As most currency traders will tell you, there are times when it is prudent to sit on your hands and do nothing especially when the lack of colour prevails. I think I am safe in the notion that this is one of those moments.
The overall picture remains intact, i.e., we at ParityFX continue to forecast that EURUSD WILL reach PARITY in 2015. The market still has that psychological 1.00 in its sights. The stark differences between the ECB and FED make this forecast a “done deal” rather than an “if”. The ECB’s larger than expected QE announced on the 22nd January in conjunction with the FED’s nudge that rates will go higher in 2015 (US growth continues to impress) will ultimately push us to PARITY before the new year’s eve party kicks off.
The amazing turnaround in oil prices over the past few months has and continues to bring shockwaves through the financial markets. Who would have expected oil prices to fall over 40%. The fall in oil continues to add downward pressure on inflation globally thus keeping global CB’s policies “accommodative”. I have commented that the lower oil prices will be a massive boost to growth which in turn will give CB’s additional firepower when looking at their individual economies and how they could spur them onwards and upwards. I think to a larger extent CB’s globally have used all their monetary policy bullets and are now looking at market fundamentals (lower oil prices, QE, negative policy rates, buying other assets, keeping rates stable for longer ) to raise GDP levels. While cheap money is a good thing, we know only too well that greed could see an abuse of that luxury and in turn running the risk that when rates start to rise those investors will be unable to service the debt sending us back to 2008.
For years I have been saying that Greece will not exit the EU. That the framework simply does not exist and the fallout would make the Lehman Brothers (Bank) collapse pale in comparison. Still there are many commentators and risk takers who are betting that “Grexit” could indeed happen. Greek banks continue to see an outflow of deposits by their customers adding to pressure on the banking system. Wednesday sees a decision by the ECB on whether to roll ELA (emergency liquidity assistance) lines to Greek banks. The risk of a full-blown crisis should a political showdown with the ECB happen, would mean Greece defaulting,. As I mentioned above depositors are withdraw billions from Greek banks, echoing the summer of 2012 when the Greek central bank was forced to provide up to €124bn of ELA – loans to keep the banks running. The problems of course don’t stop at Greece. You can be rest assured, Spain, Italy, France and a number of other EU members will pull out the “hey if Greece are getting it what about us” card. Seriously, if that happens we might as well start burning our EUR’s because that could be the beginning of the end of the EU as we know it. The mere writing of this scares the caboodles out of me!!!
With regards the GBPUSD and EURGBP my views remain unchanged. Vs the USD the GBP will hit new lows in 2015 aided by a (I SERIOUSLY HOPE NOT but it looks likely) a hung parliament and a stronger USD, while Vs the EUR the GBP will hit new highs in 2015 aided by a stronger UK economy and inward investment and generally as a safer option from the political risks within the EU. I think the GBP could head another 1000 pips easily this year with 1.4000 and 0.7150 my targets. Unrealistic??? In JULY 2014 we predicted EURUSD at 1.2000 (from 1.3750) – needless to say WE WERE SPOT ON!! The point I am making is everyone agrees that the US economy is powering ahead vs the UK and EU. Everyone agrees that the UK is powering ahead of the EU. That pretty much equates to EURUSD at PARITY, GBPUSD at 1.4000 and EURGBP at 0.7150.
As regards the emerging market currencies, TRY, RUB, ZAR, INR & MXN are all likely to suffer the fallout from the strong USD. Internal bubble and strife, inferior and worsening ratings and generally poorer trading conditions will keep EM currencies on the back foot. For those EM communities that have strong export sectors this is not such a bad thing given that commodities and precious metals are USD based.
Have a good day ahead
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