Good morning

Key reversal day yesterday saw both the EUR and GBP (vs the USD) gain significantly despite strong Retail Sales and PPI numbers in the US. The market is OVERBOUGHT USD and yesterday strikes me as one of those days where despite strong US numbers (giving further support to the FED’s intentions to raise rates) the market decided to take profit. As soon as the rates turned, the herd jumped in and covered taking whatever profit they could so as not to risk losing the pot altogether. GBP rallied to (at one point) over 1.4800 and has since settled back to circa 1.4760 as I write this while EURUSD jumped to over 1.07 and too has settled back at 1.0650 as I write this. The overall big picture has not changed. We know that there will be times when profit taking takes place and best to step aside and let it happen. I am convinced that the large Macro Hedge Funds and Sovereign Wealth Funds who have all been long USD for quite some time remain long USD and have by no means been spooked by yesterday’s moves. In fact it would not surprise me if yesterday’s move actually gave them the opportunity to add to their positions. So who was involved yesterday, I would say it was the banks (and the FX options desk trading their “positive gamma” (long options) and day traders who were bailing out some of their positions. If you look at the options market, GBP vol remains ABOVE EUR vol in the 1m bucket ahead of the UK elections.

Talking about the UK elections, GBP is likely to remain highly volatile ahead of the May 7th elections given the uncertainty of who will run the country for the next 5 years. The UK economy is performing amazingly well with our growth rates exceeding all other Western economies. That is by no means something to sniff at. The Chancellor and Gov. of the BoE should be mighty proud of what they have achieved in the face of extreme adversity. Austerity is simply a MUST if we are to sustain this momentum and keep the economy on the current course. And it is for that reason the markets are “petrified” about the results. As the 150 business leaders who signed “THAT LETTER” a Labour/SNP Govt. will in all likelihood derail this economic growth and set us back to the dark days of the financial crisis. As I have written before one has to be financially prudent in good times and bad and overspending will lead the UK back towards bankruptcy (Labour admitted as much). I hope when the day finally arrives and the voters are standing by their booths about to tick the box, they think long and hard about their finances and long term prospects. Economic growth is dependent on the survival and growth of our businesses so keeping them financial sound is imperative if we want the UK to flourish. One thing (and the FX traders have all commented on this), a change in leader and a swing to the left will not be seen positively and you will see the GBP almost certainly take a battering vs the basket if currencies (and especially vs the USD and EUR). The warning shouts have been made, let’s hope people sit up and take notice.

Emerging Market (EM) currencies on the back of the weaker USD saw gains with the ZAR appreciating from 12.16 down to 11.96 at one point. The ZAR has fallen back slightly to trade at 12.02 as I write this. ILS rallied from over 4.01 to trade as “high” as 3.9496 currently trading at 3.9700. Do not be fooled by the rally in EM currencies overnight. This is all on the back of the weaker USD. When the USD rally commences again be rest assured EM currencies will begin their fall again. China recorded their LOWEST growth rates in over 5 years with the GDP number at 7%. The spate of bad economic numbers continue to plague the economy and as we have said previously, the bad data adds to speculation that the PBoC will ease monetary policy (lower rates). Lastly let’s NOT FORGET Greece. 24th April is a crucial date for the Greeks on whether they can repay the €1.5bn owed to their creditors. The GREXIT rhetoric continues and while we still maintain Greece will not exit the EU, one must never rule out the impossible. Perhaps it would be a good thing for them to leave and go it alone. I am sure the Russians will have their say….

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