20150630 – GREXIT OR GREXIN?

High Low High Low
EUR/USD 1.1244 1.1155 USD/ZAR 12.2906 12.2017
GBP/USD 1.5740 1.5692 GBP/ZAR 19.34 19.19
EUR/GBP 0.7146 0.7104 USD/RUB 56.44 54.61
USD/JPY 122.73 122.05 USD/ILS 3.7918 3.7500
GBP/CHF 1.4654 1.4544 S&P 500 2,067 2,056
GBP/AUD 2.0531 2.0428 Oil (Brent) 62.44 61.98

By now we all know about the events of the weekend. Capital controls in Greece; and the Greek government has put the decision about whether to accept the bailout to a referendum for Greek voters. It is due to happen this next Sunday, and already Eurozone leaders have insisted that this referendum is effectively a vote on Greece’s Eurozone membership, a rejection of the bailout and its associated terms doesn’t result in an alternative proposal being presented. This really is as good as it gets. Take it or leave it. Grexit or Grexin if you will! That’s the politics, but of more interest to me is how the markets have reacted. Here’s a brief rundown…

 

EUR/USD – gapped 1.6% lower in thin Sunday night (at least if you live in the European time zone) trading. Rallied 2.1% on Monday closing above the Friday’s price range. This morning the currency pair is trading near the top of yesterday’s range, albeit with signs of some slight reversal of yesterday’s euro strengthening.

 

EUR/GBP – gapped 1.3% lower in thin Sunday night trading. Rallied 1.9% on Monday closing far above Friday’s price range. This morning the currency pair is trading near the top of yesterday’s range, albeit with signs of some slight reversal of yesterday’s euro strengthening.

 

Eurostoxx 50 – gapped lower 4.3% in very thin (off market?) trading on Sunday night. Trading in a massive range on Monday but closed the day almost another 1% lower. This morning the index is already over 0.6% down

 

Other markets – there was clearly a flight to quality as bund yields dropped 20bps from Friday’s close to Monday’s open, but by mid-afternoon yesterday half of those gains had been given back, before a rather more gentle rally into the close. Some of the risk off trade is being given back again today with a slight uptick in bund yields this morning. This risk off phenomenon also manifested itself in some spread widening versus other Eurozone sovereign debt versus bunds.

 

No need to run through it in detail, the pattern is fairly clear. Extreme risk off on the announcement of capital controls in Greece as seen by the reaction of the markets. But, one might ask, how come the euro bounced yesterday? That’s the easy question… the euro is now the world’s funding currency, we should expect it to rally when fear is in the air, and decline when greed is in the ascendancy. The reaction overnight on Sunday is slightly more puzzling to be honest, but could have been the reaction of very illiquid markets with people far away who misunderstand the current paradigm. If that’s the case, they lost a lot of money dumping euros on the assumption that heightened risk of Grexit will be a euro negative. In my view, it is very likely that ECB has (having had years to prepare) successfully put in place infrastructure that will protect the Eurozone monetary system from any cataclysmic consequences of Grexit. If that is indeed the case, then once this crisis is resolved, the market will naturally look towards the next thing. That next thing is what action the US Federal Reserve is likely to take concerning interest rates in the United States. Assuming there are no global implications to Grexit, then an interest rate hike is imminent and the US dollar should rally. Are there global implications? Probably not, if the ECB has properly walled off the Greek economy. I’m sure that Draghi and Yellen are in constant contact and they will understand better than most whether that is indeed the case.

 

I’m not sure what to think about Prime Minister Tsipras, but it’s not clear to me that he’s anybody’s fool. So far he has shown a good grasp of geopolitics, with his flirtation with President Putin. He has also shown a certain political savvy in passing the decision on to Greek voters. If they vote to accept the bailout terms he will effectively have washed his hands of making the decision himself, and they will have done so accepting the consequences of a brutal austerity package that will affect generations of Greeks. It will inevitably lead to a cultural change in Greece, at least in terms of how Greeks interact with their government and their expectations of the services they can expect. It’s just possible that Syriza can get away with the classic “not me Guv!” response when the pain of implementing the austerity programme is implemented by them. It is also sensible that this denouement has happened as early as it has in his premiership. If this is his political calculation then it is genius. When you think about it, it’s not that dissimilar to the thought process behind the Conservative party’s austerity strategy after their UK election in 2010. And look what happened… the Conservative party just won an outright majority.

 

One thing is certain, Greek referendum polls could have a significant impact on global risk sentiment this week. There remains the possibility that the corrective dynamic which started after the dollar highs in mid-March are still in force, so we must be open to the possibility that EUR/USD could make another new high. We still maintain a fair amount of conviction that when the bigger picture trend starts again it will likely lead to new dollar highs and euro lows, but when that start will be is the trillion dollar question. Looking at previous bigger picture dollar moves, corrective periods have lasted as short a time as 3 – 4 months and in some cases well over a year. We should be open to all possibilities.

 

 

 

 

 

 

 

 

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20150629 – ITS MAKE OR BREAK TIME

Good morning

High Low High Low
EUR/USD 1.1173 1.0952 USD/ZAR 12.4240 12.1850
GBP/USD 1.5752 1.5662 GBP/ZAR 19.54 19.16
EUR/GBP 0.7097 0.6984 USD/RUB 56.37 53.33
USD/JPY 123.88 122.09 USD/ILS 3.8289 3.7861
GBP/CHF 1.4777 1.4673 S&P 500 2,105 2,062
GBP/AUD 2.0691 2.0425 Oil (Brent) 63.36 62.14

36 hours to make or break. Greece will either step up and dance to the tune of the Troika or she will default and potentially exit the EU/EUR. That is what we face. Stocks have been absolutely battered at the open down between 4-5% depending on which country you look at. The world has not faced such a situation since the great depression as uncertainty surrounding Greece continues to plague the markets. The USD closed around EUR 1.1175 on Friday and immediately gapped below 1.10 at the open in NZ. It has since recovered to 1.1077 as I write this. With the local banks and stock market closed for the week ahead of Sunday’s referendum and capital controls put in place, the Greek people have now been restricted to a partly €60 withdrawal in cash per day. This in itself will bring chaos to debtors and creditors who are waiting for payments this week so much so local businesses are now asking for payments in cash only and rejecting credit card payments. What an absolute shamble we are witnessing. 2015 and Greece is on her knees. How this has been allowed to happen is beyond me and the Greek people must bear the blame for what they are going through. After all it is them that voted in the Syriza party so they must now accept the repercussions of their moment of madness voting for Syriza. What they were thinking is just too difficult to answer. Did they really think they could bully the ECB and IMF into accepting THEIR terms? Absolutely not. Spain, Cyprus, Ireland, France, Germany et al all accepted that austerity was a must and change had to happen. They have all since turned the corner and are on the road to recovery, yet the Greeks stood firm and rejected austerity. Raising taxes on the rich will not solve the problems. France tried it and failed and went back to normality. Surely that in itself if clear enough for the Greeks to see. They need to reform their pensions and labour laws in addition to raising taxes (VAT included) and stopping the bribery and corruption that is so prevalent amongst the wealthy. I am afraid to say the Greek economy is coming to a complete standstill this week with the impact on economic activity so severe it will add years to put right.

Should the referendum produce a “no” vote to austerity and bailout Grexit will simply be too hard to avoid as the consequences unfold. Generations will be affected, financial ruin will ensue and g-d only knows how they will come back from this financial ruin. The Greeks have said they want to stay in the eurozone. Those that voted for Syriza MUST now see what a mistake they made with Tsipras and vote him and his pack out and into oblivion. And with everything going on PM Tsipras used words like blackmail and injustice urging his voters to vote NO to the creditors. After all it is their (ECB/IMF) fault Greece are in trouble. Amazing!!!!

The next 5 days will be some of the most crucial hours we are ever likely to witness. What will matter this week is the hardship the Greek people will have to endure. Either they will have had enough and decide to vote YES, or they will be so mad at how they are being treated they will vote NO. What is certain, is a no vote will lead the Greeks into a black hole so deep the earth’s crust will not be enough to stop it. I like so many others have watched in bewilderment as the Greeks have turned their backs on the ECB and IMF and in turn opened the door to potential financial ruin.  With the referendum on Sunday, it looks pretty likely that the Greeks will default on their €1.6bn repayment due tomorrow. The current bailout programme also expires tomorrow and the one month extention request put forward by the Greek FM was rejected. And so the coming week will be fraught with rumours, tongue lashing and severe market volatility. I STILL think a deal will be reached and that the Greek people will see sense and vote YES which should hopefully bring in a new government as the world steps back from the financial atom bomb.

Let’s all pray our friends and family in Greece see the light and accept the game is up and change has to be accepted. Let’s pray we do not see Lehman Brothers (round 2) and a return to the hardships we all went through and witnessed in June 2007. One thing is certain, the FED is watching these events unfold with much interest given they are “supposed” to raise US rates in September. That date could be delayed if Grexit happens. One thing is for certain, the events that will unfold over the coming week will be like NOTHING we have ever seen before. The only definitive thing we know is financial markets are going to be ripped here there and everywhere. GOOD LUCK and G-d Speed

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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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20150626 – DAILY UPDATE

` High Low High Low
EUR/USD 1.1209 1.1179 USD/ZAR 12.1462 12.0920
GBP/USD 1.5755 1.5719 GBP/ZAR 19.12 19.04
EUR/GBP 0.7123 0.7101 USD/RUB 55.62 54.02
USD/JPY 123.67 123.22 USD/ILS 3.7924 3.7614
GBP/CHF 1.4757 1.4715 S&P 500 2,104 2,098
GBP/AUD 2.0446 2.0337 Oil (Brent) 63.83 63.37

It’s not all gloom and doom in Europe, as we’ve mentioned in recent days. France appears to be on the road to recovery, but clearly of the cyclical variety, nothing structural has been implemented yet, and in a funny way this might just stop any chance of that. To the south, Spain’s economy has been growing at its fastest pace for 8 years according to the central bank, and the forecast for 2015 as a whole has been revised higher to 3.1%. Yes the unemployment situation is still horrific, but this can only be good news, and it’s surely a poke in the eye to the anti-austerity brigade, but I’m sure they have an excuse for this. Still, we can’t escape Greece unfortunately, and failure to reach a compromise yet again means that the saga continues until at least Saturday where another meeting of the eurogroup finance ministers is now billed as make or break. We shall see, but meanwhile EUR/USD remains in a consolidation formation moving in as tight a range as we’ve observed for quite some time. Chart patterns like this are inevitably followed by a move in the direction of the prior trend, so my instinct is to look for a decline in the currency pair when the consolidation ends. Watch this space.

 

The consumption numbers published yesterday in the United States painted a fairly rosy picture with consumers beating economist forecasts quite comfortably, and jobless claims continued their slow steady decline, pointing to steady improvement in the labour market, and naturally consumer sentiment. All great news, and all supportive of the idea that there is no reason for interest rate rises to be delayed much more. It really could be any of the next few meetings.

 

After months of consensus amongst the Bank of England policy makers it appears a hawk is raising his head again. Martin Weale recently suggested that the UK central bank should raise rates as early as August. Quite a turnaround, and if I was a bit more cynical, I might think that the UK economy is now being assessed purely on its own merits with no election issues clouding the picture. But nevertheless, he does have a point, the UK employment situation is easily as impressive as in the United States, theoretically there’s no reason why these two advanced economies shouldn’t move at around the same time. No reason I guess apart from the size and importance of the Eurozone economy to the UK I suppose. Now obviously there isn’t going to be a rate rise in August, but it is certainly a good thing to have the debate firmly back on the agenda. Wherever possible interest rates should be normalised, otherwise what are we going to do when we actually really need to cut rates?

 

We expect currencies to have a fairly gentle day today, barring unforeseen announcements. Our longer term view of a stronger greenback and pound sterling versus a weaker euro remains intact. We do however remain mindful, that there is room for a counter-trend move before the bigger picture dynamics reassert themselves.

 

 

 

 

 

 

 

 

 

 

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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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20150625 – GOOD NEWS AND BAD NEWS…

` High Low High Low
EUR/USD 1.1228 1.1182 USD/ZAR 12.1667 12.1143
GBP/USD 1.5726 1.5676 GBP/ZAR 19.11 19.00
EUR/GBP 0.7149 0.7126 USD/RUB 55.45 53.58
USD/JPY 123.97 123.55 USD/ILS 3.7819 3.7246
GBP/CHF 1.4691 1.4633 S&P 500 2,113 2,107
GBP/AUD 2.0405 2.0251 Oil (Brent) 63.96 63.59

So.. where to start? I’ll do the bad news first, we always like our readers finishing our updates with a smile..

 

It looks like we were all too optimistic about an imminent resolution to the Greek crisis. A resolution that would have released €7.2bn of desperately needed bail-out funds to the Greek government, a compromise that would see the approximately €1.5bn owed to the IMF this month dealt with. Those hopes appear dashed at the moment, of course given the nature of European politics, there’s every chance that a last minute compromise is found. I don’t know about the rest of you… I just want the whole darn thing to be over! This time around the IMF is having the greatest difficulty accepting the economic reform proposals of the Greek government, but the Greeks are holding fast to their plan, they would rather increase effective taxation than cut benefits. I’m not one who thinks much of IMF plans for crisis hit countries on a historical basis, but there’s no doubt which path would be more sustainable. Particularly in a country that has such a terribly difficult time collecting taxes already.

 

The better news, is that Q1 GDP in the United States has been revised higher, so the first few months of the year actually saw only a slight decline of -0.2% versus the initial -0.7% number. That’s a considerable improvement, but obviously a lagging indicator. It does however confirm that the U.S economy has continued along at a solid if not spectacular clip. Remember the excuses for a weak Q1? Weather, ports strike, strong dollar etc… well this implies that the US economy handled all those headwinds rather better than expected. If 2015 is anything like the previous year the next two quarters could show dramatic improvements on the first. So at least one part of the global economy is making a decent fist of things then. Some strong consumer spending data later on today could reinforce this view, and no doubt the data will be keenly monitored by the Federal Reserve.

 

The big question now, is what impact will the continuing Greek saga have on European stocks? We’ve seen prices rally 7% since last week Thursday, on the back of hopes of a resolution and EUR/USD fell 2% over the same period. Does some of that hope get unwound? I’m guessing not to any great extent, unless there are more definitive signs that the parties are actually moving further apart. Students of recent European politics know that brinkmanship is a weapon used at the highest levels, I’m not done hoping yet!

 

The Central Bank of Nigeria, after consultation with senior commercial bank officials in recent days has put forward proposals to lessen the pressure on the naira (NGN) and the foreign currency reserves it holds. Here is the document:-

http://www.cenbank.org/Out/2015/TED/TED.FEM.FPC.GEN.01.010.pdf

The backstory is that the CBN has been under pressure in recent weeks following news that JP Morgan is going to review the participation of Nigerian debt in their emerging market index. An unwelcome situation indeed, as this would result in far less interest in Nigeria from foreign investors, loss of prestige, a significant impact on naira liquidity… I could go on. The solution arrived at by the CBN, while laudable, isn’t really what you expect from central banks. But restricting the access to foreign exchange for certain imported goods, which are actually also produced in Nigeria does have the sniff of common sense about it. Why does Nigeria import cement when it has Dangote? Why on earth does a country like Nigeria import palm kernels/ palm oil/ vegetable oils? This is Nigeria’s wheelhouse, it shouldn’t be so! It is hard to disagree with the sentiment behind these restrictions, but the other question needs to be asked. Why are imports of these products able to compete with local products at what would be seen as fairly punishing exchange rates? There are clearly gaps in Nigerian infrastructure and inefficiencies which if tackled as a priority by the new Buhari administration would eliminate the need for imports without the need for decree. Food for thought. One would hope that the new administration consults these same bankers, and other business leaders to plot a sensible path to realise Nigerian economic potential.

 

After a number of days of dollar strength, mild reversals would not be a surprise. That said the short term trend is clearly in favour of the dollar. Key levels to watch are 1.1292 in EUR/USD, and 1.5803 in GBP/USD. Above those levels, and the short term trend should be questioned.

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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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20150624 – DAILY UPDATE

` High Low High Low
EUR/USD 1.1225 1.1154 USD/ZAR 12.21 12.14
GBP/USD 1.5804 1.5723 GBP/ZAR 19.28 19.12
EUR/GBP 0.7114 0.7084 USD/RUB 54.66 52.67
USD/JPY 124.11 123.75 USD/ILS 3.7766 3.7418
GBP/CHF 1.4729 1.4661 S&P 500 2,127 2,121
GBP/AUD 2.0446 2.0287 Oil (Brent) 65.12 64.59

At the eleventh hour it appears that Greek officials and creditors are close to a deal, but the outcome is still an unknown. On a personal level I find it hard to believe there won’t be an agreement of some sort in the next few days. Let’s not forget that Greece needs to repay some €1.5bn by the end of this month, and as you know… time is running out. Yesterday the market’s reaction to increasing hopes of a positive outcome resulted in a considerably weaker euro against a basket of currencies, even as European stocks continued this week’s impressive rally. No one should be surprised, this has been the paradigm – European stocks higher, euro weaker – for the last few weeks.

 

In deference to the never ending nature of financial markets, it behoves us to consider what is likely to happen if and when the crisis is indeed resolved. As an aside, a resolution by no means implies a happy outcome for any or all parties, it is merely a compromise that enables Greece to continue to function within the auspices of the Eurozone structure. Chancellor Merkel and other Eurozone leaders have already been shown in the most blatant manner that the stakes are of the highest geopolitical order, with Tsipras’ flirtations with Vladimir Putin. Say what you will about Tsipras and his relative lack of experience of big time politics, he has played the geopolitical card as well as he could, one might question his decisions at the national level, but he clearly has a grasp of the deepest fears of Eurozone leaders.

 

But there’s more going on in the world than the Greek crisis. There’s not really much new information to report regarding the United States, the decisions the Federal Reserve will have to confront in the next month or two have been well flagged. However we did get some strong home sales data on Monday in the U.S, and I mentioned the strong PMI data out of France and Germany yesterday. But we also saw rather disappointing industrial production numbers in Italy, albeit with new orders surprising on the positive side, but we also got strong Italian retail sales data yesterday as well. Net net one could describe the Italian data as a marginal positive, and the Eurozone aggregate PMI data was good, which is no surprise given the two largest components – France and Germany – were positive contributors. And so when I add that durable goods orders in the United States were good, we start to get a macro picture that’s certainly better than the rather gloomy Q1 data. Don’t pop out the champers yet though, the US PMI yesterday was not as good as forecast, and a decline on the previous month’s data to boot. It would be best to summarise the data as mixed but not confirming what appeared to be a slowing global picture from all the Q1 data. Almost the goldilocks scenario of not too hot but not too cold.

 

This morning we’ve seen French GDP published exactly in line with expectations, German business expectations slightly less optimistic than forecast and a continuing picture of deterioration from Scandinavia. Something we’ve not really talked about in recent weeks was the seeming equity bubble in China over the last few months. All of the good cheer has disappeared in recent days with a rather sharp decline, but for now I’m not too concerned as key support levels appear to have held. Given the State sponsorship of the equity rally (or at least encouragement) a bursting bubble in China could well have global implications, but for now that is not the case. We will continue to monitor the situation. We live in a world where global risk sentiment can be impacted by any number of sources so vigilance remains the name of the game.

 

So… what now for currencies? We continue to maintain that a continuation of US dollar strength is likely, perhaps even inevitable given the longer term macro dynamic in play. We look for the pound sterling to continue to strengthen relative to the euro for similar reasons, the monetary cycle in the Eurozone is lagging those of the UK and U.S. Given past big dollar moves, the corrective nature of currency markets since mid-March remains fairly brief in the context of some of the longer term moves we’ve seen in the last 30 years. This means that the jury is out for when we start to see impulsive dollar strengthening again. It is entirely within the realms of probability that we could see 1.60 before sub 1.50 in GBP/USD, and 1.18 before 1.05 in EUR/USD. As always we will continue to monitor key levels and try to interpret the implications of global events in the context of currency markets.

 

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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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20150623 – THE WORLD’S FUNDING CURRENCY

` High Low High Low
EUR/USD 1.1348 1.1240 USD/ZAR 12.1687 12.0919
GBP/USD 1.5833 1.5764 GBP/ZAR 19.20 19.11
EUR/GBP 0.7181 0.7122 USD/RUB 54.71 52.83
USD/JPY 123.79 123.34 USD/ILS 3.7984 3.7635
GBP/CHF 1.4667 1.4553 S&P 500 2,129 2,119
GBP/AUD 2.0513 2.0405 Oil (Brent) 63.75 63.25

I’ll start with an apology to readers. We were unable to put out a blog yesterday, but never fear, full service is resumed today.

 

I can imagine laymen everywhere shaking their heads in bewilderment, “Good news in Greece” they say, “but… wait a minute.. the euro is dropping now!?” At first blush it might seem absurd, but there are reasons why a paradigm of Greek crisis resolution should result in a weaker euro:

  • Eurozone QE
  • Relative growth
  • The euro has become a funding currency

 

Let’s tackle the good news first, and then I can come back to elaborate on the last bullet point. The first two bullets should be fairly intuitive. The Greek government presented concessions to an emergency summit of Eurozone leaders yesterday evening. The concessions in the form of more realistic economic reform proposals will be used as the basis for further discussion this week. No doubt they will have to be fleshed out and there are likely stumbling blocks ahead, but this appears to be the first attempt in quite some time by the Greek side to come up with a compromise. Rather comically the Greek submission was supposed to arrive on Sunday, but the wrong documents were sent. You can’t write this stuff up! Other good news came on the macro front, with solid data coming out of both France and Germany. The latest purchasing managers index data presents a picture of France in particular which is heartening, after all for the last few years France has been one of the sick men of the Eurozone, if we get a decent recovery going there it should boost the chances of the likes of Spain and Italy and even Greece exporting their way out of this ungodly mess.

 

Back to currencies… as I mentioned earlier, the euro is significantly weaker this morning. One of the reasons I put forward is the fact that the euro could now be a funding currency. When investors have good risk appetite, a typical investment strategy is to borrow in a cheap currency (a funder) and buy more risky higher yielding assets (bonds, equities, real estate etc). This is what we think has happened to the euro, and it is a position in which it has supplanted the US dollar which for a decade was the global funding currency of choice.

 

Yesterday saw some fairly impressive moves in equity markets in particular as the sounds coming from Eurozone officials in the know, became increasingly positive. Stock markets were up 3 – 4% and Greek banks in particular rocketed higher. This is not the end, but it could well be the beginning of the end. We should remember that if the Greek crisis is resolved the matter that moves to the forefront of our collective mind will be the timing of interest rate hikes in the United States. There is even a potential link between the two events, should the crisis in Europe recede, the risk of global contagion is off the table, and the Federal Reserve will be free to assess the U.S economy purely on its domestic merits. With tightening labour markets and signs of wage growth the central bank might even be encouraged to move faster than expected.

 

 

 

 

 

 

 

 

 

DISCLAIMER

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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20150619 – TAKING STOCK

` High Low High Low
EUR/USD 1.1400 1.1316 USD/ZAR 12.2560 12.2190
GBP/USD 1.5897 1.5851 GBP/ZAR 19.47 19.38
EUR/GBP 0.7178 0.7138 USD/RUB 54.17 51.78
USD/JPY 123.23 122.81 USD/ILS 3.8447 3.8070
GBP/CHF 1.4656 1.4615 S&P 500 2,124 2,119
GBP/AUD 2.0461 2.0317 Oil (Brent) 64.47 64.09

We’ve had a full day for the markets to adjust to the new reality after Wednesday’s FOMC announcement. First of all some quotes from the FOMC press release in bullet points:

  • pace of job gains picked up while the unemployment rate remained steady
  • a range of labor market indicators suggests that underutilization of labor resources diminished
  • business fixed investment and net exports stayed soft
  • energy prices appear to have stabilized
  • Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
  • Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate
  • Committee anticipates that it will be appropriate to raise the target range for the federal funds rate 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

Reading between the lines of FOMC press releases is art as much as science, but I can tell you that the consensus is that a September hike is considered very likely, providing any Greek catastrophe is not deemed to have an adverse global market impact. It’s worth pointing out though, that Goldman Sachs has now pushed back their expectation of the first hike to December, the rationale being that no clear signal was given for September which was a pre-condition as far as they are concerned. No one expects this rate hiking cycle to take interest rates substantially higher. Historically US rate hiking cycles have tended to raise the level of interest rates anything from 3 – 5%, but this time around the expectation is for no more than 1 – 2%, leaving an end rate of about 2% which is no great shakes. Furthermore, given the job the ECB has done over the last few years to reduce, if not, eliminate the risk of contagion, I consider it very unlikely that the goings on in Greece will delay any action on the other side of the pond.

 

You really wouldn’t know it from the price action in the currency markets. Over the last week, the US dollar is significantly weaker against its major peers. There have been a range of explanations for why this is so, and I will expand on that shortly. But I thought it worth illustrating the one asset class where the reality on the ground is impacting prices in the way one would expect. Below are charts of the main US equity index, the S&P 500, and the European index, the Eurostoxx 50. The divergent price action since the start of April is clear for all to see…

S&P 500

20150619 SP

EUROSTOXX 5020150619 EU

 

But back to the seemingly anomalous dollar price action in recent days. If you were observing from Mars, and you were told that the Federal Reserve is about to hike interest rates, and Greek debt default is imminent, you would expect – assuming of course financial matters are conducted in the same way across the solar system and by all intelligent species – the US dollar to rally strongly while the euro collapses. But that’s not what we’ve seen, in fact we’ve seen the exact opposite. The two most intriguing explanations I’ve heard, quite apart from my stock answer to this conundrum (which is that the market still owns too many US dollars, and has sold too many euros already) are the following:

  1. Investors who had been buying European stocks had been hedging their exposures. The Greek crisis has resulted in a reversal of that trade (quite apparent from the chart above illustrating the fall in European share prices of the last few weeks), and as a result the hedges are being unwound as well. If you close out the hedge, it means you are buying euros.

 

  1. Greece should not have a material impact on the euro anymore as the risk of contagion has been eliminated. Thus what we are seeing has more to do with a correction in the US dollar following fairly soft Q1 data.

I invite you to choose the narrative that best fits reality as you see it. Personally I think there is something to be taken from each of those explanations.

Back to reality… The UK economy, as highlighted by both employment and consumption data in recent days is one of the rock stars amongst the advanced economies, and is amply justifying the incumbent Tory party’s recent election victory. GBP/USD broke the 1.5816 level I have discussed repeatedly, and as a consequence I have thrown out my view that the dollar bull-trend is back in play. If the facts don’t support a theory, dump it and don’t look back. As far as I’m concerned, it is irrelevant that EUR/USD has not currently confirmed this by breaking to a new high as well. That may well happen in the next few days or weeks, but I am happy to view the period since the mid-March EUR/USD lows until now as part of a huge corrective complex within the bigger picture US dollar bull trend that has been in force for over a year. In the context of similar dollar bull-trends that have occurred in the last 40 years, this is an entirely reasonable view to maintain. At the end of the day, it all comes back to the bigger macro picture. Strong solid growth in the US and UK, versus more sluggish signs of recovery in the Eurozone tells me that the USD and GBP will continue to outperform EUR in the months ahead, interspersed with periods like now where corrections are necessary because the market has got ahead of itself.

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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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20150618 – DAILY FX COMMENT

Good day

Apologies for the late sending of his comment.

High Low High Low
EUR/USD 1.1429 1.1329 USD/ZAR 12.3256 12.1338
GBP/USD 1.5931 1.5805 GBP/ZAR 19.50 19.31
EUR/GBP 0.7183 0.7154 USD/RUB 54.13 52.80
USD/JPY 123.61 122.47 USD/ILS 3.8330 3.8017
GBP/CHF 1.4620 1.4552 S&P 500 2,118 2,090
GBP/AUD 2.0553 2.0256 Oil (Brent) 64.98 63.42

European Stock markets have been pummelled over the past 4 days as investors run and hide on the back of the increased risk of GREXIT. PM Tsipras continues to talk tough saying he will not be bullied into accepting the terms the ECB and IMF have laid out. I really do not understand how he can risk the Greek population’s livelihood just so that he can be seen as the “tough guy”. This is not a time to play silly games because the resulting fallout for Greece will be a financial catastrophe that will last for a generation. The people who were seen demonstrating in the street last night against austerity should hang their heads in shame. They simply do not comprehend the damage that will be caused when the ECB halt the ELA and bailout funds (€7bn) to the CB of Greece, not to mention the capital controls that will follow. People will not be able to transfer funds abroad, their funds will be locked and even the simple act of withdrawing money from the ATM will be a luxury. Tourism and investment for a while will stop as investors gauge the market.

There is a meeting in Luxembourg (as we speak) of key Eurogroup members to discuss the Greek fiasco. What we do know is the 30 June is d-day. If no agreement is reached the ECB could announce a halt to ELA and capital controls which could pretty much force Greece to default and exit the EU. Chancellor Merkel doesn’t want to see it, in fact no one wants to see it. But at some point Troika will throw in the towel because they just cannot get through to the Greeks.

Last night post FOMC, the USD edged higher as they cut their forecast for US growth and lowered the interest rate hike expectations for 2016. The median FED funds rate remained at 0.50-0.75% for 2015, however for 2016 the median for 2016 fell by 0.25% to 1.50-1.75%, while the median for 2017 also fell by 0.25% to 2.75-3.00%. Bottom line we still think there will be 2 rate hikes in 2015, Sept and Dec. To add to the USD’s woes UK retail sales data came in above-forecast following up on yesterday’s supper strong wage growth numbers and hawkish comments from the BoE.

For now we all sit and wait and HOPE that Troika and the Greeks defy the odds and agree to an “eleventh hour” agreement. This will be hailed as a win win and expect bonds, stocks and EUR to rally like there is no tomorrow. G-d help us all should the opposite happen.

 

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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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20150617 – FOMC TODAY

High Low High Low
EUR/USD 1.1279 1.1238 USD/ZAR 12.4369 12.3595
GBP/USD 1.5653 1.5625 GBP/ZAR 19.46 19.33
EUR/GBP 0.7209 0.7184 USD/RUB 54.54 52.59
USD/JPY 123.69 123.35 USD/ILS 3.8534 3.8186
GBP/CHF 1.4595 1.4443 S&P 500 2,105 2,096
GBP/AUD 2.0308 2.0169 Oil (Brent) 64.00 63.67

In last week’s blog on 10th June, I said the following…

 

“I view the current dollar weakening (cable bounce) as a correction with possible targets at 1.5490, or possibly 1.5670, and furthermore, it would seem unlikely that a new impulsive wave in the dollar bull-trend commences until at least the backend of next week.”

 

So far this week, cable (GBP/USD) has rallied as high as 1.5655, and we are currently not too far from those highs, later on today we’ll get the announcement from the Federal Reserve, following the Federal Open Market Committee meeting which started yesterday. I see no reason to retract my prognostications of late last week, if any dollar rally ignites this week, it was always likely to be after we’ve moved on from what could be a potentially significant event in the macro-world. To be clear, the market believes that September is the most likely start for a rate hiking cycle in the United States, but we should get more clarity about how the US Central bank intends to manage monetary policy in the latter half of 2015. I keep looking at longer term historic charts of US dollar index, to get an insight into the price action during a longer term major bull trend, and the inescapable conclusion is that the correction we’ve had since the highs of mid-March have been mild, and relatively brief in comparison to past events. I’m particularly drawn to the huge Volcker inspired rally that ended in the mid-1980s and also the rally that ended just after the millennium, if even the smaller rally is an indication of how far much dollar appreciation is still to come, then we are not even half way there yet. Consider the implications of that statement… we have seen the greenback strengthen from EUR/USD 1.40, and we might not have seen half of the move yet? Woof!

 

Non-oil exports out of Singapore were published in the Asian session today, and they were quite disappointing, -0.2% versus +3.1% forecast for year on year to May. I always pay special attention to any data out of Singapore as it is an extremely open economy that is as connected to the global supply chain as any. It is effectively a litmus test for the global economy, so perhaps some concern is justified.

 

In a short time we’ll get average earnings data for the UK. I’ll be paying special attention to this data, it will get tougher for Governor Carney to keep rates on hold until next year if things start to run ahead of him. It would also cause further strength in pound sterling. We should at least get more information about the voting split at the Bank of England a little later this morning, truth be told, no one is expecting any surprises here. All are expected to have voted to maintain the status quo.

 

For now, we maintain the belief that the US dollar is in fact ascendant, and as I’ve said in the recent past, we will hold to that view unless EUR/USD goes above 1.1467 and GBP/USD goes above 1.5816. We don’t expect too much excitement from the major currencies until after the FOMC announcement which is at around 7pm UK time.

 

 

 

 

 

 

 

 

 

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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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