20150130 – HERE THERE AND EVERYWHERE

High Low High Low
EUR/USD 1.1345 1.1317 USD/ZAR 11.5681 11.5177
GBP/USD 1.5090 1.5051 GBP/ZAR 17.44 17.35
EUR/GBP 0.7530 0.7509 USD/RUB 69.30 67.68
USD/JPY 118.47 117.76 USD/NGN 190.8 189.0
GBP/CHF 1.3993 1.3867 S&P 500 2027 2016
USD/ILS 3.9455 3.9189 Oil (Brent) 49.27 48.74

 

Yesterday’s US initial jobless claims report was an eye opener. A massive positive surprise with substantially fewer claims than the preceding period. Economists had forecast 300,000 jobless claims, but the actual number was just 265,000, which is as low as it’s been for 15 years! There are suspicions that there is some seasonality to this low number, but never-the-less this is another stunning demonstration of the robust growth in the US economy, and it is also a good example of why the Federal Reserve may well be correct if they raise interest rates later on in the summer.

 

On the other side of the pond, the Danish central bank has cut interest rates for the third time in 10 days! The rumours of the EUR-DKK peg being under threat are clearly true, and the central bank is reacting aggressively with the deposit rate being cut a further 15 basis points to -0.5%. Nationalbanken has also been selling Danish Krone to relieve the pressure and sustain the peg at 7.46 to the euro. I agree with the economists who are concerned that the central bank is acting a little scared and desperate. You never got this sort of frantic reaction from the SNB, they just quietly and confidently stated that they would sell whatever amount of Swiss francs were necessary to maintain the peg. Clearly they feel exposed, all I can say is their first few days being in focus has been seriously unimpressive.

 

Inflation keeps falling here there and everywhere with German numbers slipping into negative territory even as the numbers also fell in Japan (albeit still positive), blame it on oil, we all knew this would happen. Same thing in Spain with deflation deepening, but here’s more positive news… Spanish growth numbers were better than expected, +0.7% versus +0.5% forecast, annual GDP is now the highest it’s been since 2008 at 2%.

 

Today the new Greek government will meet Eurozone officials in what is likely to be the first of many face to face meetings seeking to resolve the looming crisis. It may not feel like it yet, but we’re probably as close to a break-up of the euro as we have been since the weeks preceding Mr Draghi’s “whatever it takes” speech. As it was thousands of years ago, Greece is once again the centre of civilisation, or at least it has our collective attention!

 

I spy with my little eye, a complete 5 wave move down for EUR/USD from the highs early last week. If this is correct the likely corrective sequence could take us up to the 1.1560 – 70 area before the next impulsive move lower. At least that’s what I think when I put my Elliott Wave hat on. This makes a good deal of sense to me, and it implies that we don’t see the bearish euro trend reassert itself until early next week probably. Perhaps Nationalbanken is supplying the bid for euros right now!

 

Some consumer spending and sentiment data coming out later in the US, as well as GDP data and Chicago PMI. We will tweet if anything really stands out. Expectations are for 3% growth versus 5% last time. Very respectable..

 

 

 

 

 

 

 

 

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

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.

 

Follow our tweets @parityfxplc

 

20150129 – AFTER FOMC..

High Low High Low
EUR/USD 1.1305 1.1261 USD/ZAR 11.6403 11.5581
GBP/USD 1.5164 1.5125 GBP/ZAR 17.63 17.51
EUR/GBP 0.7464 0.7441 USD/RUB 69.34 67.38
USD/JPY 118.10 117.39 USD/NGN 192.5 189.0
GBP/CHF 1.3806 1.3676 S&P 500 2005 1994
USD/ILS 3.9673 3.9321 Oil (Brent) 48.67 48.37

 

The FOMC meeting last night, showed board members sticking to their guns, despite continuing dollar strength and an energy price induced disinflation, they remain on course to raise rates in 2015, because US growth is solid and they continue to see strong gains in employment. Despite falling energy prices the United States central bank sees through the numbers and anticipates that households will have increased spending power while improvements in the job market will eventually push inflation back towards 2%. June remains the earliest month in which interest rates could be hiked, given their “patient” stance, and board members appeared unperturbed by the dislocation between financial market inflation expectations which are in decline and the more steady survey measures they also monitor. They have discarded their “considerable time” guidance which refers to how long they intend to keep rates low, but they have also indicated that they will take international developments on board. Equities didn’t like the announcement too much this time, the reality of a Federal Reserve Bank determined to introduce proper discount rates into the system at this point in the cycle shouldn’t be either surprising or unwelcome, but we have lived in a zero interest rate paradigm for so long the adjustment is likely to be painful. One expert on CNBC last night opined that the Fed is keen to raise rates if only in defence of capitalism. I fully applaud this, how can a business know the proper hurdle rate for viable investments in this zero interest rate world? Still we will have to keep an eye on the S&P 500 in the next few sessions, 1.5% below current levels is a significant support level, the mid-December low. Below that, the way is open for further declines.

 

Currency markets reacted as one would expect, with a bid returning to the US dollar which appreciated versus most G10 currencies: euro, pound sterling, Australian dollar, New Zealand dollar etc… it didn’t do much against the Japanese yen though, at least after the initial general greenback surge. USD/JPY remains at roughly the same levels as before the FOMC meeting. I believe the Japanese yen is one to watch with its own specific dynamic, it may need to correct its trend a bit more before the trend weakening re-asserts itself. We will update you as events unfold.

 

In Germany, the unemployment rate fell yet again, to 6.5% although the actual reduction in unemployment was less than forecast. It must be surreal in Germany right now… so so growth, very low unemployment and now QE! In southern Europe, Spain has released some decent retail sales numbers which are much better than expected. +6.5% versus 2.5% forecast, year on year to December. Not bad at all! There’s a slew of Eurozone data coming out later, but nothing that really stands out. Not much more on the data front today although South Africa does announce its rate decision.

 

Currencies in emerging markets could well be under pressure going forward, they’ve been relatively unscathed since mid-December, I don’t expect that to continue for too much longer, and already we are seeing the Russian rouble as well as the Nigerian naira under pressure, when you consider that the market isn’t properly pricing a rate hike from the Federal Reserve yet, it’s easy to appreciate that there is ample scope for dollar strength against less liquid currencies. Already the charts for the South African rand and Brazilian real indicate that these currencies could be set to trend lower again. The major resource currencies – Australian dollar, New Zealand dollar and Canadian dollar – are not exempt from this likely depreciation. Watch this space.

 

 

 

 

 

 

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

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.

 

Follow our tweets @parityfxplc

 

20150128 – THE EURO TAKES A BREATHER

High Low High Low
EUR/USD 1.1384 1.1330 USD/ZAR 11.6022 11.5370
GBP/USD 1.5200 1.5154 GBP/ZAR 17.62 17.49
EUR/GBP 0.7498 0.7471 USD/RUB 68.25 66.62
USD/JPY 118.27 117.72 USD/NGN 192.5 191.2
GBP/CHF 1.3791 1.3624 S&P 500 2053 2029
USD/ILS 3.9600 3.9150 Oil (Brent) 49.18 48.92

Some fairly important macro data was published yesterday that’s worth studying:

  • 4th quarter UK GDP growth disappointed slightly, coming in at 2.7% annualised versus expectations of 2.8%. Still it marks an improvement of 0.1% on the previous quarter. UK growth is still solid.
  • Durable goods orders in the United States disappointed in December, coming in at -0.8% versus +0.6% forecast. This is an improvement on the November -1.3% number, but a decline is a decline, and economists will probably be lowering their estimates for 4th quarter GDP growth now. Still even a +3% annualised growth number for Q4 is solid even if it marks a cooling off in comparison to the smoking hot +5% Q3 number.
  • More and more US multi-nationals are warning about pressure on profits because of the strong US dollar. Not a shock really. In addition there are growing concerns about stagnating demand outside of the United States. Well… concerns from other companies maybe, but not Apple! Simply stunning numbers.. the largest net income by any public company in history for the 3 months to December at $18bn!! This was on the back of iPhone sales with 74.5m units sold, smashing even the most optimistic Wall Street forecasts. And this wasn’t just about domestic holiday sales. Demand for the iPhone 6 was surging in China
  • Also in the US, the Conference Board consumer confidence index improved significantly in January hitting its highest level since 2007 at 102.9 versus 93.1 in December.

 

An interesting data mix yesterday, that’s for sure. I would say goldilocks, but that descriptive has already established its place in the financial lexicon, far be it for me to challenge that. It does seem clear that there is a reasonable chance for US consumers to do what they’ve done historically and bail the rest of the world out.

 

In Asia overnight, the Singaporean monetary authority, MAS, surprised the market and loosened policy prompting the biggest one day fall in years. The Singapore dollar hasn’t traded this weak since 2010. This is a trading nation, and possesses one of the largest hubs for oil refining anywhere in the world. Not a huge shock that times are tougher there, and stagnating growth in its larger neighbours certainly doesn’t help.

 

One of those neighbours, China, is finding targeted stimulus less effective than hoped as industrial profits fell by 8% last month… an unwelcome new record if the data is to be believed. On the other hand the local currency, the renminbi is now one of the 5 most used payment currencies in the world, joining the US dollar, the euro, the pound sterling and the Japanese yen in the heavyweight category. Steady progress towards the end goal of convertibility and reserve currency status continues.

 

Another interesting titbit from Asia which I find interesting, and could have longer term ramifications is a move by Japanese corporates away from age based pay, to a more sensible and market sensitive norm… pay based on merit. Revolutionary indeed! Now if they can just get more women into the workforce they might be able to grow their way out of the horrendous problems. Probably too little too late though.

 

The steady depreciation of the naira continues, and the near term prospects for the Nigerian economy look fairly grim. I was struck by some data which shows that under the previous President Obasanjo’s term of office, the average oil price was below $40 per barrel, yet growth averaged about 7%, while under the incumbent President Goodluck Jonathan, oil has averaged considerably higher, close to $100, but growth has only averaged about 6%. One hopes that if he wins another term he makes growth and employment an absolute priority. As things stand the economy, or more specifically, federal and state government coffers are clearly unprepared for a sustained period of lower energy prices. This is one of the main reasons why we, at ParityFX, remain bearish on the prospects for the naira. Even if sensible policies are put in place, it will take time for the benefits to work through the economy. If the Central Bank of Nigeria has any hopes of maintaining a reasonable reserve buffer they will probably have to allow the naira to weaken a lot more.

 

Yesterday was a short covering day for the euro, as traders took the opportunity to lighten up their short positions, and those who had enthusiastically dumped euros following the Greek election news probably had to scramble and reverse those trades. Buying the rumour, selling the fact remains an essential component of successful trading! I’ve said it many times before, corrections are necessary for the long term health of trends, it is possible there might be more legs in this euro recovery, but that’s not the bet I would want to take. The trend is for the euro to weaken, and it looks increasingly likely that we will see parity versus the US dollar at some point this year. We should also see the euro weaken further against the pound sterling, I see 0.7250 as a likely initial target.

 

We have the FOMC later on today and as always the statement will be closely monitored. Economists aren’t expecting too much drama, a lot has already been said in recent months. Governor Yellen has pledged patience regarding their determination to raise rates, but what will be interesting to see is the outlook for growth and inflation. It will also be of great interest to hear how much the global outlook for growth impacts on their view of when to hike rates. This is important. We will report back tomorrow, as this could greatly influence the dollar trend.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

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.

 

Follow our tweets @parityfxplc

 

 

20150127 – THE GOOSE AND THE GANDER

High Low High Low
EUR/USD 1.1259 1.1223 USD/ZAR 11.4905 11.4391
GBP/USD 1.5117 1.5072 GBP/ZAR 17.33 17.25
EUR/GBP 0.7463 0.7436 USD/RUB 68.18 67.26
USD/JPY 118.67 117.85 USD/NGN 191.0 191.1
GBP/CHF 1.3676 1.3581 S&P 500 2061 2056
USD/ILS 4.0017 3.9803 Oil (Brent) 48.33 47.81

 

Prime Minister Tsipras has moved quickly to form a coalition with a small party that is as fiercely opposed to the strict conditionality of the bailout terms as Syriza is. If anyone was in any doubt about what we’re going to be talking about in the weeks and months ahead, they should be disabused of such silliness now. On the other side of the negotiating table senior Eurozone figures have already made comments indicating that there will be little support for any moves by the new Greek government to seek debt write-offs. We’ve been down this road before and we have seen Eurozone leaders allow situations to approach the abyss in order to cow supplicants, I fear this could go down such a path again. And the euro has already been smashed around for months, it almost doesn’t bear thinking about, but this could get ugly. As I said yesterday, it would be really difficult for European creditor nations to back down from their stance as we have Spanish elections this year and Podemos is the the Spanish equivalent of Syriza in the most important issue. What’s good enough for the goose will surely be good enough for the gander! And that gander is a much much bigger economy with a whole magnitude more debt to renegotiate. Good luck with that!

 

Russian debt has been downgraded to junk by Standard and Poor’s yesterday night. This should be no surprise with the collapse of oil prices and the effects of sanctions devastating the Russian economy. But nevertheless the rouble has been hit hard closing at year to date highs of 70.84 yesterday versus the dollar. It has improved somewhat this morning but the market has only just opened. Give it some time…

 

It’s worth noting that some emerging market currencies have looked a little peaked recently. The naira trades close to its record lows in the inter-bank market on a 191 handle, and in the Bureau de Changes locally the rate is trading above a 200 handle these days. Elections are weeks away and no one can say whether the incumbent PDP or the APC will win this one. Incumbency is usually everything, but the coalition of Northerners and South-westerners is a potent combination indeed. If the APC loses again there could be protests and instability. If the APC wins federal institutions will be tested like they haven’t been since democratic rule was reintroduced. A bureaucracy exists on the back of PDP power, it could take ages before it is ready to cope with new political masters. Either way there will be instability of one sort or another. Watch this space.

 

Some hopeful noises from the Secretary General of OPEC.. “maybe prices have reached a bottom”. How inspiring! It makes me almost want to go out there and take a punt that we’ll see a sharp bounce from here. But perhaps there’s more substance to the comment. Certainly the Baker Hughes oil & gas rig count is now 20% below the October high. BHP, the Australian mining conglomerate, has recently indicated that it has shut down 40% of its US shale drilling rigs. Clearly production is getting taken out as a result of lower energy prices. This really does look like evidence the market is trying to find a bottom.

 

Moving on to other commodities, I mentioned copper some weeks ago, I should talk about iron ore now. Prices are now as low as they have been in over 5 years, slowing Chinese demand the main culprit. There really is nowhere to hide for commodity producers. Australia and Brazil are among the larger iron ore producers so I wouldn’t be surprise to see a continuing impact on the Australian dollar and Brazilian real from this in the longer term. I do however observe signs of positive divergence in AUD/USD at the present time, so a recovery of some sort might precede deeper declines in the currency pair. USD/BRL looks as if the opposite might be about to occur with significant Brazilian real weakness ahead looking increasingly likely to me. We shall see.

 

For now the impending financial repression of the ECB must combat the political noise coming out of Greece, something for everyone…

 

 

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

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.

 

Follow our tweets @parityfxplc

 

20150126 – ROCK AND A HARD PLACE

High Low High Low
EUR/USD 1.1250 1.1097 USD/ZAR 11.4699 11.3930
GBP/USD 1.5046 1.4982 GBP/ZAR 17.22 17.06
EUR/GBP 0.7489 0.7404 USD/RUB 66.16 63.75
USD/JPY 118.32 117.26 USD/NGN 191.5 190.8
GBP/CHF 1.3298 1.3143 S&P 500 2053 2031
USD/ILS 4.0318 3.9922 Oil (Brent) 48.42 47.8

 

Welcome to the age of political contagion in Europe. We’ve had the sovereign debt crisis, we have seen Mr Draghi and his “whatever it takes” statement and his market calming actions thereafter, and now we see the potential for an endgame that some experts identified over a decade ago. It really could be that serious. The dislocation between an aloof political elite and the people they serve may meet its Waterloo this year as the Greek anti-austerity party Syriza pulled off a historic election victory. Mr Tsipras, the Syriza leader, will begin talks to form a coalition government with the backing of over 36% of the electorate, his party is expected to get 149 seats in the 300 seat parliament. No one should be under any illusion that their agenda will dominate Greek politics over the next few years. But what do they want? And why does it matter so much? Why indeed do we, at ParityFX, view this as having the potential for serious political contagion? Here are a number of key points to note:

  • Greece has a public debt that amounts to 175% of GDP, which in money terms amounts to about €320bn
  • Eurozone governments have already made commitments to further debt relief as long as the Greeks stick to a program of structural reform and austerity
  • Syriza came to power on the back of promises to renegotiate and cut the debt pile by a third. They, correctly, argue that the debt burden is unsustainable
  • Greece is required to pay over €3.5bn of principal in July, and another €3bn in August
  • Eurozone governments directly (or via the European Financial Stability Facility) hold approximately two thirds of the Greek governments debt, the maturity on these loans have been extended out past 2040 and the interest rate on the debt radically cut to just 50bps over the euribor rate. Compare that to where Greek debt actually trades in the open market.. well over 10%
  • Eurozone governments will argue, correctly, that Greece has already benefited from two rounds of relief that have substantially cut the debt burden
  • Greece is not the only European country facing elections with an increasingly powerful anti-Eurozone party at the centre of the debate. Consider Podemos in Spain and UKIP in the UK.
  • Greece will only be a part of the ECB’s quantitative easing programme if the government complies with the agreements that are already in place

 

This election outcome will reverberate across the European political landscape over the months of 2015 and the European political elites will be in quite a quandary. If they back off from their requirements of Greek austerity, what will they do if Podemos wins in Spain, or if the Portugese or Irish seek more relief as a consequence? Yet on the other hand consider these facts:

  • The youth jobless rate in Greece has risen from 32.2% in 2010 to 57.5%
  • The jobless rate amongst women in Greece has risen from 15.4% to 30.5%
  • Public sector salaries have been slashed by almost a quarter since 2010
  • The minimum wage has fallen by over 20%
  • And the income of young workers has declined by over 30%

 

Is it any wonder that a party with radical ideas should win in Greece? It would be shocking if they didn’t!

 

It comes as no surprise that since the news started coming through late on Sunday EUR/USD has traded as low as 1.1097. We haven’t seen the euro trade that weak since 2003. I fear more records will be broken in the weeks to come. Equity markets, unsurprisingly, have not responded well to the election results, but there hasn’t been anything too dramatic yet. Markets are just a little bit down in the early European sessions.

 

I won’t spend anytime reporting on macro data this morning. I think the above narrative neatly encapsulates what will govern market volatility today. The rock of European governments trying to avoid opening a Pandora’s box of debt renegotiations versus the hard economic place the Greek electorate find themselves in, is plenty enough for all of us to digest on a Monday morning!

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

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.

 

Follow our tweets @parityfxplc

20150123 – TOWING THE LINE

High Low High Low
EUR/USD 1.1375 1.1314 USD/ZAR 11.4378 11.3842
GBP/USD 1.5028 1.4962 GBP/ZAR 17.15 17.08
EUR/GBP 0.7584 0.7551 USD/RUB 64.99 62.62
USD/JPY 118.82 118.09 USD/NGN 188.0 191.1
GBP/CHF 1.3104 1.3031 S&P 500 2065 2059
USD/ILS 3.9671 3.9428 Oil (Brent) 49.78 49.26

 

As expected the ECB did announce a programme of quantitative easing, but surprisingly the amounts and length of the programme are larger and more aggressive than anticipated. In effect the ECB becomes the last major central bank to conduct such extraordinary measures. In a way, and this is just my personal view, I feel less respect for them now for towing the line, but there you go! I’ll start by summarising the key points:

  • €60bn per month – the rumours had been for €50bn per month
  • Starting from March, and to last until at least September 2016 or until inflation has returned to near its 2% target – some had speculated on a 12 month programme
  • The programme includes the purchase of bonds with maturities up to 30 years; it will focus mainly on investment grade debt, but Greek and Portugese bonds will be included (these are rated as junk)
  • National central banks will assume most of the responsibility for losses of their own national debt (a concession to Germany), although there will be risk sharing on 20% of the asset purchases
  • Mr Draghi said “a large majority [of the ECB’s governing council], so large we didn’t need to take a vote”

 

As you can see from the table above, the euro is trading substantially weaker than this time yesterday. Not a shock, as we at ParityFX have indicated over the last few months this was always going to happen if QE was implemented. In other markets, equities rallied, with European stocks unsurprisingly being the outperformers, following the announcement. The rally continues this morning with the Eurostoxx index up 1.5% already. European bonds were also big winners with the Bund yield falling to a new all-time low of 0.38% at one point yesterday. Commodities had a good day too, gold traded up to $1307 and Brent oil went as high as $50.44.

 

What to make of all this? Well to start off with, the signs were quite clear and I hope I was able to successfully convey that yesterday. This was going to happen. There is a very real chance now that EUR/USD could achieve parity sooner than I have previously suggested. I wouldn’t be shocked to see it happen this year. Other European currencies will be victims of this move, and already we see GBP/USD trading below 1.50. For those who have hoped to sell pound sterling at levels like 1.60… I would suggest that the odds of that happening sometime in the next few years took a real dent yesterday afternoon, this is a new world order now, and we all have to deal with it.

 

In terms of macro-economic data, we should see UK retail sales out later on this morning. The surprise would be if we get an improvement. All the signs have been on the disappointing side for the UK economy recently, if you exclude employment data. Quite a puzzle, and certainly enough to almost snuff out the chances of interest rate hikes in the UK in 2015. We also get retail sales and inflation data out of Canada, as well as Manufacturing PMI in the United States. All quite interesting stuff.

 

I want to be clear on this.. what we are seeing right now, is a euro thing. We have talked at length about the bullish trend of the US dollar, but so far this year, the euro’s obvious vulnerabilities have dominated. Going forward, while I continue to maintain that this will be a strong year for the US economy, the chances of the Federal Reserve hiking rates are probably less than I have suggested in recent times. In a world where several European central banks have cut their interest rates to negative territory, where the ECB and BoJ are now conducting aggressive quantitative easing, where energy prices have collapsed and wiped out any immediate inflationary threat, it is unlikely that Federal Reserve officials will go out of their way to raise the Federal Funds Rate any time soon. There’s unlikely to be any need for it because the US dollar will be the currency of choice to own, we still expect it to appreciate strongly this year, and that appreciation is a monetary tightening of sorts. I would however add, with all this new monetary stimulus coming from Europe, the decline in commodity prices could stop, and who know even… reverse. This is something to watch out for, but my base case is that OPEC supply will probably continue to supress energy prices for now.

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

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.

 

Follow our tweets @parityfxplc

 

 

20150122 – ‘T’ MINUS ZERO!

High Low High Low
EUR/USD 1.1630 1.1575 USD/ZAR 11.5662 11.5021
GBP/USD 1.5160 1.5122 GBP/ZAR 17.52 17.41
EUR/GBP 0.7679 0.7645 USD/RUB 66.32 64.72
USD/JPY 118.35 117.80 USD/NGN 185.0 190.5
GBP/CHF 1.3107 1.2946 S&P 500 2041 2031
USD/ILS 3.9549 3.9307 Oil (Brent) 49.15 48.52

So here we are, ECB decision day, we only get a few days like this a year, days that could shape the course events for a long time to come. For months the market has speculated on the inevitability of QE in the Eurozone; what form will it take; will there be consensus; how much will be done, how quickly and over what period will it be implemented, how will the risk be shared out etc. And now, after the events of recent days, let me recap:

  • Swiss National Bank (SNB) eliminates the Swiss franc peg to the euro
  • SNB cuts deposit rates to -0.75%
  • Danish National Bank cuts deposit rates to -0.20%
  • German media ramps up anti-QE editorials
  • Chancellor Merkel raises concerns about countries resisting needed structural reforms if QE is implemented
  • Key southern European politicians talk up the importance of QE and question the degree of influence Germany has, as only one member of the group, in the debate
  • Ex Bundesbank head, Axel Weber, questions the future viability of the euro if countries don’t implement German style structural reforms

 

Seeing all of that put together, it is no surprise that there will such focus on the ECB meeting early this afternoon. We could see significant moves in equity and currency markets today whether Mr Draghi announces QE or he doesn’t.

 

The minutes of the Bank of England’s MPC meeting were interesting. Whereas previously 2 members advocated rate hikes with 7 keen to keep rates unchanged, the new minutes indicate that all 9 members are now happy to keep rates unchanged. The disinflationary impact of lower energy prices has had a significant impact on the thinking of members and it is clear that the chances of rate hikes in 2015 have receded somewhat. There was a reaction in the currency markets with EUR/GBP jumping 1.2% higher intra-day yesterday, but I would expect that the downward trend will re-assert itself today if QE comes. Indeed GBP has recovered half of its losses against the euro already.

 

Elsewhere, yesterday, the Bank of Canada cut rates to +0.75% (you know we live in an insane world when I actually have to put a plus sign in front of an interest rate for clarity!). This was not expected and the Canadian dollar weakened significantly with USD/CAD jumping up over 2%. The BoC was keen to offset the impact of falling oil prices, and I have some sympathy in this case, they are huge oil producers, and in their case it is entirely possible that lost production and investment overwhelms the positive consumption effects I’ve mentioned in recent weeks. Needless to say, USD/CAD now trades at its highest (weakest for CAD) levels since April 2009, above 1.23.

 

Another oil producing nation’s currency was in the spotlight yesterday as the Nigerian Financial Markets Dealers Association agreed to introduce curbs to reign in volatility. Henceforth, the market will halt trading in the naira if it moves more than 2% during a trading session. Apparently dealing was halted, in the past, if 3% was exceeded. Some economists are increasingly concerned that a further devaluation of the naira is inevitable given the low level of oil prices and the depletion of central bank reserves. I agree!

 

There’s some other macro data coming out today, but I’ll be honest, nothing really matters apart from the ECB’s decision, so I’m not even going to bore you with it. If Mr Draghi announces QE there is a risk that we could see a decent fall in the value of the euro against most currencies, and stock markets should continue to rally. However, I’m not clear how long any stock rally will last. As they say.. it’s the anticipation that’s got market going, but once you get what you want? It might just be a snooze-fest. We’ll see…

 

 

DISCLAIMER

Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416.  It is for informational purposes and is not an official confirmation of terms.  It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.

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.

 

Follow our tweets @parityfxplc

 

 

20150121 – TO QE OR NOT TO QE?

High Low High Low
EUR/USD 1.1589 1.1540 USD/INR 62.18 61.67
GBP/USD 1.5180 1.5135 USD/ILS 3.9497 3.9273
EUR/GBP 0.7638 0.7617 USD/ZAR 11.6133 11.5518
USD/JPY 118.85 117.29 GBP/ZAR 17.60 17.52
EUR/CHF 1.0140 1.0067 USD/RUB 66.14 64.55
USD/CHF 0.8776 0.8706 USD/NGN 187.05 189.55

 

Stunning ZEW Economic Sentiment data out of Germany yesterday, with the index up to 48.4 versus 34.9 previously, the forecast had been 40.0, so that’s quite an outperformance and also an 11 month high. Eurozone economic sentiment data also improved to a 6 month high. Meanwhile it looks like there’s been some serious buying of peripheral debt with a very successful Spanish debt auction yesterday. Perhaps some smart guys are getting in to the trade in anticipation of the ECB conducting quantitative easing. The lines are being drawn by politicians on both sides of the divide. Some recent comments by Greek and Italian politicians are clearly supportive of the concept of Eurozone QE, while Frau Merkel in Germany made comments that while not directly critical of the ECB can never-the-less be read as not exactly keen on the idea. Her point was valid in my view, as moral hazard is a serious issue. Why would countries with structural problems reform if the pressure is eased on them? Eurozone stocks, of course, care nothing about the finer points, they continue to rally in anticipation of central bank largesse.

The Bank of Japan kept rates unchanged, not a huge surprise, but they have cut their inflation forecast as oil prices are countering their efforts to increase inflation. They also increased their loan schemes in an attempt to boost lending, and perhaps they also did it to stave off criticism that they’re not doing enough to reach their inflation target. You could almost feel sorry for them if they weren’t embarking on a monetary project more reminiscent of the South American monetary policies of the 70s and 80s…

In the wake of the gloomy forecasts I brought to your attention yesterday, a number of leading economists, Nobel laureates among them, have voiced their optimism about global growth prospects on the back of lower energy prices. Glad to see that we at ParityFX are in good company! Interestingly some also voiced our concerns about overleveraged oil producers being a significant risk to financial markets, but the bottom line is consumers will benefit from having to spend less on energy this year.

Later on this morning we get the minutes of the Bank of England’s monetary policy committee. This should give us some insight into the voting patterns of officials, but no one really expects much of a change. In recent times there’ve been 2 members pushing for hikes, with the rest happy to keep things as they are. We will also get unemployment data for the UK, which should be interesting, and surely, given the proximity of the election, there will be some political sport made of the data. On a side note, I think it’s interesting that the former Governor of the Bank of England, Mervyn King has recently suggested that QE might not be the answer. Remember that the UK did a substantial amount of QE on his watch? Wow…

There really isn’t much else on the data front today. It wouldn’t surprise me if we see a lot of calm in the markets in this session. Save your firepower for the big event tomorrow.

DISCLAIMER
Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.
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.

Follow our tweets @parityfxplc

20150120 – IS DENMARK NEXT?

The IMF has followed the World Bank in cutting forecasts for global growth for this year and next. And in order to make today officially gloomy GDP growth day:

• the European Bank for Reconstruction and Development (EBRD) forecasts Russian GDP will shrink by nearly 5% this year;
• Malaysia, one of the largest oil producers in Asia, has cut its growth forecast down from 5 -6% to 4.5 – 5.5%
• and also China published data for 2014 which confirms that last year was its slowest year of growth in 24 years, when it faced sanctions in the wake of the Tiananmen Square massacre.

I don’t know what’s more depressing, the growth data, or the fact that the massacre doesn’t feel like it happened nearly a quarter of a century ago! Needless to say all this news seems to be impacting oil prices which are dipping again after a few days of recovery. You shouldn’t be shocked to hear that the naira, Nigeria’s currency, made a new record low again yesterday and the Malaysian ringitt hasn’t been this weak for some years. Emerging market currencies have done rather well in the last few weeks, it’s just possible that the period of relief might be ending.

It really does feel as if non-Eurozone European central banks are gearing themselves up for imminent QE. The Danish Central bank has lowered its deposit rate from -0.05% to -0.20%. Yes that’s a minus sign you see. Stick your money in your bank account and you’ll pay for your troubles! Oh to be a prudent saver in this crazy world (is it just me or does it feel like some perverse construct from Dante’s Inferno?). Following on from last week’s SNB action it does make one wonder, there are rumours that the market will try to attack the euro – Danish krone peg, all I can say to that is… wow! There is every risk that if the ECB announces QE this Thursday the Danish Central Bank will be forced to cut rates again. I’m only telling you that now, because if the ECB does do some QE I don’t think anyone will be taking much notice about what happens in Denmark!

In Germany the media is ramping up pressure on the ECB, railing against the plan to introduce quantitative easing into the Eurozone. It really does feel as if it’s going to happen. I can’t exaggerate how huge Thursday now feels. It is entirely possible that the euro could end the week substantially weaker than it is today. If you have exposure to the euro, if you own euro denominated assets, it would not be unreasonable to consider protecting yourself. Of course if anything is done, the euro is unlikely to be the only victim, the other major European currencies will likely be losers as well, albeit less so than the euro. So keep an eye out for the Norwegian krone, Swedish krone, pound sterling. Needless to say this could be an inflection point for Mr Draghi, the pressure is rising and if nothing happens, his very credibility is at risk. As a currency trader I must confess I’m really enjoying this… traders love big macro, and it doesn’t get much bigger than this! If we haven’t already mentioned this, EUR/USD is currently trading at levels not seen since 2003. 2003! The euro wasn’t weaker than this at the height of the Eurozone crisis when there were fears that the entire project would be scrapped, it wasn’t weaker than this in 2008 when the global financial system was at risk of implosion. It’s been a strange start to the week here at ParityFX, we have received enquiries from clients about whether the Italian lira is still a tradeable currency, and we have also been asked about the Old Kuwaiti dinar… hmmmm! And here we are with gold trading close to $1300… remember at the end of November when gold traded at $1140? Quite a move…

Later on this morning we get ZEW sentiment data out of Germany. The data is actually expected to show some improvement. I still maintain that lower energy prices will be a boost for advanced economies, and I suspect the anticipated improvement in sentiment is because of that. Just yesterday another of the major gas suppliers in the UK lowered prices for consumers by 5% with immediate effect. This is a good thing. But the deflation narrative is very powerful at the moment, we’ll need to see the positive effect before, in my opinion, common sense prevails. Not much else to look forward to on the data front apart from that, but who cares really? It’s all about Thursday…

DISCLAIMER
Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.
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.

Follow our tweets @parityfxplc

20150119 – NO COUNTRY FOR OLD PEOPLE

We finally got US stocks rallying into the close on Friday, but a near 10% decline overnight in China, caused by regulators curbing margin lending, will be a weight on equity markets today. Still the bias should be upwards for global equities as the market seems to be anticipating QE in the Eurozone. If you don’t believe me, take a look at the DAX, it’s now at record highs, and looks primed to continue rallying. With regards to the United States, the consumer optimism data was fantastic, and may have influenced the price action on Friday, and inflation slightly softer than expected probably helped. A combination of factors good enough for participants to overlook the softer than expected manufacturing and industrial production data which was slightly disappointing. What a strange world we live in though… the shenanigans of the SNB earlier in the week, Japanese bond yields collapsing to near non-existence, oil prices as low as they have been in years, gold up over 10% since the beginning of December, the likelihood of extraordinary measures to be taken in Europe it’s tough to find alternatives to owning equities at the moment. Regarding my comment about Japanese bonds.. I really kid you not, here’s the data:
• Japanese 2yr bonds @ -0.04%
• Japanese 5yr bonds @ 0.00%
• Japanese 10yr bonds @ 0.19%
… remember that this is a country with one of the worst demographics in the world. More adult diapers are purchased there than baby ones. It must be horrific being a pensioner there right now!

Today is Martin Luther King Day in the United States, so there’s likely to be less activity in markets, and when you consider that there’s very little macro data being published as well, this has the potential to be a fairly quiet start to the week.

In the short term the recent, primarily SNB inspired, pressure on the euro might be due a pause, the currency looks oversold versus both the US dollar and the pound sterling. However as I mentioned last week, we have now gone through levels in EUR/GBP which expose the single currency to the potential for significant further losses, and if you didn’t already know it from our comments we remain extremely bearish on the euro versus the US dollar. I could easily see EUR/USD recovering to 1.20, but the path of least resistance is very much to the downside.

Observing commodities, copper and oil have both mounted recoveries of some sort, we will have to monitor the price action this week to get a sense of how sustainable these bounces are. It does appear to have done one thing in the short term… provide some breathing space for beleaguered emerging market currencies. How long this can last is open to question, as the markets are still not pricing in any interest rate hikes in the United States, certainly not for anytime in the first half of this year. As I said earlier in this blog, it looks like a quiet day ahead, but my bias is towards a euro recovery today.

DISCLAIMER
Any financial promotion contained herein has been issued and approved by ParityFX Plc (“ParityFX”); a firm authorised and regulated by the Financial Conduct Authority (“FCA”) as a Payment Services Institution with registration number 606416. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to.
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.

Follow our tweets @parityfxplc