of any earthquakes from next week’s Federal Reserve meeting. Book squaring and performance chasing are likely to be the name of the game in the final weeks of 2014.


I made some comments about corporate debt in developing economies in yesterday’s blog, so I had better follow up on that. Over the last few years, large companies in emerging markets have taken advantage of the zero interest rate environment in major economies and borrowed at cheap rates. By some measures, the exposure is in the trillions of dollars. And here we are now in 2014, with the dollar having appreciated strongly against many of the home currencies of these corporates. For some of these corporates, times are surely getting tougher, particularly if they are not multi-national companies earning a substantial amount of their revenues in dollars or at least in currencies that have been able to hold their value versus the greenback. Why is this a problem? Consider an imaginary Russian company that borrowed dollars – which by the way would have been an entirely reasonable thing to do if you could pay loan rates of 5% for US debt why borrow at 15% in Russia? – those loans, given the roubles 80% devaluation versus the dollar are now 80% larger. If that’s not bad enough the Russian economy has slowed down substantially, so you’re hit by a larger debt burden and slowing revenues. This type of scenario might be more common than we think, and events like this were responsible for the Asian crisis in 1997 and the Tequila crisis in Mexico in 1994. I certainly don’t have enough specific data to identify the economies where these sorts of corporate risk are significant, but we all need to be vigilant. The times were too good folks. If you have a party with cocktails and champagne flowing freely, don’t be surprised when some people have hangovers the next day!


Risk markets have been gently correcting for the last 24 hours with the benchmark US equity market the S&P 500 down 1.2% cumulative over that period. Meanwhile the Shanghai Composite, the main Chinese index dropped 8% from its intra-day peak ending the day 5.4% lower – its biggest one day loss in five years. On the face of it, it seems like there might be something in the air, I’m not convinced but for the record, here are some other noteworthy things going on this morning…


  • Crude oil prices closed at another new year to date low yesterday, with the price of Brent for January delivery ending at $65.34. WTI closed near $62


  • Tesco PLC shares have dropped as much as 15% this morning on the back of a profit warning


  • Greek bond yields are back under pressure after the government called snap presidential elections, why should an election cause this you ask? Syriza the far left party could win. They could put at risk all the hard won reforms the current government has engineered. Remember Greece is by no means out of the woods yet.


  • The Russian rouble is again under pressure…not exactly a shock given what I just told you about oil prices. But spare a thought for bond yields there. They are over 200bps higher than they were 2 months ago, with borrowing costs closing in on 12.5% in comparison to about 10% in October.


I could tell you more.. but you get the point. There are lions and tigers roaming around the macro-scope today, I like a bit of fear mixed in with greed once in a while! Needless to say, US treasuries rallied with 10 year yields closing yesterday 5bps lower. I’m uncertain what the genesis of this mini-tantrum is, but as long as the S&P is down barely 1% I’ll stick to calling it a mini- tantrum. As you’ll note, most of the examples I mentioned above could be termed idiosyncratic, and I am reluctant to try to conjure up a narrative that links everything together. Perhaps it’s just one of those days. Yes certainly, bourses in the Middle East are under serious pressure now, but we all knew that would happen, those stock exchanges are loaded with oil related stocks, and construction companies that will have reduced order books given impending heavy declines in projected oil revenues, no one should really be surprised. But.. but… it’s just possible that oil prices are reaching levels that start to hurt derivative sectors. But here’s the thing, for every sector you name that is adversely impacted I’ll tell you another one that’s likely to benefit. I wouldn’t be shocked if we are making new highs on the S&P by the end of the week…


On the data front, we’ve seen some very disappointing import numbers published for Germany this morning, a 3.1% drop versus a 1.5% decline forecast. Compare that to the 5.2% rise of the previous month. Not good! Germany’s Eurozone partners have been counting on resilient demand in German to assist with their recovery plans…. Oooops! Across the channel, industrial production numbers in the UK have improved, albeit less than forecast, but.. better none the less. Please note, we continue to prefer pound sterling to the euro, and data like this doesn’t change our minds!


We don’t get much new data from the US later on today. The JOLTs Job Openings report might add a bit more colour to the whole “health of employment debate” in the United States, but non-farm payrolls was the big one last Friday. Every little bit of new information is good I guess. What is clear is that even as risk markets have pulled back the dollar’s rise has been halted for now. We are still in the equities up, dollar up paradigm clearly.


As I have mentioned in recent blogs I am concerned that USD/JPY has reached a very mature phase in its current bull trend, and this has been borne out by the facts. USD/JPY got to a high of 121.85 on Sunday, but is now trading at 119.90ish. The Japanese yen has clearly outperformed other major currencies in this mini dollar correction. It will be interesting to see what happens when the dollar regains strength. I continue to expect the Japanese yen to hold relatively better that the likes of the euro and the Australian dollar. Only temporarily though… where the Japanese yen eventually goes, might be extreme. I don’t predict good things for that currency… not at all!


Finally… while we remain bullish the US dollar against all and sundry in the longer term, we are getting close to levels against the majors – obviously I’ve already raised concerns about the Japanese yen – where more significant corrections may be warranted. This means that we might see a period of weeks, perhaps even a few months where pairs like EUR/USD, GBP/USD rally, but only before the weakness continues. For now I will need to study the charts a bit more before I can raise my level of conviction, and it would probably make sense for this to happen nearer the start of 2015. I am being cautious because we could get a capitulation fall in EUR/USD before such a scenario comes to pass, but I do feel it’s my duty to point out that the possibility exists. This concern of a dollar correction would be lessened if we see EUR/USD spending some time at levels closer to 1.21 for a reasonable (few days) period of time, I will of course update you if my conviction levels firm up. I don’t necessarily see dollar weakness against developing currencies however. They dance to a different tune and recent events may have reached points of stress that will be more difficult to recover from. More on this in later blogs, but think of all those dollars corporations in emerging markets have borrowed over the last few years, think how much stronger the dollar is now… ooops


What amazing employment numbers in the US! Economists had forecast a 225,000 increase in non-farm payrolls, a slight dip on the previous month, but we got a 321,000 increase, and the government made only a 2% contribution. When small and medium sized companies go on a hiring bonanza you know that things are good. If that wasn’t enough average hourly earnings (a number the Federal Reserve might be giving more weight to at the moment) rose faster than anticipated with a 0.4% increase, double the forecast and a substantial improvement on the 0.1% increase the month before. The State of the Union is strong indeed! US equities made new record highs, the US dollar achieved a 5 year peak, and treasury yields jumped. It becomes more and more difficult to imagine a rationale for the Federal Reserve to persist with its zero interest rate policy.


How different things are on the other side of the world. Here are a number of key negatives:


  • Chinese imports fell by the largest amount in 8 months, highlighting the weaker domestic demand conditions in the Middle Kingdom, likely as a result of the slowing real estate market


  • Japan experienced an even greater slowdown than we originally thought with GDP data revisions showing conditions are twice as bad as initially estimated. That sales tax increase in April has been a huge negative, and in light of this it’s hard to criticise Prime Minister Abe for wanting to delay any further sales tax hikes. But how do they plug the fiscal deficit? Up a smelly creek, and having to use their hands (or wishful thinking) to paddle…


  • In Europe we continue to see sluggish growth, albeit better than expected with an upward revision to the data. Meanwhile the central bank is having an internal battle between those who want to accelerate monetary stimulus and others who are sceptical about its effectiveness and indeed even its legality. Not such a strong Union there!


  • In Emerging Markets resource rich currencies are under severe pressure. The South African rand is as weak as it’s been since the peak of the global financial crisis in 2008; the Mexican peso has blown through key technical levels and looks set to test new lows in the months ahead; I’m almost bored telling you about the Russian rouble and Nigerian naira, but you should be in no doubt that they are in the accident and emergency ward as well; and that brings me to the Chinese yuan.. this is not a resource exposed currency, but it has weakened significantly today, I don’t know if this is the start of something but we need to pay attention. If this is a response to Japanese yen weakness we may all be in trouble. Currency wars benefit no one.



I don’t know how long risk markets can stay cheerful, but I’m guessing performance chasing equity portfolio managers could be in career saving mode right now. They could keep buying until the end of December, but here’s the thing.. if that is what is happening then we could be in for a nasty reversal at the start of January, it’s happened before. They’ll be buying to get a kick in performance to boost their calendar year performance, and they’ll stop as soon as the calendar year is over, leaving the markets to reverse as their marginal buying disappears. When those types of moves occur “experts” will pop out of the woodwork and assign “reasons” for the correction. Sometimes those prognostications create their own reality, and it could set off some disorderly activity in other markets. Please understand, this is entirely my conjecture, but we have seen similar scenarios in the past. What concerns me is that aggressive corrections might infect emerging markets and spark crises in countries which are probably already close to the brink.


Today is very light on the data front. We’ve already seen negative inflation in Switzerland, and disappointing retail sales, there’s not much else to see. We continue to remain constructive on the US dollar against most currencies. I’m a bit unclear about where the Japanese yen goes from here, the technicals suggest USD/JPY is in a very mature phase in its bull trend, and I continue to think the next significant move might be towards some yen appreciation, as I’ve said before trends need to rest occasionally in order to sustain in the longer term. For that reason I am more bearish about the prospects for the other major currencies in comparison with the yen, which doesn’t mean I don’t have grave concerns for Japan and its currency in the months ahead. The clear path over the next few days seems to me to be euro weakness. We shall see. As always we will tweet during the day if events merit it.

20141205 – HMMMMMM… OK!

Big data day today with US non-farm payrolls updating us on the crucial employment situation in the United States. The health of employment prospects and wage growth will be key for the Federal Reserve to determine when it is appropriate to begin normalising interest rate policy. Economists are forecasting 225,000 new jobs which would be a small improvement from the previous month, this translates to a stable unemployment rate. Perhaps as interesting will be average hourly earnings, where economists forecast a 0.2% month on month gain, slightly better than the 0.1% gain the previous month. It’s worth noting that revisions to prior months data is also an important data point, historically as employment improves the revisions tend to reveal that the initial estimates have under-estimated job growth. I was looking at some analysis last night which suggests that the month of November is susceptible to a larger level of revision than the average (71,000 vs 23,000). What this means is that even if the number comes out in line with the forecast we could see a substantial upward adjustment in the months to come which will highlight the robust recovery in the US.


But what about yesterday? We had no change in terms of interest rate at both the Bank of England and ECB, but the key moments were after the announcements with Mr Draghi at his press conference, where he reiterated his plan for new measures to expand the ECB’s balance sheet by 1trn euros. However it’s clear that there are tensions on the governing council, as the word used was “intends” and not “expecting” which sounds a good deal less certain. Needless to say during the press conference EUR/USD aggressively reversed from a new year to date low of 1.2280 to above 1.2450 before trying to recover lower later on in the afternoon. Fun and games! The lack of unanimity continues to make the ECB look considerably less decisive than its peers, and as a consequence one could argue that it has relatively less credibility as well. It doesn’t help that whereas the Federal Reserve is clearly planning on looking through the impact of lower energy prices on inflation (which is what most analysts will do), the ECB continues to use the disinflationary impact as an excuse to implement yet more monetary easing.


Oil prices are back near the lows again, and this is reflected in the weakness of the Mexican peso, Canadian dollar and Russian rouble. In fact with a lot of these oil rich currencies, you almost don’t have to look at them to determine their direction at the moment, just have a look and see what the price action is in Brent or WTI! Liquidity arrives a bit later for the naira, but I would imagine the Nigerian currency will also be under pressure after some calmer price action in the last day or two. There are signs that the Kremlin is starting to feel pressure from the collapsing value of the rouble. Yesterday President Putin threatened to take on the currency speculators, who clearly he blames for Russia’s currency woes. Nothing to do with Russia’s oil dependency then? Hmmmm…. Ok!


It seems that we’re set up for continued dollar strength today, as well as rising equity markets, but there might be some caution in front of the data event later. The S&P 500 made another record high yesterday, but doesn’t it always these days? I should also point out that we get Eurozone GDP data later this morning, expectations are for 0.8% year on year growth which would be unchanged from the prior quarter. It’s an interesting number, but as GDP is such a lagging indicator I’m uncertain how much of an impact it will have on currencies.


Strong ISM numbers in the United States yesterday briefly took US equities to new record highs, as US manufacturing firms declared their confidence in US future economic prospects. As President Clinton once said in a speech to Congress.. “The state of our Union is strong!”. Still.. it’s worth noting that the retail sales numbers that came out of the Eurozone earlier yesterday was also better than expected too. Perhaps we’re starting to see the effects of the calamitous decline in energy prices? Perhaps…


ADP non-farm employment data disappointed somewhat, so it will be interesting to see what becomes of the bigger employment data on Friday. These things are never as obvious as it seems however, particularly given the way the data is presented, at certain times what might superficially look like a poor number might actually be as a result of people who had previously given up looking for jobs stepping forward once more boosting the number of jobseekers. In short, sometimes, what looks like a poor employment number might actually be a sign of increased confidence. I’ll leave it to the experts to tell us what’s what!


In currency space, some of the most under pressure emerging currency markets have retreated from the abyss, as energy prices continue to consolidate near their year to date lows. As I keep on saying, trends need breathers every now and then for sustainability. We will need to observe the price action in the coming days and weeks to ascertain whether oil prices have indeed found their base. I believe it’s safe to assume that commodity exposed currencies (which aren’t all in the developing space – CAD, AUD, NZD) will be hostage to the fortunes of the energy complex for now.


This leads us to the major currencies. The Japanese yen has been within a whisker of 120! The last time we saw such levels was way back in 2007. At that time the pair hit a high of 124.16, and while I believe the bullish rally is mature, it is conceivable that there will be a serious attempt to reach those levels again before any correction occurs. I will say this though.. I believe at this stage in the game it is more likely for us to see 110 before we see 130, but that doesn’t mean to say that we won’t get to such rarefied levels. As I’ve mentioned before, I am unsure of the logic of QE in Japan at this stage. It’s not clear to me that it benefits corporates on the whole, and I certainly don’t see higher inflation helping a country with one of the worst demographics in the world – after all.. more pensioners use diapers in Japan than babies! How are people who depend on the fixed incomes of their pensions going to benefit from higher inflation? The only winner is the Japanese government, and while the central bank continues to buy government bonds (JGB) perhaps disaster can be averted, but woe to all of us if everyone else decides it makes no sense to hold JGB’s anymore.


As I observed yesterday, it appears that the pause in the dollar bull trend is over. Of the major currencies the euro, Japanese yen, Australian dollar, Swedish krone, Norwegian krone and Swiss franc have all made lows in the last 48 hours versus the US dollar. I think it’s fair to say the bull is snorting! I’m not surprised that pound sterling is showing a bit more evidence of resistance, but I’ll admit that both the Canadian dollar and New Zealand dollar (commodity exposed no less) have been a bit surprising.


Today is a big day for data that could impact the macro-scope. Both the Bank of England and ECB will announce their rate decisions, and while we don’t expect any changes, it’s what they say – more specifically what Mr Draghi says – that will matter. Given that we’ve just seen worse than expected unemployment data out of France this morning, and the fact that inflation data remains weak, we expect Mr Draghi to continue to talk about extraordinary methods to expand the Eurozone central bank balance sheet. Again.. as I’ve said before… falling oil prices are a good thing and a boost to the European consumer, but I’m sure that an energy induced price fall will be used to aid Mr Draghi’s objective. His speech begins at 1330hrs UK time. Not much else for us on the data front, apart from Canadian PMI’s. Perhaps that, along with the unchanged rate decision last night, will help me understand why the Canadian dollar appears to be doing better than I would expect!


The rout in the Russian rouble continues this morning with a 1.4% fall to USDRUB54.80, when you consider this is one of the ten largest economies in the world, it should give you a sense of how extraordinary this is. Not since the height of the global financial crisis in 2008 have we seen sustained moves of this magnitude in the currency markets, and we have reached a stage where episodes like the Icelandic devaluation pops into my mind. Don’t get me wrong, Iceland was a small economy that possessed a banking system that was leveraged to almost comic levels. My point is that Iceland was the first really non-standard macro-economic event that occurred as the sub-prime disaster was really starting to gather pace. At a certain point in time one is forced to wonder, are there other potential victims of oil (let’s not kid ourselves, sanctions are also part of the equation where Russia is concerned), are there entities or countries that are exposed to Russia which could suddenly take centre stage? My point is that Russia is a $2trn economy, its currency doesn’t lose 50% of its value in 3 months without adverse repercussions elsewhere. Benign equity and risk markets, you’ve been warned!


You would think that this continued rouble weakness is happening in tandem with dramatically weaker oil prices today, but this is not the case. Energy prices are consolidating after the recent dramatic falls, and whether we have already seen the bottom or not is a story for another day. For what it’s worth I suspect we will see more pressure in the coming weeks before there’s any realistic basing in this move. To be clear.. the rouble is not weakening in isolation.. both the Mexican peso and Nigerian naira are also in the firing line today but to a much lesser extent. I read a great piece in the Financial Times yesterday which argues that the fall in the Russian rouble means that there will probably be only a negligible impact from a lower dollar price of oil on government revenues which are rouble denominated – the rouble price of oil is virtually unchanged. You can’t say the same for the price of oil in Nigeria or some of the other oil dependent economies though, for example in Nigeria the naira price of oil is substantially weaker (~20%), which should hit government revenues. Food for thought, but Nigeria is far more import dependent than Russia so there would be collateral damage somewhere along the line. Looking at the Mexican peso, we are now past USDMXN14.10 which is likely to convince some market technicians that the path is clear for a significant bullish advance. I must say, this is the beauty of technical analysis.. you view a chart without prejudice and it tells you a story, even if there is a compelling fundamental narrative which should see Mexico benefitting from robust growth in the United States and thus boost the peso. Please note that a significantly weaker Mexican peso would pose as much of a competitive risk to China as does a weaker Japanese yen. This is because Mexico will always be a first choice alternative to China when global companies are looking to export into US markets. Collateral damage everywhere…


Over the last 24 hours, we are seeing definite signs that the dollar bull trend may be reasserting itself. The euro has made a new year to date low, as have currencies like the Japanese yen and Australian dollar… all versus the US dollar. We still have a month to achieve the targets we speculated upon 3 or 4 months ago (EUR/USD to 1.22 etc) and the current price action increases our confidence that we will get there.


This morning we have seen some mixed PMI data from some Eurozone countries with disappointing numbers from Spain and France, better than expected numbers in Italy, and stable numbers in Germany, leading to roughly in line numbers for the Eurozone as a whole. Meanwhile PMI data in the UK was a strong positive surprise. It’s only one data point, but I continue to support the view that the pound sterling has room to appreciate versus the euro. This afternoon we will get ISM data in the US, which is always important, economists expect a slight improvement. We also get Eurozone retail sales very shortly, as well as an interest rate decision in Canada. This is the first week of December, so we still have employment data at the end of the week in the United States to look forward to, this will compete for key data event of the week with the interest rate decisions from the ECB and Bank of England tomorrow. Much to look forward to!


Good morning

The Reserve Bank of Australia (RBA) has kept their bank rate unchanged at 2.50% and repeated their forward guidance of steady rates. The steady fall in both precious metals, commodities, and oil has kept the RBA’s rhetoric mostly unchanged. As a result of these comments the AUDUSD has bounced back to trade around 0.8500 again. Having said that the continued slowdown in China and the EU has weighed heavily on the AUD and we expect renewed/continued pressure in the coming months.

Apart from  the RBA, we have BoC (Canada) Wednesday, and BoE (UK) and ECB (EU) on Thursday. No change is expected from any of the aforementioned. In fact it is safe to say interest rates are unlikely to budge at least until end Q2- Q3 2015. The data does not lead itself to warrant raising rates and the mismatch in global growth re-enforces this point.

The fallout from the drop in oil prices will obviously start showing itself in the coming months as the data is published. There will be winners and losers on both sides. Marginal oil companies will struggle to stay afloat, the big oil producers will continue to argue amongst each other (OPEC refused to take action to support prices) and the consumer will hopefully be the biggest winner when they fill their car up. Already the gas price in the US has dropped 50c a gallon. Unfortunately the same cannot be said for the UK and EU where prices remain “abnormally” high. What is certain is we are paying over the odds for our fuel. Then again what option do we have!!! Between the high Govt. taxes and the oil companies trying to squeeze every last drop out of us, the consumer will continue to pay over the odds. Good old demand and supply!!!

USDRUB (Russia) hit all time lows of 53.96 before CB intervention brought the rout under “control”. The RUB is trading at 51.25 as I write this. I can just imagine the conversations being had yesterday at the Politbureau and what needs to be done to stop the RUB’s utter collapse. The currency has now fallen an eye watering 48% since the summer. While this obviously goes some way to help oil/metal/gas producers (selling in USD and converting into RUB), it is the local industry that imports raw materials who are getting “shmaltzed”. The bad news is the CB has floated the RUB which is now at the mercy of the market. They certainly do not want to be left with egg on their faces, so best thing is to take a deep breath and watch the game unfold.

USDILS on the ropes again trading at 3.9500 as I write. Remember just a couple weeks ago we were “battling” to break 3.81/3.82 level. A distant memory wouldn’t you say. The BoI will probably have to give the market something to smile about or risk seeing the ILS climb above 4.00 in the coming days/weeks. The good news for the most part is the high tech industry which for the most part sells its wares in USD and is thus immune from the recent depreciation in the ILS. Again it is the import market that will suffer (oil/textiles/Vehicles). Like the other EM currencies, the ILS will not be sparred and further losses are expected.

GBPUSD recovered yesterday to trade after stronger Manufacturing PMI numbers were published. The GBP rallied through to 1.5740 (currently 1.5720) while vs the EUR the GBP rallied from 0.7975 (1.2540) to 0.7915 (1.2635) currently. I know I have said this many times but I am forced to say it yet again. The GBP will FALL against the USD while the GBP will RISE against the EUR. The pullbacks from this are normal and expected. But one has to look at the big picture and all the signs point to my thoughts above. Things would have been very different had the UK’s GDP been matching that of the US’s. So US GDP 3.90%, UK 0.80%, EU 0.1% pretty much sums up what I was saying.   US > UK > EU. European holidays are the way forward. However FEAR NOT, if you have to buy USD, PLEASE give some serious thought to HEDGING via forwards or options. But do something because come 2015 we will not be trading around these levels.

Have a good day ahead