The story will simply not go away. If you are looking for a reason for the USD rally yesterday look no further than…Greece. The negotiations and tit for tat continues unabated. The Greek Govt. has said they are going to hold more talks with Troika (her creditors) today and try find a solution. Obviously there is more than meets the eye. The Greeks no doubt are trying everything to appease their anti-austerity supporters and keep Troika happy. In the end though the Greeks will have to accept that they simply have to accept the line thrown to them by the creditors and move on.
As ParityFX has been citing for a couple months the much anticipated rise in US interest rates has vastly contributed to the recent gains in the USD. Cast your mind back to 01 January and the EURUSD was trading at 1.2000!!! It was back then we forecast that (1) US will raise rates EARLIER than everyone in expecting – Q2, and (2) EURUSD will reach PARITY WELL AHEAD of what others were predicting. EURUSD is currently trading just under 1.0700 and given the proximity I think it will be safe to say that our predictions are looking good. Then of course there is the small matter of the ECB’s new stimulus plan, which began this week. The plan is simple, lower interest rates and devalue the EUR. As the monetary policies of the two central banks move in different directions, vast differences in growth (GDP), employment and general data being published and the fact that NEITHER CB has mentioned a word about the strength of the USD or weakness in the EUR confirms what we have been saying in January. One has to applaud the measures taken by Pres. Yellen and her colleagues at the FED. They pushed ahead with reforms and pumped the US economy with cash and liquidity. No doubt those measures are now reaping the rewards while the ECB dug their heels in, buried their head in the sand and hoped for a miracle. Unfortunately it was not to be and the ECB is now throwing everything and the kitchen sink simply to stay above water. Things would have looked vastly different had they started the QE reforms around the same time as the US. Alas let’s not cry over spilt milk. As far as the USD is concerned not only are we going to penetrate PARITY, but we are heading for the all time low in the EURUSD 0.8225 last printed in October 2000. Granted that is still some way off, but casting my mind back to those days (and they were awesome) the stage is set for a repeat of a EUR drubbing.
The strength of the USD is not only affecting the EUR of course. In fact it is having a vast impact on EM currencies and stocks. Some other examples include:
(1) USDZAR and ZAR crosses being hit hard by locals. Last week the Fin. Minister surprised by announcing a rise in income tax, fuel and electricity levies. In other words, they have spent so much money of Pres. Zuma’s new house they need to recoup that from his people. As for electricity, what a joke. The powerhouse of Africa and they continue to suffer from blackouts. Perhaps stop exporting so much electricity and keep your own country lit. Their technology is so back dated, it will take billions to see it right. Not in my lifetime!!! Suffice to say the increased taxes and stronger USD has seen the ZAR fall over 7% in recent weeks. GBPZAR having fallen to 17.75 is now trading upwards of 18.60 as time of writing. Your castle lager now costs £0.80!!!
(2) India Balance of Payments narrowed in Q4 (2014) to 1.60% of GDP. With a lower import bill it is highly likely the BoP will turn into a surplus in Q1 2015 and much to the envy of her trading partners.
(3) Chinese data continues to disappoint pointing to a continued “slump” in growth. Industrial production and retail sales both disappointing. As I mentioned a couple days ago, we are looking for FURTHER EASING by the PBoC as well as further QE to support growth and reach their target of 7% this year. Who wouldn’t take 7% growth….but this is China and 7% is deemed as underachieving.
(4) BoI rate cut and the non-spoken words that a devaluation of the ILS was on the cards is now taking shape. From 3.9350 when ParityFX recommended buying USDILS) the ILS has in fact devalued and is currently trading at 4.0450 (2.8% fall). As long as the USD continues to outperform, EM will continue to feel the brunt.
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