Good morning

The GBP came under renewed pressure yesterday after Q1 GDP numbers confirmed a slowdown in consumption. Month on month came in at 0.30% while year on year was 2.50%. This is pretty much confirmed what the Gov. reported recently.  In line with what we are witnessing globally the UK is not immune to a general slowdown in Q1 GDP numbers. Investment in property in the UK has also slowed after the Chancellor raised the stamp duty on properties in excess of £2mio meaning investors are being more cautious with their money. There is still “new” money coming out of Greece as local investors steer away from the local economy in the event of a default and GREXIT. As I have repeatedly said, the latter is not an option and all efforts will be made to ensure this does not happen. But as much as I think GREXIT will not happen, it still cannot be ruled out. Even if GREXIT does not happen, the Greeks could still default sending shock waves through the financial markets. With a continued slowdown in China and recent disappointing data out the US the UK will likely see 2015 GDP at between 2.2-2.4% which on the face of it is still acceptable but lower than what the Chancellor and Govt. were hoping for. The continued austerity measures the government is initiating are essential to keep the UK on her toes without falling into a bear trap. As such I expect the GBP to face renewed selling pressure especially vs the USD over the coming weeks.

US GDP numbers are to be published later and like the UK we are expecting the data to confirm a slowdown across the pond too. We know the FED are lining up a rate hike this year and the uptick in CPI recently took us a step closer. However the FED will be watching today’s number as a slowdown in growth could delay that rate hike. The last thing the FED want to do is jump the gun on their rate hike cycle only to see the US economy fall back into a recession. While most will probably agree this won’t happen, caution and care is called for. What the data is showing us is things are not what they appear and further austerity (in China, EU, UK, Australia et al.) is needed to keep the local economies moving ahead. It does surprise me then that the anti-austerity faction in Greece continues to believe they can get through this “mess” without changing the way they spend. Last time I checked EUR were not raining over Greece so where they think the money will miraculously appear from is beyond me.

Today has seen some very interesting data published again pointing to a slowdown. Here are some: (1) Australia new home sales down from 4.405 to 0.60%, (2) NZ business confidence down from 30.205 to 15.70%, (3) Japan construction orders down from +10.8% to -12.10%, (4) Swiss GDP down from +0.605 to -0.20% for Q1 and year on tear down from +1.9% to +1.1%, (5) German retail sales down from +4.3% to +1%, (6) French PPI 0.10% to -0.40%, (7) Spanish CPI down from +0.90% to +0.50%  – as you can see does not make for pleasant reading this morning. Still to come today is Italian GDP, Spanish Business confidence, Italian CPI, Greek PPI, Greek GDP, Portuguese GDP and Italian PPI. It is interesting to observe that the EUR has actually clawed back some of her losses we saw over the past 24 hours to trade at 1.0950…as I mentioned yesterday next Friday is another repayment day to the IMF so expect some comments over the weekend from the authorities over Greece. Overall my impressions remain the same with the USD ultimately king of the castle.

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Good morning

Good old Greece will just not go away. The Greeks said they are making progress and a deal in forthcoming, Troika replied that was not the case and negotiations were still on-going. Like I said before, there is negotiations behind the scenes and kept quiet and negotiations in front of the camera and reported in the news. Ignore the latter completely and concentrate on the former because that is all that counts. In my humble opinion an agreement WILL be reached in some form which will allow the markets, Greece and the ECB/IMF/Creditors/Troika to breathe a sigh of relief, if only for a a short time until the next repayment is due. 5 June is the next deadline for the repayment to the IMF so the pressure is non stop. The USD gained over the past week mainly on the back of (1) Higher US CPI (2) Improved US data and (3) Greek woes. I think if a deal is reached and is to the satisfaction of all parties, there is a likelihood that the EUR will enjoy some respite and rally. However this rally will be short lived considering EVERYONE is talking the USD higher on the back of the imminent (September) FED rate hike. That I believe is a BIGGER story than the Greek solution given the message it portrays to the market that the US IS BACK IN BUSINESS!!

I wanted to highlight one piece of data that came out this morning. For anyone that purchased a property in Spain 2000-2008 they have seen the value of their property collapse (apologies). However over the past year the local agents have reported a surge in foreign buyers (including KKR and Soros) of Spanish property. Taking a step back, Spain realised back in 2008 that they too had overspent and austerity was the key. Suffice to say I am pleased to report Spanish GDP came out splendidly reporting 0.9% Q1 and 2.7% year on year. They endured tough times, they cut back, they cut red tape and property bribery, and most importantly they became financially savvy. Great news for the Spanish economy and better news for Spanish property owners who are now seeing their properties rising in price. So Mr Tsipras and your Syriza party, time to get your ducks in a row because a return to the good days is possible and within your grasp. Time to take the bull by the horns and make it happen. The hard part is selling the idea to those people who voted for you. Perhaps you can mention without the ECB/IMF loans and bank prop up, there will be no money full stop. No guessing what the right choice is.

What this space because there is still a great deal to write about.

GBP – Revision GDP to be published for Q1. 0.40% Q1 and 2.5% year on year expected. The GBP has lost its shine over the past week falling from over 1.58 to 1.5320’s. Mostly on the back of the stronger USD overall and the loss over the euphoria gained from the elections. Parliament is a go and cuts are on the horizon. For those 200 people that protested yesterday in Parliament square, GET A JOB!!

Overall I think the GBP will continue to suffer at the hands of an ultimately stronger USD. People are talking about EURUSD PARITY sooner rather than later (Q3-Q4). If the US surprise and hike you can bet your bottom USD we WILL hit PARITY!!! So for all you UK IMPORTERS, best you HEDGE YOUR FOREIGN purchases now because the GBP is expected to trade below 1.50 again (when I can’t say, but it is NOT far away I think). Great news for EURGBP – your holiday remains and will remain cheaper than this time last year (12%) and I expect this trend to continue (GBP >EUR).

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This has been a reasonable week for data, positive consumer sentiment numbers in South Korea, Finland and Germany; solid durable goods orders in the United States; a better than expected growth outcome in Singapore. Just the sort of environment for a trend to quietly go about its business. Of all the aforementioned macro news, I am particularly heartened by the Singaporean data, a +2.6% year on year growth rate to the end of Q1 versus 2.2% forecast and 2.1% up to the prior quarter, a clear improvement. I always consider Singapore to be one of those key economies that can shed light on more than itself. It is such a crucial trading economy, and is highly sensitive to global trade and general global economic trends. If Singapore is improving, the chances are the global economy is too.

The Financial Times reports that the IMF now considers the Chinese currency, the renminbi, to no longer be undervalued. This is a departure from the stance still taken by the United States, but it’s a welcome one, and at least theoretically should be free of politics. The last 12 months have seen substantial moves by most currencies against the US dollar, and while the renminbi has weakened slightly, we’re only talking about a few percentage points versus magnitudes more for most others. This means that the Chinese currency has actually appreciated substantially against a basket of currencies, which implies a departure from the mercantilist economic strategy of the last few decades. The Chinese definitely appear sincere in their desire to rebalance their economy to a more consumer oriented and domestic focussed economy. This will greatly benefit the global economy, but these changes are likely to take a generation to come to fruition. In between there (the future) and now, are likely to be many challenges, the like of which the Chinese leadership currently face. One of these soon to be challenges is the impact of U.S interest rate normalisation on the Chinese economy. Indeed this is a question for all emerging markets, and it’s a point that we’ve raised many times before. It could be a bumpy road ahead, and Governor Fischer, one of Federal Reserve’s most senior policymakers acknowledged that there could be some difficulties ahead, as rate rises in the U.S are inevitable now. He did make assurances however that some weight would be given to the likely impact of this important decision on the global economy. Our view is that the Chinese economy will be fine, but there could be difficulties for some Chinese corporates as substantial dollar debt issuance has occurred over the last half decade. It is not clear however that this rises to the level of a systemic threat to either the Chinese economy or indeed the global economy, but you can count on significant volatility ahead. The US policymaker went on to say that the Federal Reserve will make every effort to communicate its intentions ahead of time, which for my money is what they’ve been doing all year anyway!

What does this all mean? It means that the narrative for the bullish US dollar trend is still intact. We might not be quite there yet, the employment data in the United States and specifically wage growth remains of vital importance, but the time for interest rate rises is imminent. It has to be if Fischer’s belief that the Fed funds rate will be in the 3 – 4% range in a few years. For that to happen we have to start soon. I won’t bore you with reasons for a weakening euro narrative. All you have to do is switch on your news channel or pick up your paper. Bottom line the trend of a weaker EUR/USD and by extension a weaker GBP/USD is intact. It’s a question of when not if…

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As I mentioned at the end of last week, 1.5446, the week’s reaction low for GBP/USD, would be a key level that could confirm a renewed dollar rally. The breakdown occurred overnight with a decisive near 50 pip collapse of the currency pair which leaves it hovering close to 1.5400 now. This is by no means the only sign that something important is happening: EUR/USD is down 5% over the last 10 days; -4.5% for AUD/USD; and USD/JPY is up over 3% and is now at 7 year highs. What is interesting, so far, is the relatively gentle reaction of the minor currencies. That’s not to say they’re not weaker but these currencies are generally only 2% weaker over the same time period (MXN, ZAR et al). The US dollar is clearly strengthening against a broad basket, and it no surprise that the euro is the primary victim.

As I’ve already said, the greenback has been rallying for the last 10 days, but we are likely to hear competing narratives over the next few days about why. Prime candidates are the higher than expected US core inflation numbers and the Greek Interior Minister warning that Greece could default on its June IMF repayment. The US data was published at the end of last week, and the Greek minister’s comments were disseminated over the weekend. I certainly don’t disagree with these factors as possible triggers for further acceleration of a move that was already in place, in fact I’m convinced of it. Certainly the US inflation numbers were new information, I’m a bit more sceptical about how significant the Greek news is, after all let’s face it, every day we hear something which implies that we’re that much closer to Greek default and Grexit. What I do find interesting is that US equity markets finally broke out to new highs in recent days, and the bond market selloff has stalled. This matches the paradigm we observed during the US dollar rally that ended in mid- March – strong dollar, rallying equities, and rallying bonds. Whether the same paradigm will underpin a new dollar rally is anyone’s guess, but that has certainly been the case in recent days. All we can do is observe asset prices and identify any variance from our recent past. For now, the correction in the prior trend lasted about as short a time as I had stated was necessary given the 11 month bullish trend that had been in place. I should also add that we have seen a very similar pattern in the distant past, certainly events are unfolding which are not that different to the pause in the great US dollar rally in the early 80s. I’ve attached a long term chart of the DXY, the US dollar index below. Look at the dollar rally in the 1980s. I’ve circled the correction which occurred after the first impulsive rally, compare that to what has recently occurred and you get a sense of how insignificant what we have recently experienced is. But there is still a similarity, albeit not of the same order of magnitude. The key takeaway I want you to bear in mind is that there could be much much further to go than what we’ve experienced so far, and over a substantial period of time to come as well. Please bear that in mind.

While many will continue to focus on Greece within the Eurozone, I would argue that there are potentially larger concerns that loom over the horizon. But first, consider that Greek Interior Minister comment. Nikos Voutsis, has stated on Greek television that the concessions required of Greece by its creditors are “unacceptable” and that “the money won’t be given”. We’ll see… we heard it all before, and we shouldn’t be that surprised. Syriza is new to governing, and we should put the comments of its leaders in context. We should also recognise that this is the Interior Minister, not the Prime Minister or the Finance Minister. Please note that Mr Tsipras, the Prime Minister, had declared that Greece would miss the €750m IMF repayment in May, but lo and behold, they managed to get it together. If the big boy cried wolf and no wolf came, should we listen to the smaller boy? I’m not so sure, but to me there is one heck of a credibility gap.

The threats on the horizon in the Eurozone that loom larger than Greece, are based on the Greek template. Look west to Spain, and we have a party, Podemos which is not dissimilar to Syriza. And we also have Ciudadanos, a Catalonian party of all things, but with national appeal. The old two party system appears broken (based on recent local election results), and while a Syriza style win appears unlikely, Spain very probably will be forced to establish a new relationship with Europe after the 20^th December elections. We have seen Greece, we have seen Britain (with the referendum to come), and now we have a country that is much closer to the Eurozone core, likely to push for change. As we get closer to the Spanish elections, the fear of what is to come will have an impact on financial markets, uncertainty is the enemy of asset price appreciation, this could be the real danger for the euro in coming months. Beware…

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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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Impressive numbers for the UK economy are becoming quite common post-election. Can you imagine if the outcome of the vote had been different and these strong numbers starting to come out after the result. There would be wailing and gnashing of teeth. But in any case, back in the real world, retail sales in the UK were excellent. Up 4.7% year on year to April, versus expectations of +3.8%. The pound sterling reacted strongly and positively in the wake of the numbers, clearly good data trumps bad data for GBP at the moment. I consider 1.5446 a significant level for GBP/USD, a fall through that level will go some way towards convincing me that a new dollar rally has commenced. It is the reaction low from earlier in the week.

There were a lot of manufacturing PMI’s published yesterday. It’s worth viewing them together:

The key, in looking at this type of data is to avoid comparisons of absolute numbers across economies, but to focus on whether the data is improving. For example, Japanese data has improved in comparison to the previous published number, albeit not as much as the economists forecast; same thing with Chinese data; Eurozone data however, has not only exceeded the expectations of economists but also beat the previous number; this makes the US the ugly duckling, because the published number yesterday was both worse than expected and also worse than the previous published number. What to make of all this? Well.. for a start it’s only one type of data point that we need to monitor, but it does reveal the relative positions of economies. The United States, clearly the rock star for the last few years appears to have cooled off somewhat, although I hasten to add that this is in the context of solid data, while the Eurozone, the basket case, is experience something of a revival, albeit from a very low base. This doesn’t alter our conviction that the US dollar is set to rally, but it does put the question to monetary authorities about how quickly normalisation can occur. My understanding is that the Federal Reserve is still much influenced by the timing of economic activity last year – with poor data at the start of the year, followed by a quite stunning improvement in economic performance in the middle. I can only suggest that the fundamental data we are receiving at the moment is sufficiently unclear and therefore challenges the dollar bull case. Luckily I pay a lot of attention to technicals and market history, on that basis, I still have a high level of conviction that within the next 6 – 12 months we will see new highs for the US dollar.

A couple of central bank decisions of the last 24 hours, rates were left unchanged in both South Africa and Japan. What I found intriguing was the price action in the case of the BoJ. The key point of the decision is that they have no current plans to expand the level of monetary stimulus, it wasn’t so long ago that news of that sort would have impacted the Japanese yen, in this case any impact has been negligible. It certainly doesn’t feel like the market is substantially short the Japanese yen yet. There is room for the Japanese yen to weaken in my view.

The new Nigerian President will assume office in the next few days. The naira is clearly in a holding pattern at the moment, waiting to digest appointments, economic policy plans, developing a better understanding of the new economic landscape in the African giant. For weeks liquidity has been worse than usual, but my understanding is that Nigeria has earned a democratic dividend. Foreign investors cannot ignore an economy of this size, with a spectacular recent record on growth, and if confidence increases there could be fairly dramatic inflows into the Nigerian economy once again. We will all hope that the dividend is spent wisely, as Nigeria has a tremendous geopolitical importance for the region.

Later on today, President Draghi speaks about Eurozone monetary policy, we get an update on US inflation data, as well as retail sales in Canada and the fiscal situation in the UK. Lots to digest in front of a long weekend.

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Good morning

FOMC minutes were published last night and did not disappoint or excite. It would appear after the FOMC minutes that the FED have given up on a June hike. This pretty much confirms the market’s expectation but it firmed it up more. Although a small number members anticipated that the US economy would be ready for a move in June, this was seemingly outweighed by the comment that many participants thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the federal funds rate had been satisfied. The minutes did say that they “did not rule out this possibility”, but it’s hard to see the tone favouring a move in June now. As we have noted previously the hot money is betting the FOMC will in all likelihood start raising federal rates in September followed by December (0.25% on each). The big question doing the rounds this morning was whether the slowdown in growth was temporary or symptomatic of a longer-lasting loss of momentum for the economy. I would think that the data was in fact temporary and normal upbeat data will start to filter through the summer. As Pres yellen has said previously, even if the data is somewhat disappointing, there is still reason enough to raise rates and let that hike filter through the economy (2-3 months) before taking the decision to hike again. The momentum remains upbeat and the markets globally are all anticipating a rate hike so any delays will filter through the USD, Treasuries and the US stock markets. I am pretty sure Pres Yellen will avoid such action and satisfy the market by raising rates in September by 0.25%.

Following the comments by Pres Draghi of the ECB about their desire to buy bonds earlier than anticipated (bring forward QE) the EUR continued to trade around 1.1125 at the London open having rallied to a “low” of 1.1079 in Asia. I wrote a few days ago that while I think we are in a period of USD strength we are not necessarily witnessing THE RALLY that will drive through PARITY. That move will come in Q3 (in my opinion) so we still have some time before it is time to “load up” on USD’s. In the meantime you are likely to see EURUSD range trade 1.10-1.13 as FX traders alike get their ducks in a row.

GBPUSD remains above the 1.55 handle having flirted to 1.5446 yesterday. The post conservative majority victory is still giving the GBP somewhat of a lift. Today sees UK retail sales and EU PMI’s (France so far coming out better than expected, Germany due at 8.30am London). The EU referendum in the UK remains the KEY EVENT RISK and you can be rest assured when a date is announced as we head closer to the election the GBP will remain highly volatile (similar to when Scotland voted on independence). But that is unlikely to happen until at least late 2017 early 2017 so we have time. In the meantime, I think the GBP will probably remain strong vs the EUR though vs the USD it is all about when the FED raise rates. If indeed it happens in September the USD will rally vs all the major currencies and the GBP not to be left aside will weaken as a result. There is a chance we could see the GBP make one more drive above 1.58, but to be honest I am sceptical and am looking overall for the GBPUSD to decline ultimately below 1.5000 over the coming weeks/months. You can only keep the euphoria over the election going for so long and with the impending JULY budget speech I think the new austerity package will be a catalyst to drive the GBP lower finally. But fear not, vs the EUR the GBP will remain king of the castle.

Today sees the SARB (S.Africa) announce their rate decision (2pm Ldn). No change is expected and rates should remain at 5.75%. If anything I see the SARB potentially CUTTING rates (Like the RBoA have done) to stimulate the economy. However with precious metals trading better (Gold 1211, Silver 17.20) the SARB will not be rushed into making any rash decisions. Chinese Manufacturing PMI published overnight at 49.10 from 48.90. Positive yes but below expectations at 49.30…still it is a better than previous number so the men and women at the PBoC are probably having a brandy to celebrate.

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Don’t look now, but the Nikkei, the Japanese stock index has made new year to date, and indeed, 15 year highs. The Nikkei has been surging for over a year now with Abenomics the primary cause, but there was some cheer today as economic growth numbers were published with a positive surprise. The Japanese economy grew at an annualised 2.4% pace in Q1 2015, but looking at the details, it’s probably not such a good thing, as the growth was largely attributable to an inventory build up. Nevertheless the Nikkei finds itself just 2 – 3% away from the dotcom era high and that would be a significant level to surpass. Another significant level to monitor in the coming weeks is the year to date high for USD/JPY and we are very close indeed. As I’ve mentioned in the last few days it appears very much like the US dollar correction is over. The Japanese yen is one of the most like currencies to weaken against the greenback and we are already seeing clear sings of this, USD/JPY has not been as high as this since the month when the correction started, which was March. Watch this space…

As in any broad based dollar rally this is not just about the Japanese yen, the greenback is asserting itself against its major rivals, and the euro is clearly that. Newspapers have latched on to the narrative from Benoit Coeure, about the ECB accelerating its bond buying in the next few weeks before the summer lull, but was that really new news? Not really. What is clear is that the euro is over 3% weaker so far this week, that’s a pretty aggressive decline in such a short space of time, and this could signal the start of the move to parity and below that we talked about at the start of the year. It will take a bit more time to establish a target move for EUR/USD, but my initial estimate could be as low as 0.9260, albeit this is not likely to happen this year. We will update you when a more considered analysis can be conducted.

Yesterday, the UK inflation data came out with a negative print. Unsurprisingly the main news outlets screamed deflation. But that seems a bit hysterical to me, yes it’s a negative print, the first one for over 50 years just going by the “CPI” measure that’s been used. But so much manipulation and adjustment has gone into that number it is an entirely different animal to the CPI measure used in 1960. That’s not to say it isn’t noteworthy. At the end of the day, the reaction function of the central bank is key, and this is unlikely to dissuade Governor Carney from keeping rates unchanged until the middle of next year. It’s worth noting that a lot of the causes of the decline in inflation relate to the energy price collapse of last year, lower air fare and ferry ticket prices are an example of lower transportation costs that have impacted the CPI basket, all oil price related.

Eurozone CPI was also published yesterday, but was considerably more stable, with an unchanged number at +0.0%. “Excuse me!”, you might say… “Inflation in the Eurozone now higher than in the UK!? But wasn’t deflation one of the pretexts for QE from the ECB?” I would probably reply no comment to that. Today we’ll get to see the Bank of England minutes, I’m not sure what more can be said, given Governor Carney’s recent comments. Perhaps of more interest will be the minutes on the other side of the pond. The FOMC minutes will be published at 7pm London time this evening.

If indeed we are seeing the inception of a new dollar bull trend I would expect cable (GBP/USD) to make a new low for the week today. The dollar has made new highs versus both the euro and the Japanese yen already this morning, but GBP/USD is yet to follow. Cross-confirmation is always a key ingredient of an incipient trend. The day is young..

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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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Good morning

After a period of consolidation on the stock markets, it would appear the USD is gearing up for further gains. I do not think this is the moment we will see the USD head towards PARITY but rather a “period” of USD strength. This strength has been aided by the apparent break higher in US stocks with rumours surfacing that a deal in Greece has been struck or is close to being struck. Greek Finance Minister Varoufakis said late on Monday in an interview on Greece’s Star TV Channel that the country is “very close” to a deal, while Prime Minister Tsipras noted “we are in the final stretch”. HOWEVER, caution is called for as the markets remain sceptical given past disappointments. If you cast your mind back a few days I wrote that there are 2 negotiations going on, one in front of the camera and the news you and I are reading daily, and the one’s going on in the backrooms where no cameras or notes are shared with the public. I will continue to write that GREXIT IS SIMPLY NOT AN OPTION and a solution/agreement will be found no matter how hard it is for either side. Of course Greece has the most to lose and will therefore have to concede “defeat”. However Greece’s creditors do not want to face the prospect of losing their investments, not to mention the financial ruin that will occur should Greece leave the EU. Therefore I am convinced the creditors will be giving Greece some slack and assistance. It is all about give and take with both sides having to concede to the other side to make sure everyone comes out satisfied.

The political fallout in Greece will be a bitter pill to swallow for the anti-austerity camp. But to survive one has to make concessions and accept change. There simply is no other option. When the news does break over the coming weeks and months that a deal has been agreed I would imagine the market will initially see this as a boost for the EUR, however that euphoria will likely dissipate when the markets reach resistance levels and the prospects of higher US interest rates. Let’s not forget despite the recent disappointing data out of the US ( Industrial Production and Retail Sales) the US interest rate curve still points to at least 0.50% rate hikes in 2015. Tomorrow sees the release of the FOMC minutes. We do not expect any major changes and continue to highlight the FOMC’s view that it views the recent disappointing data as transitory rather than something more long term.

Thursday sees the SARB (South Africa) announce their rate decision. We expect the SARB to hold rates at 5.75% for now.

Today 9.30am Ldn sees the publication of UK CPI numbers with 0.00% expected again. With the drop in oil and food prices there is now talk of the UK entering a period of DEFLATION.

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The pound sterling has retraced roughly 50% of the bearish move from mid-summer last year. The move has been rapid, but now looks to be running out of steam, with a significant reversal from the highs of last week’s already in place. At the moment it’s difficult to ascertain whether we have seen the high point in the cable bounce, but there is every chance that this is the case, as the reversal hit one of the most likely target zones. The price action in the next few days should either confirm or invalidate this view. This move has been part of a general firming of the dollar which has impacted other major currencies, but the pound sterling has been a clear underperformer for the last few sessions, as can be seen from the EUR/GBP bounce. The fact that this mini dollar revival has occurred at a time when European stocks have retraced to key levels may or may not be coincidence, only hindsight will provide us with an answer, but I am mindful of the powerful dynamic that was in place during the dollar bull trend – at that time we saw equities rally alongside the greenback.

The US dollars recovery was certainly not supported by great economic data on Friday. Industrial production numbers were, frankly, quite disappointing with another small decline versus forecasts of a small uptick. I can’t say that this is particularly significant yet, it points more towards stabilisation than stagnation, but a few more bad data points and all bets are off. If the industrial production numbers were ‘quite’ disappointing then the Michigan Sentiment data was ‘very’ disappointing. Nevertheless the US equity markets closed at record highs on Friday as equities celebrated what might be receding chances of an early rate rise.

In other parts of the world, industrial production numbers in Japan were slightly disappointing, and house prices continue to decline in China. It is clear that Chinese policy makers now consider the slowdown to be the most significant since the global financial crisis in 2008, and action is likely to try to reflate the economy. The great rebalancing – from exports to consumption – needs to be achieved within a context of an acceptable growth outcome otherwise the legitimacy of the Communist Party could be under threat. Viewed on that basis, it is clear that authorities will deliver decisive action to counter the threat of a serious slowdown.

This could be a pivotal week in the story of the greenback this year. Is the correction over? Is there more to come? We may start to get a more definitive answer in the next few days, but I do believe we are closer to the end of the correction than the start.

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Good Morning

It has been a turbulent week for the USD. Smacked against the GBP (mostly), EUR, AUD, NZD and even EM. Am i concerned by these recent developments, heck no!! As any seasoned FX trader will tell you, pull-backs happen and are healthy for the market to take profit and reinstate positions. What we are seeing is by no means out the ordinary and the “event risk” in Greece remains a daily talking point.  The other reason for yesterday’s USD sell off was the lower than expected US PPI numbers which added to the weak import prices report that was released on Wednesday. Some commentators are saying the US might even DELAY the first rate hike from September to either October or December. The USD sell off was surprising given the disappointing German & French GDP numbers and Pres. Draghi’s commitment to implement the asset purchase programme in full. As have seen in recent weeks, the ECB is committed to throwing as much money as possible to get the EU growing again (in tandem with the UK and US).

The Telegraph newspaper reported yesterday “Why Syriza are doing everything EU creditors demand”. I thought this was an excellently written article as I have always noted here that what we read in the papers and what is disclosed is NOT necessarily the same. In fact Sky news reported that Greece has done a U-turn on the proposed sale of the country’s biggest port, Piraeus to a Chinese firm. One could argue that a sale of this magnitude could be compared to Gordon Brown selling UK’s gold at $275. Unfortunately when you run out of cash and you have assets you simply do not have a choice other than to sell them. Hindsight is a wonderful thing and while Gordon’s actions were downright off the wall, Greece really has no other option. The previous Greek government had put the port on the market, but this was blocked when Syriza came to power. The apparent U-turn will indeed raise a few eyebrows back home, though the move is likely to sweeten the deal Greece is looking for with its EU and IMF lenders. The Greek FM then came out with some interesting comments saying Greece must escape the “strictness trap” of budget measures that might hurt the economy. He told an economic conference in Athens “I will be yet another finance minister who signs a mid-term fiscal adjustment programme that he knows will not work” adding “I wish that we had the drachma, make no mistake, this is not to say that I want the drachma. I wish we had not entered this monetary union … But once you’re in you don’t get out, without catastrophe.” I will simply add this, Mr Varoufakis, had Greece like the rest of the EU exercised financial prudence you would not have found yourself at the mercy of the ECB and IMF and more importantly bankrupt. Hindsight is a wonderful thing!!!

Mr Varoufakis, if you want the remaining €5.2bn of bailout cash best you sell your prize jewels, reform, institute austerity and stop telling your creditors they being too tough and need to lighten up. It is time to pull your socks up and tell your electorate austerity and reform is here to stay. Let them riot in the streets, come the summer it will be too hot to stay outside anyway so job done, all sorted.

A client asked me what I thought would happen to the EUR short/medium term, I will sign off with what my thoughts are:

“Short term I think we actually see a spike higher as the situation in Greece sorts itself out and the EUR gets a boost. I think there are 2 negotiations going on (1) what we read in the papers and (2) behind the scenes negotiating that is driving the process. In fact the Telegraph had a good article yesterday: http://www.telegraph.co.uk/finance/economics/11604518/Why-Syriza-are-doing-everything-EU-creditors-demand.html

Overall I think once the euphoria over Greece ends (negotiations successful) the FED will start raising rates as expected (Sept) and it is from then on we will see the USD start to move towards PARITY. We have noted in our commentary that PARITY EURUSD is coming, and should happen end Q3 or Q4 2015. The situation in the EU is by no means a quick fix as you have seen the €1.1trn QE. The US is well ahead of the curve and that’s why I think come the end of the year and into 2016 the USD will drive below PARITY”.

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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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