20150430 – LOOKING THROUGH THE FOG

High Low High Low
EUR/USD 1.1130 1.1071 USD/ZAR 11.8316 11.7609
GBP/USD 1.5448 1.5401 GBP/ZAR 18.25 18.15
EUR/GBP 0.7211 0.7187 USD/RUB 51.53 50.82
USD/JPY 119.17 118.49 USD/NGN 199.2 199.0
GBP/CHF 1.4530 1.4489 S&P 500 2,108 2,102
USD/ILS 3.8719 3.8518 Oil (Brent) 65.86 65.35

Yesterday’s latest FOMC statement had something for everyone, they acknowledged the weakness in the growth data published earlier on in the afternoon (more on that later), but reiterated their intention to hike rates “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term” What was particularly interesting to me was a subtle change in the statement. Here’s an excerpt from the March statement:

 

Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.”

 

If the much vaunted consistency of those same policy makers hasn’t changed why would they eliminate that sentence from yesterday’s statement? Obviously they would have had to replace ‘April’ with ‘May’, but you get my point. It implies to me that we are perilously close to a point where the Federal Reserve Board will require maximum flexibility to do what they have to do. They can no longer commit to saying there will be no rate hike next month… because there could be!

 

Unsurprisingly the US dollar strengthened. I’ve highlighted the timing of the FOMC announcement in the EUR/USD chart below. You can see, the drop indicating US dollar buying as the immediate reaction to the statement. But you can also see the subsequent recovery of EUR/USD which makes it clear that the bias remains to sell dollars in the European morning. Positioning, positioning, positioning! Too many people own dollars clearly.

eurusd20150430

Today is the end of the month – I’m not telling you something you don’t know – but as I mentioned yesterday we need to keep an eye on where GBP/USD closes this evening. Above 1.5430 will imply a much deeper dollar correction before any bigger picture trend in the greenback can reassert.

 

Just picking up from where I left it on the US GDP data… this was a very disappointing number – a quarter on quarter rise of +0.2%, when economists had forecast an increase of +1%! That’s some shortfall, and it’s made even worse when you look at the previous number of +2.2%. But I think policy makers were right to be cautious about reading too much into the data, last year’s Q1 number was also weak, but Q2 and Q3 were absolutely stunning. If the same happens this year, interest rates in the United States will definitely be higher by the time Americans sit down for some Thanksgiving turkey.

 

I could try to convince you that other items of relevance have occurred since yesterday’s blog, but I can’t justify taking up more of your time this morning. Keep an eye out for where cable closes tonight. It could mean that May is another nasty month for the dollar bulls. Speaking to a macro trader yesterday, I got the distinct impression he would like to get back on that horse (or should I say bull), this is the danger facing everyone right now. If the consensus remains that we should be buying dollars, perhaps that outcome will not happen. Markets are contrary like that…

 

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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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20150429 – OUTSIDE MONTH…

High Low High Low
EUR/USD 1.0989 1.0959 USD/ZAR 11.8912 11.8020
GBP/USD 1.5381 1.5327 GBP/ZAR 18.25 18.10
EUR/GBP 0.7162 0.7136 USD/RUB 52.48 51.27
USD/JPY 118.98 118.75 USD/NGN 199.2 198.0
GBP/CHF 1.4707 1.4623 S&P 500 2,119 2,115
USD/ILS 3.8677 3.8475 Oil (Brent) 64.74 64.18

 

The dollar is much weaker this morning, indeed April has been as poor a month for the greenback as any since September 2013. We are hovering near 2 month lows with the FOMC policy meeting this evening. Let’s be under no illusions, this is more about a dollar correction than a strengthening of the euro, pound sterling… or frankly pick A.N Other currency! But as I’ve suggested in the recent past, an 11 month trend should result in a corrective/ trendless market that lasts 3 to 4 months. If you wanted proof of this, then the weaker than expected UK GDP numbers yesterday are a case in point. British year on year GDP growth was 2.4%, which was weaker than the forecast 2.6% and much weaker than the prior reading of 3.0%. Looking at the numbers it looks to be primarily weakness in the construction sector, but this can be volatile and certainly Q1 is not known for booming activity in the building sector anyway. The point though is that we had unexpectedly poor data, and you would have expected the pound sterling to take a hit, well it did.. briefly.. but then surged to close at new highs for the day. That sort of price action tells you one of two things:

 

  • either people really want to own pound sterling,
  • or they own too many dollars.

 

You don’t have to be Sherlock Holmes to work out that this is about the dollar which has been performing poorly against most currencies in recent weeks, even less liquid emerging market ones! I’ll finish with one more point, a technical observation if you will, an analytical skill dear to my heart… if GBP/USD closes the month of April above 1.5430, a deeper US dollar correction may be in store for us. In technical analysis circles we describe that sort of phenomenon as an ‘outside month’, rest assured we will let you know if this occurs.

 

Later on today we get US GDP data published as well as the aforementioned FOMC policy meeting. US growth continues to look solid, with employment conditions continuing to tighten. There are some signs at the margin now that forward looking measures of inflation are starting to perk up as well. I was reading a research piece last night, about a measure of US wage growth which fixes industry weights at pre-crash levels, this has the effect of boost the importance of lower paid sectors, recalculating recent wage growth data using this methodology shows wage inflation currently accelerating. This will have clear inflationary consequences both directly and and indirectly as the more poorly paid consume a greater proportion of their income. It reinforces my confidence in the sustainability of US growth, but it also sharply brings into focus what the Federal Reserve decision makers will be talking about this evening. Are they more or less likely to hike rates in the next few months? Absolutely no point speculating about it, we’ll know in a few hours. What I will be monitoring is the impact of what they say on the US dollar. If it is reasonable to describe their views as hawkish and the greenback still continues to sell off, that will confirm my concerns that dollar positioning is still at fairly extreme levels.

 

Not much else to report, risk sentiment looks a tad less impulsive and bullish than in the recent past… I guess even QE can start to look like old news after a while. The story remains US dollar weakness though and how long this paradigm will last

 

 

 

 

 

 

 

 

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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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20150428 – EDGING CLOSER AND CLOSER

Good morning

High Low High Low
EUR/USD 1.0896 1.0866 USD/ZAR 12.0400 11.9800
GBP/USD 1.5254 1.5217 GBP/ZAR 18.35 18.24
EUR/GBP 0.7156 0.7131 USD/RUB 52.10 51.70
USD/JPY 119.20 119.00 USD/NGN 199.2 198.5
GBP/CHF 1.4567 1.4532 S&P 500 2,113 2,107
USD/ILS 3.9132 3.8817 Oil (Brent) 64.93 63.91

Would you not agree we live in a funny old world. Only yesterday did we report that Eurozone officials criticised the “amateur” Greek finance minister warning that time is running out to stop Greece going bankrupt. Well well well wouldn’t you know PM Tsipras has shuffled hi bailout team and side-lined the “amateur” finance minister Varoufakis.  The eurozone representative that made this comment on Friday that the fresh package of loans to Greece (€50-60bn) would be of a “completely different order” to the current €240bn rescue package. Suffice to say after negotiations reached boiling point last Friday as negotiations descended into a screaming match, the Greek PM had to make a move and remove the “amateur” out the equation in the hope that negotiations can now take place in a more calm and professional manner. The markets liked this move and there is hope that an agreement and more importantly a solid list of reforms can now appease the IMF, ECB and Greece’s other creditors.  Greece has an enormous debt mountain to climb with funds due later this week, mid-May and July/August when €6.8bn of government bonds held by the ECB are due to mature. I have no doubt that the creditors will have to extend the repayment period for all these loans not to mention adding to them to keep Greece floating. As we saw in Argentina in 1982, 2001 and most recently 2014 when they defaulted the country is still standing (albeit on 1 leg). One really must question whether throwing good money after bad is really the answer to Greece’s woes. At some point the IMF and ECB should sit down and ask this question seriously. In my humble opinion, Greece SHOULD default stay in the eurozone, reform and start again. What is the point of handing out another €50-60bn when part of that money will simply go to paying back present loans. In fact JP Morgan Asset Management noted recently there is a 50% chance of “some form of Greek sovereign default.” The time to act is upon us and I think if Greece had to default and clear the cobwebs the markets would actually see this as a positive and you could very well see the EUR RALLY (yes I am not going mad).

Over the past 72 hours the EUR has in fact traded sideways to higher. No doubt the FX market is viewing the negotiations closely and hoping that a resolution will be found. Considering all the bad press recently you would think the EUR would be trading BELOW PARITY. You know what I am about to say, yes I really do think the FED and ECB are propping up the EUR so as NOT to increase FX volatility. This would just add to their mounting problems. While I still believe PARITY is coming, it will only be towards Q3-Q4 when we start to see this happen. By this stage the US would have raised rates at least once, Greece will have had some solution and we would have enjoyed our summer on the beach.

Sky news reported this morning that Frank Maloney, sorry Kellie Maloney (the former boxing promoter and UKIP candidate) said a vote for UKIP is a wasted vote. Furthermore she continued “If we want to stop Labour and the SNP I think you’ve got to vote Tory. A vote for UKIP would be quite wasted, I believe. I know UKIP are not going to like hearing that, but if they’re honest they would say the same things as well because they’re not going to get enough seats to wield any power. I think they’ll get four or five seats, maybe.” Kellie, I had enormous admiration for you when you were a boxing promoter and taking Lennox to the world title, I have even more admiration for you now. My dear reader, I am not trying to be political here by indicating who I support. What I am trying to say is for the UK economy to continue on the current growth path, ONLY the Conservative party can achieve this. After the horrendous comments by the leader of the SNP (Trident) I cannot help but feel a tinge of utter fear over how the UK will end up should the country vote in favour of a Labour/SNP coalition. 5000 business leaders, 15 heads of FTSE companies employing in excess of 200,000 people (not to mention their dependants) should take note and spread the word. We want to keep our jobs, we want to keep our families healthy and content, we want the Conservatives. Full stop!!

I sincerely hope the FX market knows something the rest of us don’t. The GBP has rallied handsomely over the past week rising from 1.46 to a high of 1.5254  today. It would appear that there is more “petrol in the tank” and the GBP has the legs to continue through 1.53 before finding resistance. Depending on the results next week the GBP will either end up shy of 1.6000 (Cameron win)  OR crash below 1.45 (Ed wins) heading towards 1.40. For all the people that voted Labour/SNP your US and European holiday just got a lot more expensive, your jobs will now be on the line and you will be worse off by 2020. That my dear reader is your choice!!

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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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20150427 – DAILY FX MACRO

Good morning

` High Low High Low
EUR/USD 1.0887 1.0838 USD/ZAR 12.1539 12.0800
GBP/USD 1.5191 1.5141 GBP/ZAR 18.46 18.33
EUR/GBP 0.7172 0.7148 USD/RUB 51.47 50.57
USD/JPY 119.28 118.76 USD/NGN 199.2 198.5
GBP/CHF 1.4518 1.4462 S&P 500 2,123 2,117
USD/ILS 3.9317 3.8839 Oil (Brent) 65.51 64.99

With a mere 10 to go before the UK elections the Conservative party have been given a boost as 5,000 small firms back the Conservatives. The Telegraph newspaper reported this morning that the leaders of 5,000 SME’s signed a letter backing Mr Cameron and warned that Labour/SNP would pose a risk to the economic recovery. The firms who employ in excess of 100,000 people across the country stated they “would like to see David Cameron and George Osborne given the chance to finish what they started”. This letter in conjunction with the letter signed by 15 FTSE business CEO’s (who in turn employ in excess over 100,100 people) means that over 200,000 people are now relying on their owners continuing their businesses and in turn keeping them employed (not to mention their families who they support). The letter praised the Conservatives economic plans and said the Tories are “genuinely committed to making sure Britain is open for business”. Furthermore the firms said the Conservatives’ commitment to low taxes has helped “to get the economy moving again” by creating a mouth watering 1,000 jobs a day since 2010. The letter adds “A change now would be far too risky and would undo all the good work of the last 5 years.” Karen Brady writing in the Telegraph warned that “Ed Miliband and his team don’t really get what it is to run a business. If Labour got into government and started wrecking our economy again, many more businesses would struggle and jobs would be lost. It doesn’t bear thinking about. David Cameron and the Conservatives have a clear plan for this country which is already taking us in the right direction.” If you would like to see what it is like to go bankrupt and economic chaos simply pop over to Greece. The country is on its knees and facing economic and financial ruin not to mention the Greek people. This letter should be read and delivered to every home in the United Kingdom. People should read this letter very carefully and decide if they want prosperity or chaos. Surely these letters are enough to make people vote Conservatives on the 7th May. Surely these letters are enough to make people young and old realise that their future and that of their children and their children is dependent on their vote on the 7th May. How much more do they  need to know. There is really no other way to put it, vote Conservatives for financial stability and prosperity, vote Labour (SNP) for financial chaos, bankruptcy and job losses. As I have written previously, you are NOT voting for a party you are voting to keep you family prosperous, healthy and stable. That’s your choice!!

Talking about Greece, Greece has 15 separate debt payments to make between now and the end of July, totalling €16.5bn. These include redemption of its short-term government debt (T-bills), paying down IMF loans, and calling-in maturing bonds held by the ECB. The viability of a default within the EU/EUR would depend on which of these payments are not satisfied. With a payment of €760m due on the 12th May to the IMF, reports have indicated that even if Greece miss this payment the IMF would not immediately trigger a default  and would afford Greece a 30 day grace period. Having said this a failure to pay the IMF would call into question whether Greece can pay the other loans due to the ECB and European Financial Stability Fund. The default scenario will in effect bring into context the state of the banking system. The local banks are the largest holders of Greek government debt and therefore a Greek government default will in all likelihood lead a run on the banks and in turn the complete financial support system in Greece. If the banks go bankrupt this would lead to total financial  default and as the saying goes, you can kiss Greece goodbye. Perhaps Ed Miliband should read what I have written because a Labour/SNP government….my hands are shaking so much I cannot bring myself to write what the consequences for my BELOVED UK would be. I just hope I don’t have to brush the cobwebs off my South African passport (don’t get me wrong I LOVE my birth country but the UK has been my home for the past 18 years). To add to the misery in Greece, Eurozone officials criticised the “amateur” Greek finance minister warning that time is running out to stop Greece going bankrupt. I am sure those officials read our commentary because only a couple weeks ago PARITYFX Plc wrote that that the biggest issue in Greece are the leaders and their INEXPERIENCE in dealing with their financial woes.

Jeroen Dijsselbloem, president of the Eurogroup, said on Friday there were some “big, big problems to be solved” before Greece’s creditors would release badly needed funds to the country. “A comprehensive deal is necessary before any disbursement can take place. We are all aware that time is running out.” Mr Dijsselbloem also admitted negotiations had been tense and at times heated, and followed reports that some Eurozone finance chiefs had accused Mr Varoufakis of wasting time and gambling with Greece’s future. “I can’t tell you how discussions took place, but I’ll be frank, it was a very critical discussion, we came to an agreement two months ago. Today we hoped to hear positive results and an agreement to which we could make a decision, and we are still far from that. So it was a very critical discussion, and it showed a sense of urgency around the room.” As the saying goes if you going into a gunfight, don’t bring a knife. Mr Varoufakis, please sort your country’s finances out so that we can write about something else!!

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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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24/04/2015 – WORKING THE RANGES

` High Low High Low
EUR/USD 1.0987 1.0786 USD/ZAR 12.1917 12.4046
GBP/USD 1.5137 1.5027 GBP/ZAR 18.39 18.25
EUR/GBP 0.7213 0.7172 USD/RUB 51.17 49.87
USD/JPY 119.67 119.15 USD/NGN 199.2 198.5
GBP/CHF 1.4432 1.4361 S&P 500 2,116 2,109
USD/ILS 3.9412 3.9063 Oil (Brent) 65.25 64.46

 

It’s interesting looking at the surge in Renault shares this morning, the move was on the back of Q1 numbers beating analyst forecasts. The automobile company mentioned the weak euro and stronger demand in Europe. It’s the second bit that really captures the imagination, that’s great news however you want to look at it. As an aside, I personally will not be buying Renault stock here, I don’t think I’ve ever seen a better representation of a 5th wave completing – that’s Elliott Wave Theory speak for what looks like the end of the rally in Renault shares.

 

Wherever that stronger demand is coming from, it’s unlikely to be France, which really looks like the sick man of Europe. Look south across the border and you’ll see a Spanish economy well into its 2nd year of post crisis recovery with employment expanding albeit from depression style levels, and then look northwards across the Maginot Line and you can also see a German economy that’s chugging along at quite acceptable levels. Suffice it to say that there are pockets of hope in the Eurozone economy amidst the more gloomy areas we’ve had to dwell on over recent times. But the gloom continues to dominate, and it’s to Greece we look, with the government capitulating to creditor demands (why do they put themselves through all this if they eventually succumb? Somehow it seems even more humiliating! Or perhaps it’s just me…). Earlier this week the anti-austerity government caved in to demands and ordered local authorities in Greece to hand over spare cash. Needless to say, they aren’t flavour of the month at home now and I suspect life will get very difficult for them, it’s one thing to be in opposition but the realities of governing are an entirely different species of problem. Welcome to the party! The approval ratings of Syriza are in free fall already and they’ve been in government barely 2 months. The government faces a tough time finding €1.7bn to meet April’s wage and pensions bill, and let’s not even consider the €0.75bn IMF payment due in 3 weeks. The good news is that if Greece pushes ahead with a list of reforms it could pave the way for over €7bn of loans from its Eurozone partners, the bad news is that without these reforms it’s probably impossible to stave off default in May/June or later in the summer as there are large payments due to the IMF and ECB looming.

 

Why is the euro not weakening in the face of this potential calamity? That’s a tough one on to answer, I suspect there will be some compelling reasons a posteriori, but for now I am keeping an eye on the price action. The euro in recent days has strengthened and early this morning was in danger of breaching the 1.09 level in EUR/USD. This tells me that we’ll need to see very very bad news before the euro can continue on its weakening trend. As I’ve said in recent times I have doubts about that occurring before June or July, as the prior 11 month trend needs time for a corrective pause before it can gather strength again. I believe this is what is happening as too many US dollars are owned right now, it’s hard to find that marginal buyer. This is evident in the price action of the greenback against a swathe of currencies, just look at the pound sterling just 2 weeks away from a completely unclear UK electoral outcome. The British currency’s appreciation against the dollar is something that is hard to comprehend in the face of all the political uncertainty. I can also direct you towards AUD/USD which has been appreciating in recent days despite all the disappointing China economy related news. Quite clearly the narrative is about the US dollar, not these other currencies, I contend as I’ve already indicated that US dollar positioning is not allowing further strengthening for the moment.

 

It seems to me, given the dynamic which is in play, at the moment, that if you have US dollars to buy or sell, you will have good ranges over the coming weeks to implement either objective. The trick will be avoid being greedy, at least get some done and then try to work a better average for the full amount.

 

 

 

 

 

 

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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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20150423 – THE MIGHTY GBP

Good morning

` High Low High Low
EUR/USD 1.0728 1.0679 USD/ZAR 12.2890 12.2020
GBP/USD 1.5041 1.4989 GBP/ZAR 18.45 18.37
EUR/GBP 0.7135 0.7117 USD/RUB 52.63 52.00
USD/JPY 120.10 119.66 USD/NGN 199.3 198.5
GBP/CHF 1.4612 1.4521 S&P 500 2,108 2,101
USD/ILS 3.9619 3.9317 Oil (Brent) 63.09 62.47

Despite the 2 main parties running neck and neck in the polls and the real threat of LABOUR/SNP coalition government, the GBP shrugged off this “bad” news and once again rallied through 1.50, only this time it was on the back of the MPC April minutes. Bottom line the BoE sees more medium term upside risks to inflation and wages which in turn means an interest rate hike is coming. No doubt the weak GBP vs the USD added to the depressed inflation figures as food and oil prices kept inflation at 0%.  The minutes quoted “it was possible that the appreciation of sterling was feeding through more quickly into the CPI than expected. That could mean less downward pressure on prices to come and a faster pickup in inflation when the effects of recent falls in energy and food prices drop out of the annual comparison.” Furthermore the committee added “it was unlikely that activity growth could be maintained at its current pace for long, without generating greater inflation in wages and prices, in the absence of some material improvement in labour productivity.” In other words the committee views there is a medium-term risk that wages and inflation are leaning to the upside giving rise to the prospects of higher interest rates. I stress MEDIUM here as the market is not anticipating a rate rise until late 2015 early 2016. One thing’s for certain, whereas before the data was pointing to the possibility the UK would hike before the US, this has now been dispelled and the hike will in all probability come when those wage and inflation numbers start to grow. I bet the BoE’s biggest fear (and they will not admit this publicly) is if there is a change in government in May, this could potentially derail the BoE’s plans given the potential damage to the economy that a Labour/SNP government will cause. Yes i am that worried!!! The GBP not only rallied vs the USD but also (as you can see from the table) against the EUR (-0.0080 pips) and CHF (+0.0350 pips).

The SNB (Switzerland) reduced the group of sight deposit account holders that are exempt from negative interest rates in an attempt to increase to effectiveness of the banks negative interest rate (-0.75%) policy as a disincentive to hold Swiss deposits. This announcement will add downward pressure on overnight rates and keep the CHF under pressure. While the threat FX interventions and further interest rate cuts may be used by the SNB, we do not expect this to be forthcoming as the SNB allows the market to determine the CHF levels for now. Exporters in CHF have had a pretty tough time since the peg was abolished with the CHF now 16% stronger vs the EUR alone. The SNB are trying to make it as unattractive as possible for the Greeks and (ECB) QE money to end up at the SNB. The Swiss do not want to be seen as a safe haven arena, and will therefore continue to let the market know this.

Greece…who would have thought after the bells and whistles in Maastricht that we would be talking already of an EU member leaving the EU. There I was thinking that in an age of mind-boggling technological, medical and fiscal advancement the intelligent folk in Greece would realise by now that they have no other option but to reform and change their ways. As Warren Buffett noted recently, GREXIT might not be such a bad thing. Mr Buffett, you might have a point. While you are unlikely to hear what is going on behind the scenes I can almost guarantee that the CB’s (ECB, FED, BoE, BoJ) are all talking about the possibility of GREXIT and how they will support the financial system in the event of this happening.

Data: Weak data out of China and Germany this morning. The number on the left is today’s print vs last month’s number (on the right). No wonder the PBoC are WORRIED. They lowered the RRR rate by 100bps recently and with a continued slowdown across the board, lowering their interest rates and continued QE is a given.

Chinese HSBC Manufacturing PMI (Apr) 49.2 49.6

 

German Manufacturing PMI (Apr) 51.9 52.8

 

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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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20150422 – NOT SO CLEAR CUT

` High Low High Low
EUR/USD 1.0775 1.0716 USD/ZAR 12.1395 12.0676
GBP/USD 1.4959 1.4913 GBP/ZAR 18.12 18.03
EUR/GBP 0.7207 0.7181 USD/RUB 53.93 53.38
USD/JPY 119.79 119.45 USD/NGN 199.3 198.5
GBP/CHF 1.4274 1.4234 S&P 500 2,105 2,096
USD/ILS 3.9587 3.9379 Oil (Brent) 62.31 61.37

 

Cheaper oil prices are working wonders even on the Japanese economy it seems, with a first trade surplus in nearly 3 years. For a while there I thought Japanese trade surplus might have gone the way of the dodo. The reality is that unless Japan moves to renew its commitment to nuclear power it’s hard to see how energy imports won’t move the trade balance back into deficit over time. Not unless the Japanese yen appreciates significantly in value anyway!

 

Minutes from the April Bank of England policy meeting have just been published indicating a more hawkish tone surrounding policy maker discussions. Boosted by more positive conditions in the Eurozone economy, UK growth has been re-accelerating in 2015 and inflation expectations in the UK have been rising, with a consequential impact on rate hike expectations. We have always maintained that after the UK elections the central bank might have made a re-assessment of the need for rate hikes in the UK economy with employment conditions continuing to be solid this side of the channel. This could be a positive for the pound sterling albeit only after the results of the election provide more clarity for fiscal and business decisions. Not long to go now, but it’s still tough to figure out what the outcome of the vote will be, I’m not even going to speculate, it’s simply too close to call.

 

In terms of the bigger picture I still maintain that we are likely to be in directionless markets where the US dollar is concerned for months to come. I was looking at an interesting analysis yesterday which compares the greenbacks trend now to that which occurred in the early 80s. After the Volcker inspired appreciation trend had persisted for a similar length of time there was a substantial retracement back then. The comparative now would be for a move up to the 1.15 – 1.20 area in EUR/USD and 1.60 – 1.65 in GBP/USD. History doesn’t always repeat itself for sure, but we should at least be open to the possibility, particularly as positioning still looks to be more aggressively in favour of the US dollar now. Corrections don’t have to result in large counter-trend rallies, a period of directionless or trendless price action could also effect the same outcome this time around, forcing the consensus dollar bullish view to retrench. Either way, I am of the strong belief that before the US dollar can step back into an appreciation trend the inevitability of the trend needs to be challenged and this has not happened to date.

 

Some positive inflation data out of Australia is made more significant when you consider the Bank of England’s findings regarding rising inflation expectations. In Australia the inflation outcome published overnight beat forecasts. Perhaps we are in a deflationary (disinflationary?) world but it certainly seems less clear cut than suggested. As I said a number of months ago, the deflation paradigm seems to be related to the fall in energy prices and given the phenomenon of collapsing oil prices ended some time ago perhaps a re-assessment of the global falling inflation trend should be reviewed going forward. Things are not as obvious as they might seem, and even activity in Europe looks to be holding up reasonably well all things considered. Just look at the decent numbers published today for Italian Industrial New Orders, up +2.2% versus the February year on year decline of -5.5%….

 

 

 

 

 

 

 

 

 

 

 

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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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20150421 – DAILY FX MACRO

Good morning

High Low High Low
EUR/USD 1.0752 1.0695 USD/ZAR 12.1865 12.1275
GBP/USD 1.4913 1.4865 GBP/ZAR 18.13 18.05
EUR/GBP 0.7211 0.7192 USD/RUB 53.34 52.95
USD/JPY 119.54 119.16 USD/NGN 199.2 199.0
GBP/CHF 1.4266 1.4235 S&P 500 2,107 2,095
USD/ILS 3.9526 3.9367 Oil (Brent) 63.61 63.00

16 days to get it right. I cannot emphasize the importance of the UK’s General Elections on the 7th May. Having stared down the abyss, the UK economy has come back stronger. No words can describe how important it is for the economy to stay on track. As the saying goes, if it ain’t broke don’t fix it. I am afraid to say and the people in the know have said it, any change to the current rebuild will derail everything the Conservatives have achieved and fixed over the past 5 years. This is no longer about which leader you want in power or even which party. In fact what it comes down to is simply which party will achieve the growth numbers that will make the UK an economic powerhouse globally. It is now a proven fact that the only party that will and can achieve this is the Conservatives. Sir John Major will enter the election campaign with a speech saying a Labour-SNP government will lead to “mayhem” and more importantly to economic chaos. You do not need an IQ of Einstein to understand these comments. Over 150 business leaders (15% of the FTSE 100 firms) have openly stated the same thing that anything but a Conservative government will surely lead to economic chaos, a fall in growth, job losses, a fall in property prices, and most importantly emigration OUT of the UK. People are worried. Unemployment is falling, wages are rising, people are better off. Don’t change it. Not to mention the need to keep the UK safe from outside threats and thus the importance of Trident (consider the jobs and wealth it creates). What i am saying above will have a major impact on the GBP and UK stocks/Gilts. We saw over the past 48 hours the GBP rising vs the USD (stable vs the EUR). The GBP has since come off from 1.5054 to trade at 1.4875 as I write this. This could be explained by the fact that the USD has begun rallying again and the polls continue to suggest Labour-SNP government. One thing I can almost assure you of, anything other than a Conservative government you can “kiss the GBP goodbye”. The City and global traders have all said the same thing. The warning shots have been fired.

Overnight the head of the NY FED acknowledged that the FED has a special duty of care for the whole world. He noted “The normalisation of US monetary policy could create significant challenges for those emerging market economies that have been the recipients of large capital inflows in recent years,” he said. We at the FED take the potential international implications of our policies seriously. In part, this is out of simple self-interest, since the international effects of FED policies can spill back onto the US economy and financial markets. In part, too, it reflects a sense of special responsibility we have given the dollar’s role as the international reserve currency.” Only recently the IMF warned of a “cascade of disruptions” for the global financial system if the US rates jump suddenly and there is a further surge in the USD. Jose Vinals, the IMF’s head of capital markets, said last week that the world is entering uncharted waters as Fed prepares to pull the trigger, warning of a “super taper tantrum” that could inflict even more damage than the original Fed-induced taper tantrum in May 2013. That event set off an exodus of capital from countries with big current account deficits, notably the “Fragile Five” of India, Indonesia, Brazil, Turkey and South Africa. Mr Dudley said interest rates in the US should be around 3.5pc once inflation returns to 2%. This is a warning shot that will send shivers down a great many spines. Borrowing in USD’s outside the US has surged from $2 trillion to $9 trillion over the past 15 years. Half of this is now concentrated in emerging markets, including $630bn to Russian companies and state entities, and roughly $350bn to Brazilian firms. It also includes at least $1.1 trillion of loans to Chinese companies, much of it through Hong Kong intended to circumvent China’s internal credit curbs. As we have noted several times in this commentary the FED will act wisely and patiently knowing that too much too soon will create a ripple effect that could damage all the good work the FED has achieved over the past 2.5 years.

The Telegraph reported this morning that the Greek government has ordered a mandatory transfer of cash reserves from state-owned companies to its CB in a desperate bid to gather enough cash to remain solvent. The decree could now help the government meet its monthly €1.7bn wage and pension bill, averting a default on its own citizenry. Greece owes over€1bn to the IMF that is due around the 14th May. The IMF and other creditors are becoming more and more concerned Greece will simply run out of cash. Needless to say the next choice will be default or reform. They cannot have it both ways. It is time to switch off the tap and get people back into jobs and stop retiring on a full pension at 50.

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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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20150420 – DAILY FX MACRO

Good morning

High Low High Low
EUR/USD 1.0825 1.0766 USD/ZAR 12.0785 12.0065
GBP/USD 1.4985 1.4934 GBP/ZAR 18.08 17.95
EUR/GBP 0.7247 0.7202 USD/RUB 52.49 51.00
USD/JPY 119.03 118.52 USD/NGN 199.2 199.0
GBP/CHF 1.4272 1.4195 S&P 500 2,097 2,080
USD/ILS 3.9372 3.8905 Oil (Brent) 64.37 63.36
 

Greece continues to plague the markets with discussions ongoing on finding a solution to their debts. Discussions over the weekend at the IMF’s Spring Conference found no agreement forthcoming. In fact only last week we noted the IMF snubbed Greece so it is no surprise that no agreement or plan was found. This Friday is a crucial day in Greece’s calendar with a meeting of the EuroGroup and repayment of €1.5bn. I think it is fair to assume the Greeks are nearly out of cash and the repayment could very much fall into default (unless an extension is agreed). No one wants to see the Greeks exit the EU. Both sides want to find a solution and draw a line in the sand. However with the Creditors and Syriza standing firm on their positions we need a miracle to avert a full blown crisis from ensuing. As ECB’s President Draghi noted the EUR was better equipped than it had been in the past to deal with new Greek crisis, but he warned of “unchartered waters” if the situation were to deteriorate, suggesting that a Greek default and an exit from the single currency would be a shock with unknown consequences for the European economy. His statement echoed US Treasury Secretary Jack Lew who said that a renewed crisis in Greece would endanger the recovery in Europe as well as for the global economy, and the IMF’s chief Christine Lagarde last week advised the Greek government to speed up the technical work on designing reforms rather than hope for a grand political bargain. European Commissioner for economic and financial affairs Moscovici set the middle of May (11th) Eurogroup meeting as the ultimate deadline for an agreement to avoid a default. No doubt both sides want to find a solution. I have commented regularly that GREXIT will make the Lehman Brothers default seem like kids play. We are talking proper numbers here and more importantly we are talking about something that has never happened before. I am certain the ECB, FED, BoE, BoJ etc. have plans in place for such an event but putting it into practice will be another story altogether. The strain on the banks could be so severe we could see multiple bank collapses which in turn could lead to financial ruin for banks, companies (who lose their money deposited in the banks), individuals…do you see my point. Financial armageddon. You probably thinking the EUR is trading around PARITY after this…alas some weaker than expected US data coupled with profit taking saw the EUR APPRECIATE aver 1.08 handle on Friday. It has since fallen just below to 1.0785, needless to say all eyes on Greece this week.

As PARITYFX has noted several times recently about the state of the economy in China and our expectations, we saw the PBoC cut the RRR rate by a whopping 100bp effective today. Additionally they implemented stricter margin trading rules and stricter rules regarding the supply of shares available for short sale. With China’s growth “slowing” to 7% recently the PBoC are now using their financial muscle to boost that number back to 10%+ and what they are used to. As a result Commodity currencies – AUD, CAD, NZD – strengthened 0.4% against the USD, while Brent and WTI prices rose more than 1% today, following a 9% rise last week. The strength of the US economy is paramount to a global economic recovery. Not to be outdone, it is becoming more and more important that China (as well) grows. This is especially true for economies like AUD and NZ where China is their biggest trading partner.

UK elections a mere 17 days away with the winner looking as uncertain as ever. Perhaps one should look at the employment numbers recently to see how well the Conservatives have done to improving financial matters since the 2008 financial crisis. Jobless claims down 2.3%, average weekly earnings increased 1.8% (February from +1.6% in January) and the fastest growing economy in the Western World. Not a bad job by the Chancellor and the Governor.  You might not support the Conservatives in fact you might even dislike David, but what you can’t argue with is people are BETTER off and improving with every passing day. Just thinking along those lines and your X must appear next to the party that is promising more of the same growth and prosperity rather than the X next to the party that will take us back to 2008 and bankruptcy. Not to mention giving up on Trident!!! Oh-my-g-d: I would feel a lot safer knowing I had a Trident was protecting me and my family and friends. Someone needs to have a word with the party advocating getting rid of this. Perhaps we should have let them go-it-alone.

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20150417 – WHERE TO?

High Low High Low
EUR/USD 1.0793 1.0737 USD/ZAR 12.0066 11.9400
GBP/USD 1.4956 1.4915 GBP/ZAR 17.93 17.82
EUR/GBP 0.7222 0.7194 USD/RUB 50.30 49.90
USD/JPY 119.14 118.81 USD/NGN 199.3 199.0
GBP/CHF 1.4309 1.4265 S&P 500 2,109 2,104
USD/ILS 3.9390 3.9080 Oil (Brent) 64.07 62.92

Forecasts for the Federal Reserve’s first rate hike have been pushed back by a majority of economists, the expectation is for a move in late summer. Interestingly, the IMF published a report this week suggesting concerns that there is still a dislocation between market expectations of a Fed hike and what policy makers are saying, but it’s worth noting that a senior Fed policy maker quickly played down this concern, observing that the market is correctly reflecting the levels of uncertainty surrounding a possible first US rate hike in 8 years.

 

I would just reiterate a point I made about this some months ago when this was a hot topic… developing countries which have accumulated high exposures to dollar debt are going to find life more difficult going forward as funding issues come into play. It is one thing to borrow at cheap rates but when those rates start to rise, investor concerns about the sustainability of payment schedules will mean that the yields these economies experience will go up somewhat more dramatically than any hikes that actually occur. The same – and more so – goes for corporates in these economies that borrowed extensively when the US dollar was weak. Now they will find themselves in a situation where their local currency earnings do not go as far in covering their interest payments as they did when the dollar was cheaper. Even if they are still able to comfortably cover interest payments, the proportion of their cashflow which is required to cover interest payments will be rise, earnings will be adversely impacted and leverage will increase. Obviously this will be less relevant for the companies with the foresight to hedge their dollar loans, but how many of them have done that? According to the data, corporates in China, Brazil and India have been particularly keen to take on these dollar loans, and the burden of indebtedness will be lower at the country level this cycle and more focussed at the corporate. As the situation evolves later on this year we should see signs of pressure in some markets, and you can be sure of contagion as the innocent are penalised as well as the guilty.

 

Looking at the charts of the major currencies (specifically EUR, JPY and GBP) versus the greenback, we are approaching rather interesting territory. Resistance is just above for EUR/USD and GBP/USD and we are already breaching the support zone for USD/JPY. In short, we might be in for a bout of dollar weakness. My level of confidence in this view will increase if we see a more sustained attack on these resistance and support levels, as always I will endeavour to keep you informed on this matter. For now, it is certainly not enough that USD/JPY is showing signs of weakness, I would rather see cross-confirmation from the other major currency pairs. For what it’s worth I am monitoring the 1.0850 – 1.1075 zone in EUR/USD and the 1.50 – 1.51 zone in GBP/USD. If we trade for a period of 48 hours above the upper bounds of the aforementioned zones it could be an indication of a more prolonged period of US dollar weakness.

 

The rather uninspiring data coming out of the United States in recent days might be the proximal cause of dollar weakness, but to be honest the data isn’t indicating a slowdown so much as it points to a levelling out of growth in the U.S economy. And if employment growth remains solid as the signs suggest then we will see a tightening of the labour market in the United States. A US consumer buoyed by wage growth could easily sustain a healthy U.S economy for quarters to come.

 

This morning we get aggregate inflation data for the Eurozone, and economists are forecasting an unchanged year on year number at 0.6%. Low, but hardly deflationary. Let’s see what happens in a few months when the levelling off of energy prices starts to be get reflected in the numbers. What excuse will Mr Draghi come up with for continued extraordinary monetary policy then? Germany is forecast to grow 2% this year, hardly panic stations. Across the pond we should also see inflation data published as well, and just as important we should get some Michigan sentiment data. It will be interesting to see if the softening up of data is impacting future growth expectations. And from a traders perspective I will be keen to see how this affects the price action in the greenback.

 

For now currency markets remain trendless in terms of the bigger picture, while the bullish paradigm in major market equities and bonds continues…

 

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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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