20150317 – MACRO FX DAILY

Good morning

High Low High Low
EUR/USD 1.0622 1.0551 USD/ZAR 12.4275 12.3470
GBP/USD 1.4846 1.4760 GBP/ZAR 18.43 18.22
EUR/GBP 0.7192 0.7118 USD/RUB 62.35 61.23
USD/JPY 121.52 121.22 USD/NGN 199.9 199.1
GBP/CHF 1.4964 1.4787 S&P 500 2,081 2,068
USD/ILS 4.0210 4.0014 Oil (Brent) 54.40 52.89

The BIG event for the week has to be the FOMC meeting starting today and ending tomorrow. The expectation is that the FOMC are likely to END forward guidance by dropping the “patience” language in favour of language that highlights that the US economic outlook warrants a gradual removal of policy accommodation or in simple words, they are ready to hike interest rates when they ready to do so. As we have been saying recently, as the outlook in the US has improved from month to month, the employment and activity outlook is robust enough to warrant hiking rates as early as May 2015 (most commentators looking for June onwards). Following the March meeting the FOMC meet again 28/29 April and then 16/17 June. It is for this reason I think they will surprise the market and hike sometime in May. Surprise is what they probably want, as this will take out any nasty moves in the June meeting. While the market ultimately expects a hike, positioning will be crucial so May looks to be the best bet for me. EURUSD has been trading “sideways” for the past few days ahead of tomorrow’s meeting. We expect that to change once the rhetoric is confirmed, and the USD to reassert itself as the currency to hold. I therefore expect the USD to mount another challenge on the 1.04 handle post meeting.

Oil has fallen hard over the past 24 hours as rumours surface about a deal between the US and Iran and more specifically Iran sanctions relief. Caution is always warranted when it comes to Iran as the sanctions are unlikely to be removed in their entirety. A case of wait and see will be initiated. I will not get into my opinions and thought on the outcome of the negotiations but the US had better tread carefully because a nuclear Iran will bring the world to their knees. Iran’s neighbours are none too happy as we know. The Saudi’s especially have noted their unhappiness at the prospects. Time will tell how this will all play out.

Wednesday sees the UK government present its 2015-2016 budget. Already we have seen they are due to change the inheritance tax, minimum wage and access to pensions. Make no mistake this is a political coup ahead of the elections in May. The UK economy is moving ahead nicely and these carrots will be seen by the electorate as a way of making it easier to pick the Conservatives as the party to lead for the next 5 years. I for one sincerely hope this is the case. Like I have noted previously, a Labour government will set the UK back to 2008 and the GBP will in all likelihood be crushed. How many FTSE 25 companies have come out in recent weeks to voice their concern about a Labour government. If people do not listen and take notice then it will be these same people that suffer the consequences of their vote. Already today we have seen the GBPUSD lose ground falling beneath 1.48 handle and EURGBP climb above 0.7170 (1.1930) after trading as high as 1.4250 ( 0.7019) just last week. The Conservatives have done an amazing job steadying the ship and putting the UK on a growth course. That is simply because the people who are running our finances know what they are doing. No disrespect meant, but Ed Balls as our Chancellor….I would rather have “Curious George” (if you have kids and they watch Disney jnr you will know what i mean). As things stand, I think the GBP will recover against the EUR, but regardless against the USD, the writing is and has been on the wall for months. The USD remains king of the castle and despite the economic soundness of the UK economy, the US economy still dominates (especially as I mentioned above the anticipated hike inn rates over the pond).

Across the other pond, the RBA (Australia) considered cutting rates in March but decided to wait for the time being (as we said it wasn’t going to wash). After starting the easing cycle in February, we remain confident they will cut in May (5th). The RBA members are waiting because  (1) benefit in allowing some time for the structure of interest rates and the economy to adjust to the earlier rate cut,  (2) advantages in receiving more data to indicate whether the economy was on the previously forecast path, and (3) a greater degree of uncertainty about the behaviour of borrowers and savers in a world of very low interest rates.  The RBA retained a strong easing bias, with members “recognising that further easing over the period ahead may be appropriate” and “were of the view that a case to ease monetary policy further might emerge” even with low interest rates and a lower exchange rate. The AUDUSD is trading around 0.7640 having appreciated vs the GBP in particular over the past 96 hours. I am firmly of the view that the AUD will remain “weak” and continue to slide vs the USD (and GBP) once the dust settles.

Israeli elections today. So much has been said and written. These days it does not matter who wins the most seats but rather who can form a majority in the Knesset. It is a race between security and socio economic. The latter there is grumbling over the rise in property over the past 5 years (+50%). But if you have been to Israel you will have noticed besides its beauty and history, there is only so much space to build, so instead of going out they going up (hello NY). Demand from Europe, UK, US (techies) means property is like the holy grail in Israel. I am not surprised to see prices grow. Even the BoI recently suggested the rise has been worrying. Then again the RBA (above) have the same issues. Property is king.  Needless to say overall my view is the ILS will remain weak and under pressure along with other EM currencies.


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