Good morning

COWABUNGA was first popularized by a character in the US TV programme “Howdy Doody”. I hope they don’t mind me using this phrase.

“COWABUNGA” is used to express DELIGHT or SATISFACTION: Back in August 2014 ParityFX wrote and I quote: “It is my opinion that the USD (and I have said this many times) will break 1.3000 handle and by the year end could very well be trading around the low 1.20’s that’s how confident I am. Everything you read points to 1 main catalyst for this and that is the USA is coming OUT of the economic stagnation while EUROPE seems to be heading back IN to another mild (we hope) recession. This will have a marked impact on all currencies and therefore I expect to see a pickup in volatility as market makers begin to turn their positions around to reflect the anticipated change. Already we are seeing this in FX volatility levels”.

The markets opened in New Zealand and IMMEDIATELY started BUYING the USD vs EUR, GBP, CHF, CAD, AUD, and NZD (excl JPY). The lows witnessed this morning have been MONUMENTAL: EURUSD 1.1859 from 1.2050, GBPUSD 1.5167 from 1.5565, USDCHF 1.0284 from 0.9977, USDCAD 1.1845 from 1.1650, AUDUSD 0.8034 from 0.8140 and NZDUSD 0.7618 from 0.7755. Let’s all say it together UNBELIEVABLE.

So what is behind this move. Well I said most of it on Friday but I will recap quickly:
(1) In an interview with German daily Handelsblatt, ECB president Draghi confirmed that the CB was stepping up its QE programme, noting that “the risks of not fulfilling (the ECB’s) mandate of price stability are…higher than they were six months ago”. He said the bank was working on technical preparations to “alter the size, speed and composition of (its) measures at the beginning of 2015, should this become necessary to react to a too long period of low inflation”. (2) Greek elections to be held on the 25th January could herald the start of a new party in power, Syriza. According to a poll conducted on Dec 29 and 30, Syriza kept a 3.1-point lead over New Democracy. Furthermore, the poll showed that 74.2% agreed that Greece must stay in the eurozone at all costs. Der Spiegel noted that Berlin could envisage pushing Greece out of the EU/EUR. Economy minister, Gabriel reportedly said that the German government wants Greece to stay in the EU/EUR, and there are no contingency plans.                 (3) PMI – 4 out of 5 top EU countries reported declines in December. (4) UK PMI disappointed 52.50 vs 53.30 sending the GBP into a spiral and gaining momentum o/n with the USD’s other main basket currencies. The elections in May could signal yet another reason to SELL the GBP. Unless the Conservatives get a clear majority this time I fear the rout against the USD could be the start of “silly season”. G-d help the Queen (not to mention the UK) if Labour win. (5) China official manufacturing PMI fell to 50.10 its lowest level since July 2013. Growth risk remains on the decline bringing about further CUTS in China’s RRR (interest rates).

As I have said MANY times, the out performance of the US economy and expected divergence between US and other G4 economies (monetary policies) dominated markets last year and will continue to dominate markets in 2015.  Ultimately then the USD will be the main benefactor. The plunge in oil was also felt across markets, adding momentum to the flattening in global bond curves and generating significant stress in energy-linked assets and economies, most notably in Russia. Europe’s deflation fears were reflected in a sharp divergence between Bonds and Equities. In a nut shell it appears on paper that the US economy can thrive in isolation with the rest of its trading partners (EU/UK/China) retreating. I have said repeatedly the world NEEDS A STRONG US ECONOMY. Remember the old saying when the US sneezes the rest of the world catches a cold.

So with the markets getting “back to normal” this week after the holidays it appears we are carrying on from where we left off. The USD SMASHED through €/$1.2000 like a hot knife through butter. PARITY(FX) was reached in USDCHF. The next leg of this amazing USD story is firmly in place and the coming weeks will prove to be a KEY to the USD’s fortunes in 2015. I maintain my view (like many others) that the USD’s rally will continue unabated and PARITY €/$ COULD VERY WELL HAPPEN IN 2015. The data all supports this view and more importantly the Central Banks (FED & ECB) have been conspicuously QUIET about the moves. Silence surely is CONFIRMATION by the aforementioned authorities that they are OK WITH THE CURRENCY MOVES!!!