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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