Yesterday was one of those extraordinary days in currency markets that only come around once in a blue moon. As we mentioned, the Swiss National Bank (SNB) abandoned their ceiling for the Swiss franc against the euro, there’s no need for me to rehash what happened afterwards, but we should try to understand why. I mean really… why now? I have a suspicion that Mr Draghi may have alerted the SNB that Eurozone quantitative easing is likely to be announced shortly, in light of that a continued defence of the ceiling would be pointless. Over the last few years, the SNB has bought hundreds of billions of euros in order to prevent EUR/CHF from collapsing through the 1.20 level, if the ECB were to begin QE with the expressed intent of expanding their balance sheet by €1trn euro, the flows could be overwhelming. Of course this is just my speculation, I’ll leave events to play themselves out so we can see if I hit the mark. In any case, the market impact of the SNB decision was instantaneous. EUR/USD dropped from 1.1760 to 1.1580 in quick order, and European stocks dropped in the immediate aftermath with Eurostoxx falling 3% in the first 10 minutes. However, after a few hours we saw a strong reversal with stocks ending the session higher. I would like to think people took note of the following ParityFX tweet:

@parityfxplc : “#EURCHF #SNB #USDCHF Well well well… I wonder if Mr Draghi gave the SNB the nod that QE is about to happen. Peripheral debt anyone??”

Little noticed in all the carnage was the fact that EUR/GBP has smashed through lows that have been in place since 2009. Technically there now exists free space between where we are 0.7650 or so and the 0.7250 support zone that goes all the way back to 2003. Who knows this could help the Spanish property market if the euro really starts to feel cheap in British pockets!

The dollar continues to do.. not much. Once you look outside of European currencies it’s hard to make a case that the greenback is strengthening at all. As I said we will always have pauses in trends, it is natural and healthy. Perhaps the Philly Fed data yesterday is partly responsible, as well as the indiscriminate buying of Swiss francs against all currencies. On the other hand Empire Manufacturing data was solid, as was the Bloomberg consumer confidence indicator. All much of a muchness to be honest… I doubt anyone really paid attention to data yesterday. Surely every currency trader only had eyes for the Swissie!

Today we have inflation numbers for the Eurozone as a whole. We should all pay close attention to this, because if it’s lower than forecast and previous numbers it adds fuel to the QE fire. To be honest, today might as well be called inflation day, because we have data coming out in the US as well. Contrast the expectations of 0.8% yoy numbers for the Eurozone versus 1.7% in the US. Also important will be the Michigan sentiment data out later in the afternoon.

Yet again, US markets sold off into the close, it’s becoming a bad habit, and we’re now very close to the mid-December lows. It can be looked at in a couple of ways, these are either fantastic risk reward levels to increase ownership of US stocks, or a serious reassessment of the technicals will have to be conducted if those lows are breached. As always we will update you, and present our views as events progress. Enjoy your weekend.

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

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Yet again we made lower lows for the S&P 500 yesterday, even establishing a new year to date low. We have subsequently seen a bounce which constitutes a 2% rally from said lows. We would need to climb another 1.5% in order for the increasingly negative bias of the market not to be concerning, but on the flip side the mid December lows below 1970 represent huge levels now. We really don’t want to see the index go below there. As before the selling seems to occur when US traders get in to work – an interesting dynamic, and one we will monitor today to see if it persists.

On a more positive note, commodities, namely copper and oil had positive days with recovers of some sort occurring. Difficult to tell if these are just counter-trend rallies or if the worst is over. The way things are going, I’m inclined toward the former. Time will tell. For what it’s worth the selling of copper was out of China, supposedly on the back of Chinese hedge funds taking a gloomy view on the economic outlook, and that’s not the only sobering news coming out of Asia, where we have seen the South Korean central slash their growth forecast because of deflation fears, and in Japan core machinery orders data (a leading indicator for capex spending) fell 14.6% year on year worse than the forecast 5.8% decline…. woof! Just focussing on South Korea, those deflation fears are because the economy is a major importer of energy, I wish someone could explain to me in what world cheaper energy imports for an energy consuming economy can be read in as a bad thing, but there you go.. this is the world we live in now. Anyway, add those gloomy views on 2015 growth prospects to the World Bank’s slower growth forecast, and it seems many see a half empty glass for the coming year. Perhaps the Indians are on my side… they’ve surprised the market by lowering their benchmark interest rate because inflation is declining, with a view to boosting growth. The currency markets loved it.. the Indian rupee has appreciated by 1% today. Who can blame them? Lower borrowing costs plus cheaper energy. Nice!

Meanwhile the euro looks like the sick man amongst the major currencies, this becomes even more apparent when you look at how EUR/GBP has performed recently. The cross is at the lowest level since mid-2013, and looks set to challenge levels last seen in 2009. Some of the likely causes of this weakness are:

• a legal challenge to Eurozone QE has failed in the courts;
• ECB council member Christian Noyer has suggested that euro depreciation is “normal” given the weak growth in the Eurozone;
• and the outcome of the Greek elections looms over the markets.

There are likely other reasons, but these three are fairly juicy and support the precarious state of the euro. German GDP came in at 1.5% annual growth for 2014. Not bad.. particularly considering it barely grew the year before. And now we look forward to the boost from collapsing energy prices. Not too shabby…

But in further signs of slowing (in a purely relative sense) in the Chinese economy, credit growth has been much less than expected, with new loans coming in considerably below forecasts. That’s despite instructions from the central bank near the end of last year to turn on the taps. Very very interesting!

Not a huge amount of data to look forward to today. Empire State Manufacturing data in the US this afternoon, as well as some consumer confidence data. We’ll tweet if anything really interesting happens. I have my eye on the Russian rouble, it’s down over 2% today… oh deary me!

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

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In response to the UK inflation numbers, the pound sterling fell to an intra-day low yesterday (briefly below 1.51), but since then it’s been recovering and it currently hovers around the 1.52 level.. I can certainly understand the dip, after all annual CPI only rising 0.5% versus 0.7% expected and 1% previously, it’s reasonable to reassess rate rise expectations. The rally afterwards is a bit harder to explain, I would like to think that the market views this disinflation as I do… a tax cut for consumers, but deflation is a compelling narrative that everyone wants to promote. So if it’s not the growth benefits of richer consumers boosting sterling what is it? Perhaps it’s as simple as the market was too short of sterling, and mark my words, this was certainly all about sterling, because even as GBP/USD has rallied, so too did EUR/GBP fall. This bounce in GBP/USD looks corrective and the 1.5235 – 60 zone might be the area where we reverse back into trend again. We’ll probably find out either way today.

As with the UK, so too France this morning, inflation numbers falling to the lowest levels since 2009. The pressure on Mr Draghi to deliver quantitative easing must be enormous. I can well understand from a government’s perspective why deflation should be feared, with their massive debts that much harder to pay off, so I fully expect this deflation narrative to persist in the coming months, even though we’ve known for some time that falling energy prices would be disinflationary.

On the other side of the pond, the small business optimism data was strongly positive, and even better still, there are signs that wage growth is set to pick up, with the compensation plans of small businesses showing a marked rise. This is great news for the US economy, you don’t pay top dollar, if you aren’t bullish about future prospects, and planning on hiring more people. But we must temper our optimism about US growth with news of the World Bank cutting its global growth forecast, they are concerned about other regions and the limitations of central banks at the zero bound. I’m a bit sceptical myself, I rather think we may end up underestimating global growth this year, but they’re the experts!

US equities posted lower lows yesterday, in fact it’s becoming noticeable over the last few days that buyers are overwhelmed by sellers only when US markets start trading. Whether US investors have a different view on the world to everyone else, or some as yet unknown reason, the pattern is intriguing. As we approach the year to date low for the S&P 500, it’s fair to say from a technical perspective, that we really need to hold above there, otherwise we could be set for deeper corrections…. we’re only 1% above said lows currently.

Copper prices collapsed yesterday, and I mean they really collapsed, falling over 10% at one point. There was a recovery of some sort into the close, but it looks like the metal is opening significantly lower than yesterdays close -not a good sign! It’s a strange world we live in.. if you accept that commodity prices have some predictive power about future growth prospects then we should all be very worried. You only have to look at oil, and now copper over the last few months. It’s not every day copper trades so violently. But I would argue that commodity prices have a much weaker predictive power than in the past. What with stockpiling, leverage, economic advancements, China.. commodities like copper are a good deal less macro, and far more idiosyncratic these days. However we can’t say there is no predictive capability anymore so we would do best by logging yesterday’s price action, who knows it might yet be a canary in mine. By the way, if you missed it yesterday, the UAE – an OPEC member – was unrepentant about the cartels decision to maintain production levels…. $30 oil doesn’t look so far-fetched anymore.

We have the Philly Fed manufacturing index to look forward to later. As well as some producer price indices as well. A fairly light day data wise, but we’ll keep an eye out for items that could affect currencies. It’s been a while since I’ve mentioned the Russian rouble specifically, because things have really calmed down over the last few weeks, but if anyone thought it was over… think again. Yesterday there were signs of some excitement again, with the currency weakening again. It’s nothing too dramatic yet, but given the moves in the commodities markets in recent weeks, we would be foolish to expect no reaction. Needless to say I’ll be keeping a closer eye on the Slavic currency again. This may also be the signal to start paying closer attention to emerging market currencies in general. Christmas was a quiet time for these less liquid currencies and they made some recoveries. With commodity prices collapsing there is no reason why these currencies shouldn’t come under pressure again.

Meanwhile the Japanese yen goes the other way, trading at 2 month highs at the moment. For me.. this move is very clearly corrective within a longer term bullish trend, USD/JPY could go lower still in the short term, so there will be opportunities to sell yen (buy USD/JPY) at better levels. As bearish as we sound about the euro it’s probably fair to say that we are more bearish about the Japanese yen in the long term! Horrifying thought…

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

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It looks like the trend for global equities is down, as the S&P 500 has made lower lows and lower highs in the last few days. Why do I spend so much time talking about equities and other non-currency asset classes when my special interest is currencies? One simple answer… sentiment. The appetite for risk is most obviously expressed via equities, but we see it in currencies as well. Furthermore, when we can appreciate the inter-market relationships and correlations between asset classes, we get a better sense of what is likely to happen. Over the last 6 months we have noted the positive relationship between the US dollar and equities – when equities have rallied so has the US dollar. This is important, as it tells us that the US dollar is sensitive to positive expectations for global growth. It has also meant, that whenever we have heard anything that implies that global growth prospects are not as constructive as we had previously assumed, we don’t even have to check the screens to know that currency pairs like EUR/USD would be going higher because the US dollar has weakened. At the moment the relationship between the US dollar and equities is not as certain as it has been in recent months. I’m not here to make a claim that the relationship has changed, but it is new information and merits further observation. It could reveal the next compelling narrative that macro watchers need to keep in mind… then again, it’s just a few data points, and that doesn’t make a sample… yet.

The decline in energy prices continues relentlessly. WTI for February delivery trades comfortably below $45, and frankly, studying the chart it’s getting difficult to suggest we won’t see prices below $40 in the near future. I’m not sure we’ve been this low in 6 years. Pump prices will get cheaper, and this morning I’ve heard that a gas supplier in the UK is lowering prices by 3.5% with immediate effect. In isolation these are small things, but when you consider the cumulative boost to disposable income for the ordinary family, this represents a massive multi-billion dollar stimulus. Only in the Eurozone will this news be taken, rather ridiculously, as a negative, with deflationary concerns getting priority there. The most important point is that consumers will have more cash to spend and we are likely to see increasing evidence of this going forward. Obviously this is not such a happy story for oil producers, but the world as a whole will benefit.

In another sign of the softness of economic conditions in the UK, an important retail sales monitor disappointed quite badly this morning – the BRC Retail Sales monitor came in at -0.4% versus +0.9% previously, less than the forecast of +0.6%. But somehow I expect the market will be focussed on the inflation numbers due within the hour. Expectations are for the lowest UK inflation data in over a decade, but I suspect the Bank of England, like the Federal Reserve will take the sensible approach and look through the disinflationary effect of falling energy prices. Later on in the day, we have some chain store sales in the US which could add some colour to Christmas period shopping, we also get a small business survey which I think could be important considering that the SME space is responsible for the lion share of job creation, another job related data point coming out is the JOLTs Job Openings report. As I’ve said before job creation, and more specifically a tightening labour market and its impact on wage growth will be the crucial determinant for the Federal Reserve about when interest rates should be hiked.

Some will note that oil producer currencies have held up quite well in recent times, but I would take you back to my recent comments about the US dollar… it’s taking a breather. This doesn’t mean however that EUR/USD and GBP/USD might not do their own thing and post new lows in the short term, as I said before, these European currencies are dancing to their own regional tune. When I look at the EUR/USD chart at the moment, it looks to me, like we could get as low as 1.15 – 16 in the weeks ahead, but probably not before we re-test the high 1.19s or possibly 1.20 first. Breather or not, we remain confident that when the bullish dollar trend reasserts itself, currencies like the Russian rouble, Norwegian krone and the naira will be under pressure again. If you have exposures to these currencies, now is not the time to be complacent in my view, this is an opportunity structure the appropriate protections.

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

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The non-farm payrolls report on Friday showed a United States economy adding more jobs than economists forecast, with 252,000 new additions versus 230,000 expected. Despite a dip from November’s stellar 353,000 the numbers for 2014 in aggregate constitute the best year of job creation since 1999. Let me repeat that, the best year of job creation in 15 years! Very impressive, and for the data junkies, that’s just shy of 3 million jobs created in 2014. However as I mentioned last week, perhaps the key variable to watch going forward is wage growth, and average hourly earnings actually fell 0.2%, despite expectations of a 0.2% rise. You might say that because of the tepid wage growth the Fed might be willing to sit back and wait, but there’s nothing a central bank hates more than to be behind the curve and reacting to events. For my money, the risk remains that the Federal Reserve will hike rates sooner rather than later. You simply can’t disregard those sort of job creation numbers!

But what happened to the financial markets when the news came out? Here’s a quick run through:

• S&P 500 (my preferred proxy for global equity markets) – rose the initial half hour after the number, posting a new year to date high, before subsequently giving up 1.5% from the highs.

• EUR/USD (for currencies you have to at least look at the euro and Japanese yen, that way you stand a better chance of eliminating non-dollar factors) – fell 0.5% in the first half hour, but subsequently rallied into the close on Friday. To be clear… the dollar appeared to strengthen initially, but then sold off into Fridays close, losing all the gains and more.

• USD/JPY – rose 0.6% in the first half hour, but then subsequently reversed, giving up all the gains and more, into the close. Again.. as with EUR/USD, the dollar rallied initially but lost all the gains and more.

• Oil – the intra-day downward trend that was already in force on Friday continued after the number. It’s difficult to say what impact the US data had in this case.

• 10 year Bond yields – fell after the number

• September 15 Eurodollar (for those unfamiliar with this instrument, this is a future which roughly predicts where US interest rates will be in September) – rallied after the number, climbing about 6bps. Although the market is pricing in a 25bps hike by September, this move went some way to taking out any possibility of anything more than that.

There you have it. I’m tempted to annotate the price action above by saying something like… in the tug of war between euphoria that wage growth remains tepid, and therefore the Federal Reserve will remain in wait-and-see mode, and the realisation that the labour market is getting too tight and Fed officials will be forced to act even if wage growth remains stagnant, the pragmatists are winning. Why are the pragmatists winning? The unemployment rate is 5.6%, the Federal Funds Rate is at 0.25%. If wage growth picks up suddenly the central bank will be forced to hike reactively. For all the nonsense over the last few years about fear of deflation… trust me.. the real nightmare is when inflation gets out of control on the way up. History will look poorly on an institution that continued with a policy of zero interest rates while the unemployment rate approached levels which have historically signalled full employment.

There really is no macro data worth bringing to your attention today. We remain in a situation where energy prices are under pressure, the US dollar has taken a pause for breath, indeed against most currencies around the world, it is slightly less expensive in the last week, and equity markets are in wait and see mode. European currencies dance to their own regional beat, whether it’s the UK with the onset of election mania, and the possibility of no clear winner and no viable coalition partner; or the Eurozone with a crucial Greek election in a fortnight; the result is a real risk of outcomes which could adversely impact European currencies, hence the market is extracting an appropriate discount. Here at ParityFX, our base case remains that the bullish US dollar trend is likely to be a powerful multi-year phenomenon which like a runaway train will leave collateral damage all over the macro landscape. Yes there will be periods like the last few weeks where the trend pauses, but don’t mistake that for anything other than what it is… a pause.

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

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20150109 – KEEP AN EYE ON US WAGE GROWTH
A quite stunning rally in equities yesterday with the S&P up 1.8%. As I said a few days ago, a bounce was expected, but the more interesting question was… are we going to re-test the highs or will it just be a corrective bounce before a deeper decline. To be honest, at this point in the evolution of the bounce, I expected that I would have a better insight into which of those outcomes was more probable, but given the nature of the rally, and the preceding decline, I am unclear about the technicals at this point. I can tell you that I believe we should tick up a few more points as the short term bounce looks mature, but after an intra-day correction, it’s entirely possible that we see new year-to-date highs, but I really can’t say more than that, although I do think the risk is we re-test the highs. What is clear for all to see however is that US bond yields appear to be positively correlated to equity prices at the moment – the rally in equities was matched by rises in bond yields (declining bond prices).

Today we await the non-farm payrolls employment report in the United States, this along with Eurozone inflation numbers from earlier this week will be the critical data likely to impact the macro-scope. While Eurozone inflation is a key determinant for the ECB’s decision making process, employment data in the U.S, and more specifically wage growth is the key determinant for the Federal Reserve’s decision making. Economists have forecast 240,000 additions to the labour force, any positive surprise could put pressure on the front end of the US interest rate curve, and of course give the US dollar a boost, but I’ll pay close attention to the average hourly earnings data as well. We really are getting to the stage where we have to monitor upside surprises in that number. It’s the one thing that might cause a hawkish reaction from the Federal Reserve board members.

This morning we’ve seen further signs of the sluggish growth picture in the UK, with a slightly better than expected industrial production number albeit not as good as forecast. In fact industrial production numbers coming out in select members of the European Economic area – Sweden, Spain, France, Germany etc – are no great shakes. I wouldn’t say disastrous, but… stagnating is probably the appropriate description. Let’s be honest, it’s not really surprising! We’ve also seen inflation data in China published overnight, and that, as expected showed a slight uptick to 1.5% year on year to December, from 1.4% previously, certainly not a significant enough increase to deter Chinese central bank from easing policy should the need arise. The only other data of global import that I feel I should mention is the Leading Index data in Japan which was somewhat disappointing. I think that when Mr Draghi wakes up sweating at night, from dreaming about what could go wrong in the Eurozone, it’s images of the Land of the Rising Sun that are responsible for his terrors. There but for the… well you know!

So far this year, the US dollar really hasn’t done much, if anything it’s weakened against currencies like the Japanese yen, Mexican peso and the Indian rupee. The excitement in currencies have been focussed around the European continent, with new 2 year lows for EUR/USD posted every day in 2015 so far. The US employment data might change that picture later on today, but I would find it even more interesting if we get strong employment data and we still don’t get a dollar rally. If that happens it could well be a sign that too many dollars are owned, and it could be a warning that what had begun to look like a one way trade might need to pause for a while. It’s just something to look out for.

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

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Good morning

I bet Pres. Of the ECB Draghi must be sitting in his office thinking, when will the bad news stop!! I am afraid Pres. Draghi, not anytime soon.

What am I referring to you might be asking is the DREADED “D” word – yes my friend DEFLATION or falling prices is now stalking the EU, circling like the great white waiting to attack. As any boxer will tell you when cornered the only way to “get out” is to come out fighting and strike your opponent. Pres. Draghi, I know you are reading this before you set off to work, it is YOUR TIME to come out fighting. No more Mr. nice guy let’s wait and see. It is time to use ALL your power & “exotic” policies as a weapon against falling prices, falling inflation, stagnant wage growth, stagnant GDP and that little thorn in your side, aka Greece.

Howard Archer, chief European economist at IHS Global Insight called the recent inflation data “dire news for the ECB”. The fact is the ECB have known for months things were turning ugly and Deflation was around the corner. Well the ECB have turned the corner and run smack into Deflation. What is the point of their half-hearted measures we saw in 2014? Like his counterpart over the pond, Pres. Yellen of the FED threw everything the FED had at their problem. Needless to say look at the US today vs the EU, David and Goliath!!! As the saying goes, never send a boy to do a man’s job. Would I be correct in saying then that the root of the (EU’s) problem lies in the failure by the ECB to deliver APPROPRIATE fiscal and monetary policies?

“A bout of negative inflation could have some positive effects on the eurozone economy by boosting real incomes and spending power. But the adverse effects on inflation expectations and peripheral countries’ debt consolidation efforts are potentially greater,” said Jonathan Loynes, chief European economist at Capital Economics.

January will be make or break for the ECB. They have a meeting on the 22^nd January, followed by the press conference. The ECB MUST and I cannot stress that enough, MUST deliver or face continued mutilation in the markets, not to mention the Greek vote 3 days later which could all but bury the ECB losing them any credibility they had left. It has been reported that Germany are against additional QE measures. If this is true then I think they hinting it is time to kick “members” out the EU. The Greek vote will properly complicate things if the Syriza party wins. They want to stay in the EU BUT re-negotiate the terms of the bailout. Don’t forget the Greek banks simply could not survive without the bailout. The repercussions and fall-out do not bear thinking of.

So how did the USD fair yesterday after the EU inflation numbers were published…EURUSD traded as low as 1.1803 this morning, GBPUSD (after the VERY disappointing PMI numbers) traded as low as 1.5038. This is a –ve EUR, +ve USD and –ve GBP story. Now do you see why I have said in my opening comments of 2015 that the USD will CONTINUE on its present trajectory finishing 2015 CLOSE to PARITY (1.00/1.00) EURUSD, while the GBPUSD is destined to trade on a 1.30 HANDLE. May’s UK elections are probably the most important in decades. Given the precarious state of the world’s economies not to mention whose in power in some of them, a win of any sort for Labour will set us back to 2008. No disrespect to the Labour party but I for one would not like to see Mr Balls running our economy.. Like I said, don’t send a boy to do a man’s job.

UK interest rate decision today. No change expected. In fact it is not until the 21^st January and the BOE minutes that we will get anything more out of Gov. Carney.

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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.

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We got the new S&P 500 low I expected last night (but not much of a bounce), the ISM numbers in the United States certainly helped! The Institute for Supply Management (ISM) services index fell more than expected in December to its lowest level since June, but it still indicates that non-manufacturing expanded for the 59th consecutive month. We will need to monitor succeeding months to confirm that growth is not weakening, but for now growth remains robust. Perhaps of more concern is the rally in the bond market which has seen bond yields decline below 2%. Is the bond market telling us something about future growth? Personally I’m not concerned.. the bond rally has happened as equities have fallen from the highs so it could just simply be rotation; furthermore, across yearend, many investors are likely to have been liquidating stocks for tax purposes, bonds would be a natural home for the surplus cash; add to that the disinflationary impact of collapsing oil prices which make bonds more attractive; and finally the middle to back end of the US yield curve may not sell off quite as quickly as expected because you have to figure that Treasury supply is declining as the US fiscal position improves.

EUR/USD is back at recent lows, as is cable (GBP/USD), as I said yesterday this is more of a European thing right now, the US dollar is not rallying at the moment which is obvious when you look at other USD-G10 pairs like USD/JPY and NZD/USD. We expect the pressure on the euro to continue because of the risks inherent in the Greek election results on January 25th. As for the pound sterling, the UK services PMI dipping to a 19 month low was the main culprit, although pressure on the euro always adversely impacts GBP as well. We have to acknowledge the fact that the UK economic recovery is slowing, this has been the case in the last few months, but it really shouldn’t be a surprise. The Eurozone is by far and away the largest market for the United Kingdom, it is simply unreasonable to expect the UK economy to chug along with no impact from the stagnant economic conditions there.

This morning Brent crude for February delivery has briefly dipped below $50, and it would take someone far more optimistic than me to imagine we don’t spend a decent amount of time below that level today. It’s safe to assume that oil exposed currencies like the Russian rouble, Norwegian krone, Mexican peso and naira to name a few will be under pressure again in the very near future. Lower oil prices are overwhelmingly good news for consumers as cheaper pump prices will mean more money in the pocket, but the potential for systemic events becomes greater as this energy price decline persists. Already there are concerns about the loan book of Nigerian banks which is dangerously focussed on the oil & gas sector there. I wonder where else we should be concerned? I guarantee you there will be pockets of risk which will be brought to light in the months ahead, we can only hope that these issues are distributed enough to enable us to avoid global systemic risk events.

Some data out this morning.. slightly better employment data out of Germany with the unemployment rate decline from 6.6% to 6.5%, a slight surprise. Can’t say the same about Italian data though… 13.4% versus 13.3% previously, perhaps as in the book of Job (how’s that for irony!) “The Lord Gave, and the Lord Hath Taken Away”. Talking about employment data though.. we get the ADP measure this afternoon in the United States which should set us up for the main data event of the week, the US non-farm payrolls report on Friday. We should get some Italian inflation data later on this morning, which will probably depress us even more, that country really looks like the ugly step child of Europe right now, but for once they appear to have a dynamic leader, perhaps it’s always darkest before the dawn? At the same time as the Italian inflation data comes out, we should get a flash Eurozone number as well. This, along with US non-farm payrolls is the key data event of the week. Economists expect an unchanged +0.7% core year on year CPI number… there’ll be hell to pay if it surprises to the downside. Look out for our tweets, if anything really interesting happens we’ll let you know via that.

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A new year, and a mini-correction in risk sentiment as the S&P 500 is already down 3% from the highs of the penultimate day of 2014. Perhaps more significant though is the price action in the currency and commodity markets. Oil prices are down almost 9% from the opening price of the year, with WTI for February delivery trading below $50 at $49.40, and Brent not too far behind at $52.30. Expect cheaper pump prices! And then we look at the currency markets, and it’s all about the euro and the other European currencies in its orbit. We, at ParityFX, were gratified to see our end year EUR/USD target met, and indeed we’ve seen extensions down to the mid 1.18s and the pound sterling has not been much better with a brief spell below 1.52. The dollar is actually slightly weaker versus the Japanese yen, in a sign that the big moves are very Europe specific. The Greek elections on January 25th have implications for the integrity of the European Union, and the UK elections in the summer appear to have kicked off early. The travails of the euro are obvious to all, but the pound sterling has its own specific issues, despite the UK’s robust economic performance. The concern here is that with the recent electoral success of UKIP – a party that along with Podemos of Spain, Syriza of Greece, Front National in France and AfD in Germany are viewed as anti-European Union – could force a national government in Britain at the next election. For our readers in other parts of the world let me elaborate… if neither of the two largest parties the Conservatives or Labour are able to form a government after the next election, they might be forced to work together in government. This hasn’t happened since the 2nd World War and needless to say this is a far from optimal outcome, but the collapse of the Liberal Democrats as a 3rd force in UK politics is what makes this possible. Would a national government ever get anything done? One thing is certain.. the pound sterling would be the major victim of the resulting uncertainty.

I must confess the price action we’re seeing in the equity market is not a surprise to me, although it does appear to be happening about a week earlier than I would have anticipated. Still.. there are already signs of weakening momentum and I wouldn’t be surprised to see us make a new low sometime later on today before we see a bounce of some sort. It’s at that point that things get interesting from my perspective… what happens next? Either we see a re-test of the highs, or we see a deeper correction, I just don’t know. There are also signs of weakening momentum in EUR/USD in the longer term charts and the narrative that I find most compelling is either a rejection at the last moment of Syriza in Greece, or a coalition strong enough to supplant them, leading to a short term relief rally. I would therefore not be surprised to see EUR/USD trading up around 1.23 at some point closer to the end of this month, but let me clear.. the divergent policies of the ECB and Federal Reserve will drive currencies and volatility this year. The euro will depreciate, and the US dollar will continue to rally. Levels like 1.10 in EUR/USD look all too realistic, at some point this year, in my view and I would go further and say that EUR/USD parity.. 1.00.. is well within range within the next 18 months to 2 years. Some might ask what this will mean for the pound sterling, and I would say… it is difficult for the British currency, effectively a satellite orbiting around the Eurozone currency to diverge significantly from the path of the euro. Yes EUR/GBP is likely to be lower in this scenario, but probably not as low as one would expect, and most certainly cable, GBP/USD, will be significantly lower as well.

This morning we got some decent macro data out of China, with a services PMI measure coming out better than expected, and indeed an uptick from the prior month. Unfortunately I can’t say the same about similar Indian data, which was a bit disappointing, it’s going to be a long road for Prime Minister Modi. In Europe we will also get a wealth of services data this morning. Indeed, I can see that the French, German and Spanish data has been impressive, but the Italian data is terribly disappointing, I guess we should mark all that up in the ‘good’ box! French consumer confidence data is also looking a bit cheerful, perhaps it’s those cheaper pump prices making the sun shine brighter. We can look forward to some ISM data later on in the afternoon from the United States, as well as factory orders. The combination of all this information will be a good start in helping us build up the macro picture for early 2015.

I will talk about emerging market currencies over the days and weeks ahead. I don’t want to bore you with all that today, but I think you all know the message already! This will be a tough tough year for the less liquid currencies. The policy divergence of the major central banks, and more specifically the onset of normalisation from extraordinary measures in the United States represents a substantial and as yet unquantifiable risk to some of these currencies, and we can already see from the price action that exposures to this space are being reduced. I think it will get worse..

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!!! 

Let the GAMES BEGIN.  HOO-HAH!!!!