Good morning

High Low High Low
EUR/USD 1.1190 1.1122 USD/ZAR 12.2520 12.1750
GBP/USD 1.5376 1.5328 GBP/ZAR 18.80 18.67
EUR/GBP 0.7283 0.7252 USD/RUB 53.68 52.25
USD/JPY 124.24 123.78 USD/ILS 3.8674 3.8321
GBP/CHF 1.4351 1.4297 S&P 500 2,115 2,107
GBP/AUD 1.9767 1.9630 Oil (Brent) 65.70 64.93

What a surprise for the market. EU INFLATION (yes that is not a typo, i.e., DEflation) rose 0.30% surprising the market somewhat and giving the EUR a real boost. Moreover Greek PM Tsipras announced that negotiations were progressing nicely and an imminent agreement was forthcoming. The 2 in conjunction saw the EUR bounce from 1.0900 to just shy of 1.1200. There is the monthly ECB meeting today at 12.45 (Ldn) which is followed by a conference by Pres. Draghi. I am almost certain he will have something to say about yesterday’s CPI number and give support to QE in supporting the EU economies. There is not likely to be any major announcements regarding QE or monetary policy per se, rather questions will be posed regarding the Tsipras comments re Greece agreements. As we noted previously, an agreement of sorts will be greeted by the market favourably and that is already being priced into the FX rates we are currently seeing. However caution is called for because until we have an official press conference that an agreement has in fact been reached the market will still be weary of these comments.

After 5 days of GBP weakness, the GBP strengthened in line with the weaker USD. The GBP rose from 1.5169 to 1.5376 high, though the GBP weakened vs the EUR to 1.3730 (0.7183) following the better than expected EU CPI number. The FED communications continue to emphasize the STRONG possibility of a rate hike over the coming months and therefore there recent strength in the both the EUR and GBP (in my opinion) will be short lived once the heat rises in the FED kitchen. US data continues to impress (a couple of disappointing figures but this was an anomaly rather than something more serious) will continue to give the FED the necessary “ammo” to raise rates. Therefore over the coming months you will in all likelihood see a weakening of the GBP vs the USD but strengthening vs the EUR. Today sees UK services PMI (9.30am). Previous ticker was 59.50 with the market expecting 59.20 in line with the recent slowdown we have been seeing (GDP for example). Overall the UK economy continues to drive higher, QE is working and the Chancellor’s budget in July will reinforce what they set out 5 years ago.

Great news out of Australia which Greece should sit up and take note of. GDP rose 0.90% for Q1. No doubt the 2 rate cuts and QE have gone a long way to boost the Australian economy in the face of a slowdown in China (their biggest trading partner). This rise was the strongest print since Q1 2014 and Q2 2012 (previous high). While year on year remained at 2.3% the rise in Q1 is as a result of the monetary and fiscal changes initiated by the RBoA. So Mr Tsipras as you can see anything is possible if you put your mind and party behind it.

EM currencies remain on the back foot despite the recent fall in the USD. The ZAR in particular has had a rough ride trading up to an 11 week low of 12.34 vs the USD. The recent low vs the GBP closed in on 19.05 (12 May) but it is more a factor of what is going on locally that is driving the ZAR lower. I am a little confused WHY the SARB are not lowering rates to stimulate the economy like the Aussies did. The SARB have the ability and firepower to do it and in my opinion it is called for. While I think a rate cut is called for the SARB have other ideas as they commented that “any rate cuts domestically were unlikely despite our poor growth prospects”. The SARB also said that “moderate rate hikes were likely to achieve stability without hurting our chances of growth”. Obviously we are on different pages!!


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